Tuesday, April 24, 2012

Watching the "smart money" when investing your own money!

Should you pay more attention to the "smart money" when you're investing your own money?

Smart Money: "The funds controlled by investors who should have special knowledge of the right kinds of investments to make. Essentially, the term refers to funds controlled by insiders or to institutional money. The implication is that if the individual investor can figure out where the smart money is going, he or she can follow suit and make above-average profits. Many researchers believe that smart money is no more likely to earn above-average returns than funds invested by typical investors." (Source)

What do I know about "smart money?"

When I was a younger man I would spend time a great deal of time at the race track. While there I would also spend a great deal of time studying the way that the "smart money" was betting on a race. Then, after doing my own handicapping I would factor the "smart money" into my ultimate betting decisions.

The "smart money" tended to be the professional handicappers or someone who had "inside" knowledge of the way that a race might potentially be run. These bettors would typically make large wagers which at small tracks (Saratoga and Monticello harness tracks in New York)  could visibly and significantly move the odds on the horses in the race. For this reason "smart money" usually placed their bets late, very close to the post-time of a race.

While the "smart money" didn't always pick the winner, what better tool to use as a guide.

When I was a proprietary bond and equity trader there were always "whales" on the trading floor whose trading size and success over time made them worth watching and listening to. Like at the race track you would utilize this information when making your own decisions of when, where and how to commit money to the markets.

The EU, sovereign debt and global stock and bond markets!

Today, in a financial world that's dominated by talking heads who primarily have an agenda of wanting seeing the stock market go up, this typically bullish bias provided to viewers may not always be consistent with the realities of the markets!

The average investor, by virtue of 401(k)'s and non-retirement accounts, also have a vested interest in seeing higher stock prices. It is the rare investor who makes bets that the market will go down.

So where should an investor look who is interested in reading between the lines of the global economy to get some idea of where the "smart money" is placing its bets?

The place that I go are the credit markets because often some of the smartest people in the room are the ones who populate the fixed income arena.

Again there are no guarantees, but I would rather watch the direction of credit default swaps and the spread of the yields of all countries to German and U.S. debt than listen to some drummed up rationale of why Apple Computer is going to go over $1,000 a share. It very well might but if the overall market may be heading into a storm should I be in any rush to buy it now?

When I see higher stock market predictions made by a talking head in the face of the high and getting higher cost to insure sovereign bonds and with PIIGS yielding 6% and more, I am more likely to use the investing equivalent of the Daily Racing Form below to help me choose where I am going to place my bets!

(Click to make bigger)

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