Smart Money vs Dumb Money

For many people, spring is the most beautiful season of the year. In economic terms, this is the phase of an early recovery, as introduced in the previous chapter.

New jobs, new perspectives and new confidence are dominating this stage in the real world.

During this enjoyable economic awakening, the investor’s focus should be on technology or consumer stocks. They profit from the new confidence during the early stage of a economic recovery. But the most important thing at this stage is to sit having allready fully invested.
Or, in the language of traders – the smart money waits for the dumb money to enter the market.

In this market cycle, called market top, Dow Jones, Stoxx 50, DAX and co. are producing record closings on a regular basis and the market-action leaves the usual boundaries of experienced investors and reaches out to the general public.

The stock market becomes the topic in conversations over lunch, new TV channels appearing with market-news around the clock or bankers try to turn savers into investors and convince them to enter the market right now.

The smart investor, who already invested his money one market stage earlier, as proposed in the last chapter, has now 4 topics:

1. He sits back a while and watches how new investors – following tips of friends, media or bankers – popping up the share prices across the board and boosting the performance of the ‘smart money’ even more. The money of newcomers is labeled ‘dumb money’ as it’s invested at the highest prices close to the market top.
2. Even the hottest summer turns into fall at some point. A smart investor follows this law of nature. While the music is still playing and the general public is dancing, he leaves the party.
3. He sells his shares while the market is still rising.
4. He is not bothering to miss some new highs, there is a much more important thing for him to take care – to prepare for Mr. Bear.

A powerful creature and the symbol of falling stock markets, the bear, is just around the corner.

To profit in a general rising market is no big deal. The real challenge is not to lose money when the market tanks as it happens in stage 3 of the stock market-cycle. More on that subject in the next chapter:

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