You’ve probably heard the term “smart money” used by various investing pundits. It’s a reference to those investors (often professionals) that are consistently better informed and better at making money than the uninformed masses. What makes an investor a member of the “smart money” cadre. Are you one of them?
Smart money buys when others are fearful. A recent example of this is last year’s Gulf oil disaster. After the explosion and during the worst of the spill speculation of British Petroleum’s imminent bankruptcy caused panicked selling. The stock lost roughly half its value in less than two months. There was blood in the streets – and that was the time to buy. You’re the smart money if you bought BP after its stock price was hammered. If you had, you’d be sitting on a roughly 50 percent gain.
Smart money sells when others are greedy. In the Nasdaq Internet stock bubble of the late 1990s, many investors who had purchased Internet stocks watched their brokerage accounts swell to levels never seen before. The greed and unbridled optimism in the market was palpable. Everyone was talking about the latest internet stock sensation, the classic sign of a mania in full bloom. Many stock positions had logged spectacular gains, but the herd was convinced there was more to come. But, the smart money (I wish I could say I had been one of them) said to themselves “this can’t go on forever”. The smart money sold their Internet stocks prior to the 2000 top, just as the greed reached a pinnacle.
Smart money sees trends others don’t. A few lone voices urged investors in 1999 to buy gold. But not one was listening. No one wanted to talk about the metal or mining stocks. Gold has increased in value seven-fold (unleveraged) in the past 12 years. Enormous profits have been made in gold and gold stocks, with many stocks earning doubles on top of doubles.
Smart money ignores the headlines. This goes beyond the traditional advice of “buy the rumor/sell the fact”. Smart money largely ignores the chatter from mainstream media and instead focuses on the factors that drive headlines. When it reaches mainstream coverage, the smart money is already invested, and is looking at what will be tomorrow’s headlines.Admittedly the ability to peer into the future and divine emerging trends isn’t easy to develop or maintain. It may require years of experience to learn to sift through reams of electronic and printed information to find the nuggets. It also requires the willingness to sift through all that data. That, or you need to have the resources to pay someone else to do it for you.
Smart money doesn’t count its money before it’s made. Smart investors understand there is no sure thing – that no one is going to bail them out if their analysis is wrong. They keep a realistic expectation – and an eye – on their investments. And if they take a loss, they learn from it and refuse to let it keep them from investing again.
And now the characteristic that’s becoming increasingly critical to investing success…
Smart money ignores official government reports and relies on its own research. There are many examples of government reporting that is patently off base (i.e. a lie). A current example is the Bureau of Labor Statistics Consumer Price Index (CPI) number. That number hovers around an annual core inflation of a mere one percent. Consider your real world experience with rising energy, in particular gasoline, and food prices. When looking at all your expenses over the past year, have they risen just one percent since last summer?
Here’s what real inflation looks like compared to what the U.S. government reports. (Graph courtesy of Shadow Government Statistics).
As you can clearly see from the graph, there has been a growing divergence between the government produced CPI numbers and the Shadow Government Statistics (SGS) Alternate CPI – “the real rate of inflation”. For more information on how SGS calculates their CPI measure go here.
Costs in every major area of our lives have risen far more than what the government states in its core figure. The smart money ignores the official report and instead focuses on its own research and data.
With the above description of smart money, the next logical question to ask is, how do I start thinking like smart money?
To answer that question, you first must understand their investing time horizon. They’re not looking at next week or next month like a trader would. Nor are they looking so far out that it would take the rest of their lives to realize a profit. The smart money is looking at the likely trends over the next few years.
I think they’re asking themselves questions like these:
- Is real inflation likely to rise or fall over the next few years?
- What are the best sectors to invest in over the next few years – is it commodities, biotechnology or stocks?
- What’s more likely – that interest rates will remain at historic lows or move higher?
- Is the U.S. dollar likely to be stronger or weaker in the next few years?
- What is the best way to hedge against egregious debt and runaway government spending?
- In general which assets are most likely to make money over the next few years? Which should be avoided?
- Is it time to invest in real estate again, or will it take the rest of my life to see big profits?
- Will the global economy be on solid footing during the next few years?
- What’s the best energy investment (is oil, or something else)?
- Are gold and silver viable investments. Will the bull market in precious metals continue in the coming years?
The answers to these questions will dictate, to a large extent, how the smart money invests in the next few years.
No one, of course, can predict the future. If you refer to the above graph you’ll notice some interesting and possibly recurring trends in the rate of inflation and value of the dollar. During the crisis of 2008 the inflation rate plunged, dipping into deflation briefly according to the government CPI numbers. During the late summer and early fall of 2008 the dollar rallied by 20 percent – a huge currency move in a four month period.
As the Federal Reserve embarked on its monetization policy, they were temporarily successful in re-establishing inflation.
This summer as the crisis has worsened (or re-worsened as the case may be) the dollar has yet to strengthen appreciably and gold continues its move higher. And QEII has successfully increased inflation far beyond what the government will public admit. It is my belief that we are due for another bout of falling inflation – possibly deflation – and a strengthening US dollar.
What does this mean:
- Stocks will fall, possibly significantly.
- Commodities will be hammered – including gold and silver.
- Treasury yields will continue to fall. The bull market in Treasury will continue – at least for the remainder of the year.
- The dollar will rally, perhaps strongly. The dollar rally presents perhaps the best contrarian investment opportunity of the year. Nearly everyone, and I mean everyone, is sure the dollar is doomed as a currency – it will continue it’s fall into oblivion. I’m not suggesting that ultimately won’t happen. But, nothing goes straight down. The dollar is due for a rally. It may be short lived, but I believe it will be sharp.