Grow Your Wealth by Following the Smart Money
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of ISAS, SIPPS, Investing, Stock Market on 11th July, 2011.
Tags: bull market, healthy lifestyle, institutional investors, isa, isa account, isaco, personal pensions, shadow invest, shadow investing, sipps.
Grow Your Wealth by Following the Smart Money - Part 2
Hello,
Yesterday I talked about how I like to invest alongside the smart money. You see, rather than trying to work it all out for myself, I prefer to follow the smart money crowd.
If the smart money is saying…
... they are happy with the market, and I see that they are aggressively investing, it gives me the green light to invest.
But if the smart money is saying they are unhappy with the market, and I see that they are aggressively selling, it gives me the red light which means don’t invest.
All I do is follow their lead. When Institutional investors are buying, I buy. When Institutional investors are selling, I sell.
All I do is quickly jump onto their coattails.
What this also means is as a bear market approaches, I will never be the first to sell at the top because I’d only sell after the institutional investors have started to sell.
Having the edge
I like to think of it as getting out on the 9th floor of a ten story building.
When it is clear to me that something is wrong because of the excessive and abnormal selling activity coming from the institutions, as my positions are small potatoes towards their huge war chests, it means the clients that shadow invest me can exit at the same time as I do, into cash, and at lightning speed.
Because my clients portfolios are relatively modest in size when compared to institutional investors portfolios, not only would it often take the institutions months to sell all their holdings, they would not be able to move completely into cash like we can because they are restricted by law by a mandate, which means unfortunately they have to stay invested – even in the most brutal of bear markets. Ouch!
On the flip side, as a new bull market approaches, my shadow investing clients and I will never be the first to buy at the bottom because we’d only buy after I’d seen institutional investors aggressively buying.
Again sticking with the 10 storey building analogy, we don’t get in on the ground floor, but we do get it on the first floor.
When it is clear to me that a new bull market is underway, due to our positions being modest in size, it makes us nimble and fast on our feet which means we can very quickly become fully invested in the market.
However because institutional investors have extremely deep pockets, it can often take them months to build up their positions.
This is what gives my clients and I an edge.
If you think about it, all we are doing is following the smart money. It’s a bit like asking the audience in the hit TV show Who Wants to be a Millionaire? The audience majority almost always knows the answer and that’s how I see it with the market.
The majority in the market is the smart money and it’s the smart money that always knows the answer to how news events will impact the global markets.
And that’s why I never get bogged down with details. All I do is watch and then act. I don’t try to guess what’s going on. Instead, as I move through time, I adapt to what has actually been happening.
I simply watch to see if institutional investors like what’s going on or dislike it. If they like it, I buy. If they don’t, I move into cash. It’s that simple.
And what’s good about it is that this approach is not like day trading and it’s also nothing like buy and hold. What we do is invest for the full duration of bull markets which tend to last two to four years in length and then move into cash in bear markets which tend to last between nine and eighteen months.
How are my clients performing?
In a typical year I’d make maybe one or two trades however the last time I made a trade on my ISA account was February 2009.
Right now institutional trading activity tells me all is still good which means for now I will remain fully invested.
But the market’s health and direction can change in matter of days and that’s why daily monitoring is essential.
You see this bull market is in its third year and bull markets tend to last between two and four years.
That means eventually this present bull market will end and that will be the time when the smart money tells me something has changed. That will be the time I see institutional investors selling heavy over a sustained period of time.
As I said earlier, this approach to getting in sync with the markets trend and direction is not new. Neither is following the price and volume activity of institutional investors. It’s an approach that works for me and so far it has helped me get it right about 80-90% of the time.
This approach has also helped me to stay ahead of the market over the long-term which means it could also help you too.
Take a look at this image below which show’s my performance from the beginning of 1999 until the end of 2010.
Can you see how this investment approach my clients have followed has helped us to outperform both the FTSE 100 and the Nasdaq Composite?
Since January 1st 1999 to December 31st 2009, when compared to the FTSE 100’s price performance, the Nasdaq’s performance, and Cash ISAs, I have been lucky enough to outperform them both.
It’s also helped the clients that shadow invest me perform pretty well too.
My last two year’s ISA account performance is a further clue to say this approach I use might be worth taking a closer look at.
| Annual Performance | 2009 | 2010 | 2 year compounded return |
| Stephen Sutherland | 62.9% | 27.2% | 107.2% |
| FTSE 100 | 22.1% | 9% | 33.1% |
| Nasdaq Composite | 43.9% | 16.9% | 68.2% |
As you can see from the table above, I’ve been fortunate to beat the market in the first two years of this present bull market.
Because I made a gain of 62.9% in 2009 and 27.2% in 2010, over the last two years, my compounded two year return is triple digit which many of my clients are quite pleased about.
Until the next time my friend.
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