ARE INDIVIDUAL STOCKS INVESTORS "DUMB MONEY"?

A writer in The Wall Street Journal yesterday called the money individual investors put in the stock market "dumb money". You can read the article here.

The article goes on to say that because earnings are up, optimism is up, and the economic numbers are improving that more and more regular people are putting their money back in the market.

The term "dumb money" in stocks is similar to the term "dead money" in poker tournaments. In a poker tournament, all contestants that are recreational players are thought to be buying in with dead money since they presumably have little to no chance of winning. Only the professionals put in the smart money because they have the best chance to win.

Dumb money in the stock market is similar in that it presumes that individual investors have no idea what they are doing and are incapable of analyzing stocks and making decisions based on fundamentals. It assumes people invest with their hearts because they like certain stocks but they lack any concrete data or reasons to pick those stocks. When individuals pick their own stocks and decide it is time to go back into the market, they are doing it with "dumb money".

Stock analysts and anyone in the industry have smart money because they presumably know what they are doing. It is their "job" to know what they are doing. I assume that if people put their money in mutual funds or any vehicle where a "professional" gets a commission it wouldn't be as dumb of them.

Wall Street has often been portrayed as a very exclusive "club" of young professionals who get paid millions and live the high life. Whenever there is a stock scandal of any kind, politicians spew on and on about how Wall Street needs to be regulated or controlled in some way. Wall Street is viewed as a haughty group by many and using the term "dumb money" doesn't help stop that perception.

Articles like this which propagate the myth that individual investors are dumb seems to me to be a dumb thing to print. Why insult people? Actually, why insult the very people that you are hoping will use your professional money management services? It sure doesn't make me want to run out and hire a financial expert to take my investing to the next level!

STOCK INVESTORS SHOULD BE PREPARED TO BE WRONG

Am I the only one that buys stocks only to watch them go down the next couple of days? It seems that 90% of the stocks I buy go down right after I buy them. It's almost as if my buy order signals the stocks to go down! Now I am pretty sure that I must be experiencing selective memory but it does seem that way nevertheless.

If you are going to learn to invest your money in the stock market, one thing you have to be prepared for is that you will have losses. You will make bad stock picks and you will be wrong some of the time. It doesn't matter whether you are picking your own stocks or whether you are taking the advice of a professional, you will have stocks that are losers sooner or later.

The good investor will learn how to minimize those losses by getting out before too much damage is done but he also knows when to buy back in. The good investor will also be able to pick more winners than losers and learn how to negotiate the ups and downs of the market for a lifetime of smart investing.

One way you can lose money is by doing a lot of panic selling. Some investors hate to see their stocks go down and once it seems like that is the way a stock is going, they sell it. Selling isn't always bad of course, but if you are doing it all the time based purely on emotion because you are scared, you will find it very hard to make money in stocks. You should usually be buying and selling stocks based on a stock's fundamentals and the future you see that company having.

2008 was an awful year in stocks and a lot of people lost a lot of money. The same thing could be said right after 9/11 when the market went down fast because of fear and panic. Now, anyone who sold during those times when the market was plummeting did avoid further losses and that is good for some people. But if you kept your money in after 9/11 you got it all back several years later and a lot more.

The same thing will probably be said about the Dow going from 14,000 down to 7,000 in 2008: if you left all your money in you have gotten a lot of it back as of today and will most likely get all of it back, eventually. That is if you have the time to wait.

Panic selling and selling based on fear means that you are most likely afraid to buy back into the market. You are often paralyzed and your money will be out of the market too often. It is a fine line between being out of the market based on what you see happening with the economy or a stock and being out of the market just because you are scared.

When you invest in stocks, you have to be prepared to withstand some losses and be alright with the fact that your stocks may not go up the second you buy them. You also have to know that some of your picks will be bad ones. The good investor will be able to recognize the bad picks based on what is happening with the company or economy that turned the pick from a good one to a bad one.