The Edmond Sun

Business

November 16, 2012

THE ASTUTE INVESTOR: Looking for the smart money

EDMOND — Have you ever read an investment report that made reference to the “smart money?” You’ll hear comments how the “smart money” is going into certain stocks or market sectors. My favorite is “watch what the smart money is doing.”

Well, that sounds like good advice, but how do you know who is smart and who is not? More importantly, what is the standard for smart versus, well, not so smart? And where do you go to watch them? Maybe there is a look-out spot near Wall Street, or a favorite corner, where you can strategically place yourself for an afternoon of smart people watching. Perhaps it’s a lot like bird watching. Oh look! There’s one in a three-piece suit.

Usually it refers to what savvy corporate insiders, institutional investors, hedge-funds and other professional investors are doing at the time, in comparison to high or low levels of bullish investor sentiment. Unfortunately, the term “smart money” has led to increasing use of the term “dumb money” in some market writing, with the implication that non-professional investors must be dumb.

That is totally unfair and inaccurate. Individual investors are most definitely not dumb or stupid. That would be impossible just given the fact that they are able to be investors. Individual investors would have to be among the most intelligent, knowledgeable, successful people on the planet to have the success in their chosen careers that provide them with money that can be invested.

You don’t get to be a successful artist, attorney, doctor, engineer, scientist, business executive, salesperson, small business owner or whatever, by being anything but knowledgeable, intelligent and sometimes brilliant.

The term comes from the idea that the so-called “smart money” supposedly buys low, sells high and thrives from their investing. It also implies that most individual investors lose money over the long-term, or fail to match the gain they would make by simply leaving their money in the bank.

Numerous studies on the subject seem to verify this. Research firm Dalbar Inc. published a study in 2003 titled “Quantitative Analysis of Investor Behavior.” It showed that from 1984-2002 the average annual return on equities was 9.3 percent, while the average annual return of individual investors who invested in those equities was only 2.6 percent over the same period.

A similar Dalbar Inc. study of bond investors in 2006 showed that over the 20-year period from 1986-2005, the Long-Term Government Bond Index had an average annual return of 9.7 percent but the average annual return of individual bond investors was just 1.8 percent.

So what seems to be the problem for obviously intelligent and smart individual investors? According to other studies, the very fact that they are smart, knowledgeable, intelligent and successful — in whatever is their own field of expertise — may be the problem, as it may cultivate over-confidence when they step into money-management, a field that is not their area of expertise.

For instance, a survey by the Securities Investor Protection Corporation in 2001 revealed that 85 percent of U.S. individual investors were unable to pass a simple five-question investment “survival” quiz. In 2009, the Investor Education Foundation of the Financial Industry Regulatory Authority conducted a similar investor survey. Sixty-seven percent of respondents rated their own financial knowledge not just average but high. Yet by far the majority failed FINRA’s test of their knowledge of even the most basic of financial questions.

In 2012, the Securities & Exchange Commission published a report on financial literacy among non-professional investors. Its conclusion was that “U.S. investors lack basic financial literacy, and have a weak grasp of even elementary financial concepts.” Yet the majority rated their financial knowledge as high.

It’s obviously a potential problem for investing success when those suffering the consequences don’t even realize they have a problem. Thus, many keep investing the same way in every cycle, making the same mistakes over and over, while expecting the results to be different. (As I recall, wasn’t that Einstein’s definition of insanity?)

Gerri Walsh, president of the FINRA Foundation says, “There are a lot of people who think they’re good at handling their money, but their results tell you otherwise. Those people are going to be particularly difficult to reach and educate because they don’t think they have a problem.”

The market is a great teacher, but its lessons are often not learned. If this describes you, perhaps you need to seek the assistance of a good financial adviser to help you.

SIPC Vice President Robert O’Hara said, “We’ve been at this for more than 50 years, and we see the same problem over and over again. Investors are enticed in during bull markets, but then don’t know what to do when things turn sour later. People need to take the time to learn the basics about investing, and how to put them into practice.”

It sounds like a reasonable suggestion given the statistics. In the meantime, who wants to join me for a little smart money watching? Maybe if we hide in the bushes we can see some walking by. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.

 

1
Text Only
Business
  • Victimized by the 'marriage penalty'

    In a few short months, I'll pass the milestone that every little girl dreams of: the day she swears - before family and God, in sickness and in health, all in the name of love - that she's willing to pay a much higher tax rate.

