When the SmartMoney is Dumb

At times, my good friend, Jeff Howe, coyly claims that he’s dumb. 

He doesn’t have a college education, but if anyone believes that he’s a few bricks short of a full load, the joke’s on them.

As a successful businessman and investor, he’s smart enough to see opportunities on platters, where other people just see the platter.  Let’s take March of 2009 for example.  He saw that stocks were trading at their safest levels in years — after being offered at great discounts.  Some great businesses were selling at single digit PE levels.  So he scraped together whatever money he could and invested aggressively in the stock market. He hoped the markets would stay low, or go lower, so he could back up the truck and buy more.

Of course, Jeff’s investments have risen about 46% since March.  And he’s hoping for another, more sustained market drop, so he can fill his investment sack with more cheap shares.  That’s the really smart money talking.

This morning, I found an old copy of SmartMoney magazine, dated April 2009.  And while Jeff was buying safe stocks (the cheaper the price you pay for great businesses, the safer it is) SmartMoney had the following cover headlines:

“Protect your Money”
“5 Strong Bond Funds”
“Where to Put Your Cash”
“How to Buy Gold Now”

Thankfully, Jeff invested in stocks, and beat the magazine followers by more than 47% overall–because bonds have generally dropped in value since March, while stocks have soared.

By following the magazine’s herd, Jeff would have invested in bonds.  But bonds had risen in value before those articles were penned.  So their prices were high.  And stocks had dropped a ton before those articles were written, so they were cheaper than they’d been in years.  The magazine’s articles were prompting its readers to buy high (bonds) and ignore the lows (the stocks).

It makes me think of one of Warren Buffett’s truisms:  Noah didn’t start building The Ark when it was raining.  If he had, he might have found a shortage of wood.  Supply for boats and boat materials would have been low as the water levels rose.  Anyone selling marine products could have demanded high prices for them.

The people who owned boats ahead of time (like Noah) were already prepared.  They bought boats and materials when they were cheap.  But the difference between Noah’s world and ours is that the great floods can come at any time.  We’ve had market crashes on numerous occasions, but too few people buy their boats when the sun shines.

Jeff Howe knows this.  When the metaphorical waters rise, people start giving away their land at rock bottom prices.  And the water always recedes eventually.  Replace the word “land” for stocks, and you’ll see what I’m getting at.  Replace the words “boat” for bonds, cash and gold, and then we’re on to something.  When the stock markets dropped in March, Jeff was buying stocks with both hands.  Bonds, cash and gold were the last things he wanted. 

Bond prices soared, like boat prices would because the dumb money piled into them.  Everyone was looking for safe havens, driving the prices of those havens upwards.

The first SmartMoney headline, “Protect your money” plays on the concept of irrationality.  The best way to protect your money is to ensure that, in the future, your money has greater purchasing power than it does today.  But when the magazine was telling you to protect your money, bond yields had been driven down to near-historic lows.

The magazine was catering to the people who invest using the rear view mirror.  Instead, here’s a novel concept that isn’t really novel:  Buy bonds when they’re cheap—not when they’re expensive and buy stocks when they’re cheap—not when they’re dear.

The magazine editors were actually pretty smart—at least I’ll give them the benefit of the doubt.  They knew that most people buy high and sell low.  And they opted to show their readers the very best way of doing that.
 
It doesn’t take a guy with a college education to figure that out.  Well done Jeff.