'Dumb' Money versus 'Smart' Money
Speculation in stock markets has decreased its effectiveness as market volatilities decline. Thus, it makes speculation less successful. The relatively low returns of hedge funds in the past two years, for example, suggest the diminishing returns for speculative capital. Wave-like market movements have become a new source of speculative profits. A typical example is the current bull market in gold. The market is full of bullish calls and speculation concerning massive buying by Middle Eastern oil money and central banks. When the market inevitably corrects, the smart money, as tends to be the case, will get out first. We are seeing the same dynamic in other markets.
‘Dumb’ money can be characterized as slow money, in my view. When a market takes off, it is initially cautious and only jumps in near the top as greed overcomes fear. On the way down, it hopes for a turnaround and pulls out when fear overpowers greed. ‘Smart’ money, by contrast, is essentially characterized by an investment strategy that takes everything with a ‘pinch of salt’ and has ‘stop-loss’ discipline in a downtrend. But, ‘smart’ money can exist only when there is sufficient ‘dumb’ money.
As ‘smart’ money keeps taking money away from ‘dumb’ money, the current equilibrium will not be sustainable in the long run; however, quantifying the timeframe for this is problematic: the current global economic status quo may last for two years, five years, or 10 years. It is anybody’s guess. A shock that frightens away the ‘dumb’ money is the most likely candidate to end the current equilibrium. An outbreak of a contagious disease on a global scale, exposure of a massive financial fraud, unrest among the under privileged could upset the applecart.
Source: Internet