    April 16, 2014

  • MS_injection well.jpg Agency clarifies earthquake-related misinformation

    A state agency says misinformation related to the debate about the cause of more earthquakes across Central Oklahoma includes oil well types, well numbers and injection pressure.
    The Prague sequence of 2011 along the Wilzetta Fault zone included a significant foreshock, a main shock of magnitude 5.7 and numerous aftershocks. It has been suggested that this sequence represents tremors triggered by fluid injection.
    More recently, earthquakes have been recorded in the vicinity of Jones, Arcadia Lake, Edmond, Guthrie, Langston and Crescent. Regulators and scientists are working together to better understand what’s causing all the shaking.

    April 16, 2014 1 Photo

  • psc 1.jpg City likely to borrow less for PSC due to sky-high tax revenue

    During his State of the City Address Edmond Mayor Charles Lamb made a political announcement — he’s planning on running again for the office.
    Lamb made the comments in the question-and-answer session of his presentation during an Edmond Area Chamber of Commerce luncheon at Rose Creek Golf Course, 17031 N. May Ave.
    Mayor pro tem from 2005-2011, Lamb was elected mayor last year. His long record of service in Edmond includes serving on the City Council from 1993 to 2011.
    The question about if he will run again came from the audience. Lamb alluded to his desire to be around when the Public Safety Center is finished, which will be in the fall of 2015; the next mayoral election will be in the spring of 2015.

    April 15, 2014 1 Photo

  • Dr. Fielding’s variance denied by close vote

    Reverse-angle parking will continue at the 13 N. University Drive office of Dr. Brad Fielding. The Edmond City Council rejected a variance request by the local optometrist to end the city’s pilot project in front of his medical facility.
    Councilman Nick Massey and Councilwoman Victoria Caldwell supported Fielding’s variance request that was dismissed in a 3-2 vote.
    Four parking lines were striped late last year at Fielding’s business after the city opened new bicycle lanes along University. The city cites the safety for bicyclists and motorists who traditionally depart while backing into traffic as the main reasons for introducing reverse-angle parking.

    April 15, 2014

  • brisket2.jpg Food Network show visits Guthrie for ’89er Days

    Guthrie’s annual ’89er Days Celebration provides a variety of activities for people to enjoy including a carnival, rodeo, parade and lots of food vendors.
    This year, visitors at the 84th annual event, which runs Tuesday through Saturday, will notice an added bonus when a film crew from the new television series “Carnival Eats” will be in town filming for its inaugural episode.

    April 15, 2014 1 Photo

  • jc_TOUCH THE CLOUDS.jpg OSBI grounds voted locale for new sculpture

    City staff is working toward an agreement with the Oklahoma State Bureau of Investigation Lab to place the “Touch the Clouds” bronze sculpture on the OSBI grounds on Second Street. The City of Edmond would retain ownership of the artwork.
    The Edmond City Council voted 4-1 this week to allow city staff to negotiate the agreement as soon as possible. Mayor Charles Lamb voted against pursuing the agreement.
    City Councilwoman Victoria Caldwell said she was initially interested in placing the sculpture near the Smith House because of it’s proximity to state Highway 66.

    April 15, 2014 1 Photo

  • 11 file for county offices

    Eleven candidates filed for Oklahoma County races last week with County Assessor Leonard E. Sullivan, 79 of Oklahoma City, re-elected to office without opposition, said Doug Sanderson, secretary of the Oklahoma County Election Board.
    Voters will nominate their party’s candidates on June 24 for the statewide primary election, Sanderson said. A run-off primary election is set for Aug. 26. The statewide general election is scheduled for Nov. 4.

    April 14, 2014

  • Why Facebook is getting into the banking game

    Who would want to use Facebook as a bank? That's the question that immediately arises from news that the social network intends to get into the electronic money business.

    April 14, 2014

  • Rally for Rigs OIPA hosts Rally for the Rigs

    The Oklahoma Independent Petroleum Association this week hosted a “Rally for the Rigs” at the Oklahoma state Capitol.

    April 12, 2014 1 Photo

  • Watch China for the next economic trigger

    For my male readers out there, remember back to your teens and 20s when one of the primary goals was getting a date and finding a girlfriend? Oh come on! You can admit it.  Well imagine how it would have complicated matters if no woman would give you a second thought if you didn’t own property. No, not that old beat up car you drove and sometimes slept in. I mean real property, as in a house.

    April 11, 2014

Stocks