Want to know if you’re really a "smart-money" investor?
- Feb 18, 2005
- admin
- Investing
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!
Want to know what the REAL “SMART MONEY” is buying?
Try the Tycoon Report risk free for 30-days.
-Dylan Jovine