Want to know if you're really a "smart-money" investor?According to one study, that may have to do with what time of the day you trade more than with your actual returns.
I'VE HEARD SOME PRETTY SILLY INVESTING THEORIES IN MY LIFE.
I'll start with the most popoular one around - the squiggly line theory. Some people call it "technical" analysis. You know what I'm talking about, right? It's the thinking that states that you should buy shares in a company JUST BECAUSE the price of its stock is going higher.
Think about that for a moment. People who practice this "theory" believe you should buy shares of a business JUST BECAUSE ITS PRICE IS RISING! In my book that's called the silly line theory. Would you buy a private business just BECAUSE ITS PRICE KEPT GOING HIGHER?
What about a house? Or a car? I didn't think so (or at least I hope not). Nope, if you're anything like me you like to buy good things when they're on sale. Which brings me to the next hilarious theory I've heard recently.
It seems that a gentleman by the name of Walter Hertler, a squiggly-line analyst, thinks he can figure out the difference between "smart money" and "dumb money." Want to know more? Ok, here's how he does it.
Using a system called the "Smart Money Indicator," Mr. Hertler tries to distinguish trading activity between "wiley professionals" and the "less rational public." In English, what it means is that he tries to determine - largely by the time of the day a trade is executed - if an investor is dumb or smart. Interested to know how you stack up?
Well, according to the Smart Money Indicator (S.M.I.), if you buy your stocks during the first half hour of the day that means you're "dumb."
(Sorry folks...I'm just the messenger).
That's because, according to the S.M.I., people who buy in the morning are usually reacting emotionally based on news they heard that morning or the night before. In other words, stocks that move up or down in the morning tend to make "sucker-moves" - moves that are short-term in nature and don't follow true fundamentals. Interesting, huh?
Conversely, the S.M.I. shows that those who do their trades in the afternoon are more savvy - predicting trends that last long-term. So, you may ask, does that mean that everybody who does their trading in the morning is inherently "dumb money"? And if so, is there any way that you can evolve from being "dumb money" to "smart money"?
Well, to answer the first question, let me first let you in on a little secret.According to the S.M.I. - Yours Truly, Me, Dylan Jovine, is officially "dumb money"?I know, I know - you're absolutely shocked.Agahst. Stunned. Confused.Your head is spinning round and round.
Well, before you pick up your computer, throw it against the wall, and run out of your office half-naked let me explain.Yes, it is true that I ALWAYS enter my trades first thing in the morning.For example, I remember when we started buying shares of K-Swiss (SYM: KSWS).The stock had gotten crushed the day before and was selling for $17 per share.Of course, I've been studying K-Swiss for years and knew when the price was at $17 that it was in my buying range.So I bought it - and now the stock is selling for over $30.
Another example is Timberland (SYM: TBL).When TBL got crushed, I started buying it at $53.50 the very next morning as soon as the market opened.Right now the stock is at $72.So, if I am what the S.M.I. would consider "dumb money," than how come I've been able to average over 38.7% per year for the past 4 years?
The answer is simple really.Although I "enter" my trades first thing in the morning, it often takes me months of research in advance before I make a move.
Let me explain with an example.
I happen to love Starbucks (SYM: SBUX).Not only am I officially
addicted, but I think the company has completely changed the game
of coffee retailing.In the process, it's created one of the most
powerful retail brands in America.And it has a good chance of
creating one of the most powerful brands in the world.But as much
as I love the company I won't buy the stock.Why?Because its
selling for more than its worth.
So I wait...and wait....and wait.
What am I waiting for?Well, here's the secret.I know that one day - it may be today or it may happen in several years from now - but one day Starbucks will stumble it's toe.A bad earnings announcement.Slower growth...I'm not exactly sure, but mark my words - it will happen.And then the stock will get crushed as shareholders run for the exits in a selling panic.And if the panic gets bad enough and the stock drops far enough, the stock will be selling for a discount to what the business is really worth.And I will be a buyer - REGARDLESS OF WHAT TIME OF THE DAY IT IS.
That's because I've spent years drinking Mocha Frappuchino's in the Starbucks lounge studying the economics of the business.I've gone to dozens, no hundreds of these stores, trying to see if I could find a wrinkle, a small problem, some major thing that's been missing.And I haven't.Nope, Starbucks is a great business.But unfortunately it's not yet selling for a great price - REGARDLESS OF THE TIME OF DAY YOU BUY IT!
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