Dumb Money?

Are you part of the "dumb money?"

Here is a helpful guide:

Amateur vs. smart money

What the experts are seeing is that retail investors are slamming money into mutual funds, which then buy stocks, of course, but then there are signs that the smarties — institutional investors — are getting more cautious and looking to increase cash holdings.

That said, the outflows to cash are not all that big right now but it has to be said this dumb (or amateur money) in versus smart money out trend happened last year ahead of a stock sell-off in April. And those bad times for stocks lasted until October.

CNBC says corporate insiders are also heading out of shares. Jeff Cox pointed out that "they've dumped $4.2 billion in stock this month, about double January's level and — here's that warning sign again — the most since … last year's rally fizzled, according to TrimTabs".

And here is more from Jeff Cox of CNBC via the online transcript with errors included. You can figure it out. And check the link for Bob Pisani's rebuttal. (video here):

…(L)ook at the money coming into the market now. it's late money. the big selling point for this real has been this fun flows metric. i did szott some tracing back. i went back to 2007. in fact, 2008 was the only year, the only january that we have not seen a big in flow into funds so you can't tell a whole lot about that. you look at what the insiders are doing. that's what i'm doing right now. the corporations have stopped buying. the unsiders are selling, so this is telling you that this rally is getting very tired, and i do believe this dash for trash that i call it, the big stocks, the big metrix doing well, stocks with a lot of short interest and zero dividend payers. they have led the rally. sorry to use the word dumb money but it doesn't look smart to me right now. a dumb idea to put money to work in this market? the corporate insiders, they are sellers.

The two statements from Cox are quite similar. The only change is that the second does not refer to institutional investors but to corporations. That would be easy to miss.

Now think about this:

The market changes, but the Jeff Cox story does not. He seems to be a designated hitter for a bearish viewpoint.

The first statement was from February of 2012, one year and almost eleven percent ago. Cox's story has changed in one respect. The new statement does not cite the big money investors, because their attitude is much more bullish. He is not calling them "dumb money." CNBC's own Davos series and the Barron's roundtable have highlighted that many big-name, high-profile investors see great upside for stocks. One example, also from CNBC, is Ron Baron who provides the logic for Dow 30K.

In a further explanation of his investment philosophy, Baron said, "Over the long term, I think the stock market is going to grow 7 percent a year," about the same rate as the overall economy, not adjusting for inflation. He said that this has been the norm for generations and he doesn't see that changing.

"So people are saying … '[Dow] 14,000, is it too late?' It's not too late; 14,000, I'm thinking in 10 years, it's going to be 30,000. In 20 years, it's going to be 50,000 or 60,000."

It makes the OldProf feel like a piker. Back in May of 2010, when the Dow was at 10,000 and there were predictions of 5000, I wrote the following:

Someone needs to say this:

Dow 20K.

The fear mongers abound in the financial media.  TV and online ratings seem to go to those helping to peddle fear and sell gold or structured annuities (with high commissions attached).   Every individual investor I meet is scared silly.  They do not realize what is at stake.

For the mainstream media, it is all about ratings.  They have all learned that fear sells.  Attacking Obama, attacking Bernanke, attacking European leaders, explaining government policy as if it were the family budget —  it all works.  The big-time media have garnered page views and sold papers.

Even when they attempt to show "balance" they have someone warning about Dow 5000 and the "bull" saying that stocks will go up 8% this year!  Is it any surprise that watchers are scared witless?

Investors need to understand that they are missing more than an 8% move.  Stocks will double.  When will they get on board?  Do they have a plan?

I hope that everyone has noticed how the words from nearly three years ago still resound today. The same peddlers of fear and gold. The same Obama/Bernanke/family budget stuff.

Those who stayed on the sidelines have missed the first 40%. Some assert that the market is now "giddy" and stocks are "toppy."

Just think about that reasoning. A rising market makes new highs. If you are going to define every new high as "toppy" you will never buy stocks. As I asked three years ago, "What is the plan?"

Objective Analysis

The best way to invest is through data-driven, objective measures. When I analyze a stock, I look at the future expected earnings and cash flow, adjusted for business circumstances and risk. I look at the business cycle. I do the same thing for the overall market – as a background for specific investments.

Since everyone is citing the prior Dow 14,000 as the key point (I don't agree about the significance, but let us join the discussion) let us compare the 2007 decline from that point to the current rally (data from Friday).




S&P 500



Forward Earnings



Forward Yield



Interest Rates



Risk Premium



Risk – SLFSI



Dieli Indicator



Dieli Recession Odds Interpretation

Recession Watch 100%

9-month Recession Probability < 5%


Sources: Thomson/Reuters, St. Louis Fed, No Spin Forecast


Analysis by NewArc Investments, Inc.

Even a cursory examination of the data shows that the market is much, much more attractive than it was in 2007 – even though that story had but one flaw.

Earnings expectations are much better. You are invited to look at my last comparison of this type, where I explain why this method is better than the alternatives.

The interest rate alternative investment is pretty lame. Those whose methods ignore the asset allocation alternatives as a method are now screaming that it is all unfair.

The financial risk is very low, the objective indicator for Europe. Any investor following this indicator would have known to ignore the headline risk about Europe.

And most importantly – the recession odds. This was the key problem in 2007. Bob Dieli's indicator had all of his clients on warning. (I wish I had been one of them!) The current story is much different.

Investment Conclusion

Individual investors are fearful at the bottom, slow to spot new trends, and called stupid whenever they climb aboard. There is no objective plan for market timing, and they have all been told that "buy and hold" is wrong.

This is why I recommend the following:

  • Use data to adjust your viewpoint – not just absolute price.
  • Actively manage your portfolio, looking for the best stocks and themes.
  • Revise price targets regularly.

Ignore those who have been completely wrong, and who now call successful investors "dumb money."

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  • Grey Owl February 6, 2013  

    You rock, Jeff!!!

  • Proteus February 6, 2013  

    Hey Jeff! You promised us a thorough analysis of the Dow 20000 story, we’re still waiting 🙂 You wouldn’t want the Dow to get there before the analysis, right?
    Seriously, I remember the story and you did say you planned an explanation as to why the fundamentals justified what at the time was a considerable leap.

  • Oscar Wildedog February 7, 2013  

    I think everyone is missing the point here. The paradigm has changed in the markets. Buy and Hold is dead, insofar as the markets have become casinos. So the new paradigm with “black pools,” HFT and all the rest of them is that you have to play the markets like casinos. You wouldn’t go to Caesar’s to play blackjack and just play the hand you were dealt, without adjusting by, say, hitting on 13, 14 or 15 and hope that the dealer, sitting on 12, drew a face card. No, you adjust your bets, fold early on some hands, bet aggressively on others, double down on some, etc.
    Learn how to use options. Learn futures, bonds and currencies. Learn how to short. “Dumb money” these days are from entities who are not agile and flexible, who cannot adjust their trades, and so forth. And certainly they are not people who entrust their money to a fund manager or investment banker. Do your homework and your trading on your own. That way, you can make money at Dow 10K, 20K, 5K or 60K. That’s the “smart money.”

  • Alex February 9, 2013  

    Buy and hold is not dead at all. I’m up 75%+ since spring 09 in BA, PM, MO, GOOG, and GE. 30%+ in FDX, KO, and SO. I also bought a few thousand shares of a Bakkken oil stock called KOG at 20 Cents. It’s not at 20 cents anymore. While holding these core positions, I traded Apple using options