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What the ‘Big Money’ Is Doing Now
The Investment U E-Letter: #336
Monday, May 10, 2004
What the ‘Big Money’ Is Doing Now
And Why You Should Do the Opposite
By Dr. Steve Sjuggerud
President, Investment U
I love to know what the “big money” is doing… so I can do the opposite. That way I can really make money…
Yes, although it might sound counterintuitive, you can make more money, and lose less, by first determining what most professional investors are buying and selling – and then doing the opposite.
Here’s what I mean…
How the Pros’ “Picks” Fell 38.2% And Their “Pans” Rose 2.6%
Every six months, Barron’s magazine polls the “big money” – some of the world’s biggest investment managers – to see what they’re buying and selling. Mom and Pop America often look to the big money to see what they should do with their own investments. At least over the last three years, that’s been a big mistake as you’ll see, following the pros is NOT the path to wealth.
In the Fall of 2001, Barron’s listed 11 “picks” from the pros – stocks that should go up – and 10 “pans.” Over the next 12 months the favorites from the superstars fell by -38.2% – a miserable performance! Meanwhile, the “pans” – the stocks they thought would fall – were up by +2.6%.
Six months later (Spring 2002), the pros had 15 picks and 14 pans. Twelve months later, the results were the same the stocks the pros liked fell by -15.5%, and the stocks they hated were basically flat (-0.3% return).
In the fall of 2002, the results were even worse for the pros over the following 12 months Their picks rose by 19.6%, but their pans rose by an extraordinary 52.7%. The Spring 2003 story was almost the same: picks up 25.7%, pans up 44.7%.
While 12 months have not yet passed since the fall 2003 big money poll, the story is once again the same: The pans are beating the picks.
It doesn’t always go this way. During the bear market in 2000-2001, the pros’ picks lost a lot of money, but their pans lost even more. However
Since 2000 (all the data shown in Barron’s), the pros’ picks have lost money most of the time. And the few times they did manage a positive return, the pros’ pans outperformed their picks.
The moral to this story is, contrary to popular wisdom, following the “big money” is not the path to wealth.
What the Big Money Is Saying Now
Only 12% of the “big money” is bearish right now, which means that only 12% expect stock prices to fall through the rest of this year. This according to Barron’s is a record low. To me, it tells me that the big money is fully invested in stocks, and that everyone who wants to buy has bought. I interpret that to mean that there is very little upside left in stocks.
The big money expects energy stocks and healthcare stocks to be the poor-performing sectors. And the big money loves financial stocks right now (40% of respondents said it was their favorite sector). So maybe it’s time to consider betting on a decline in financials later in the year.
What stocks do the pros like? The same old names GE, Pfizer, Microsoft, TimeWarner What do they dislike? Amazon (15% of respondents gave the thumbs-down to Amazon). I’m sure it won’t surprise you that Amazon shares have outperformed those big money favorites over the last year.
The most startling revelation was that only 1.4% of respondents were bullish on U.S. Treasuries. That means that only 1.4% expect long-term interest rates to fall. Said another way, 98.6% of respondents expect interest rates to rise or stay the same.
If you have a contrarian bone in your body, it’s time to buy U.S. Treasuries. The contrarian case is even more powerful for corporate bonds, where 0% of respondents were bullish.
The Case for Selling Stocks and Buying… Bonds
I get a kick out of this last number the fact that not a single respondent of the big money poll was a buyer of corporate bonds. Think about this
Only 12% of respondents called themselves “bearish” on corporate equities – stocks. That means that most of these folks are excited about corporate prospects. They also reported that they were bullish about economic growth as well, expecting the economy to expand by over 3% through 2005. Yet somehow, corporate bonds are thoroughly unattractive to the big money. I’ll have to look into buying corporate bonds
The pros currently have 75% in stocks, 10% in cash, and only 14% in bonds. Looking forward, chances are, the pros won’t increase their positions in stocks much more than they already have, as 75% is a pretty healthy allocation to stocks. And looking forward they won’t decrease their holdings much in bonds, as 14% is a pretty low number.
Based on that, in the next few years, the big money may end up selling stocks and buying bonds, to bring their allocation back to a more normal level. Smart investors might sell stocks now and buy bonds raking in nice profits when the managers shift back to normal.
Getting back to the basic message, don’t believe the big money knows it all – the big money is not the path to real wealth. If anything, when the big money is all doing one thing, it may well pay to do the opposite
Learn about this super-secret opportunity in a new special report: “The Billionaires’ Secret.” Read this to learn how easily the rich are capturing fabulous profits and you can too.
Today’s IU Cribsheet
- Much of the research for today’s IUEL came from Barron’s magazine. I would recommend you check out the online version by visiting www.barrons.com. Another of my favorite research tools is Morningstar, which you can access though www.morningstar.com.
Good investing,
Steve
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