Investor Sheep to Slaughter Again?

Jun 5, 2014 by

sheep to slaughterIf you’ve been visiting here long you know my favorite investing blog is Juggling Dynamite, run by portfolio manager Danielle Park. I appreciate Ms. Park because she’s that rare person scarcer on Wall Street than even in Washington: a truth teller. She does not drink the Kool-Aid, and she pulls no punches in exposing what Wall Street’s really all about: making money for Wall Street at the expense of, mainly small, investors. (See Killer Fund Fees, High Frequency Trading, Is Your 401(k) a Rip-Off?, Financial Adviser or Huckster?, Why I’m Wary of Stocks, Must I Own Stocks?, and Buyer Beware Applies to Wall Street. (Wow, that’s quite a list! At least I’m consistent if nothing else. 🙂 ) At times Ms. Park seems to me alone in pointing out that the emperor has no clothes.

Retail Investors (That’s You) Piling Into Market

Juggling Dynamite recently published this graph:

net buys of us equities


The graph shows net buys of US equities by three different categories of buyers: hedge funds, institutions, and private clients (that’s you and me). You might say the lines depict whether these groups are, overall, getting into or out of US stocks.

Let’s trace the Private Clients green line across the six years the graph depicts. Predictably, private clients bailed out of the market during and after the financial meltdown. Then small investor divestment stabilized, and for several years, private clients continued to pull money out of the market, but at a more or less constant rate. But 2013 brought abrupt change. Last year small investors began piling back into US stocks.

The “Smart Money”

Now let’s compare what hedge funds and institutional investors—the so-called “smart money”—have been doing over the same six years.

Both hedge fund managers and institutions were buyers post-meltdown, scooping up cheap shares that were being sold in panic and horror by small investors.

But since about mid-2009 hedge fund managers have been gradually and continuously losing more and more interest in US stocks.

And in a near mirror image of small investor behavior, institutions have been bailing out of US stocks big time since about mid-2012.

Why Do Small Investors Do What They Do?

To me, the green line—private clients—illustrates two effects:

  1. Small investors’ behavior is governed by greed and fear, or human nature in other words. As a result, many small investors repeatedly buy high and sell low, just as they’ve done the past six years and are doing now.
  2. Wall Street has worked tirelessly the past half-decade to blame others (chiefly politicians and bureaucrats, everyone’s favorite whipping buoy) for the 2008 meltdown and to re-establish in small investors’ minds that they risk retiring on a cat food diet if they don’t turn over the lion’s share of their savings to Wall Street money managers.

What Ms. Park Had to Say

Here’s what Danielle Park had to say on Juggling Dynamite about this graph:

I guess you do have to hand it to those bankers; maybe they are brilliant after all. They wagered that if they could keep pumping up the stock market long enough via QE and creative accounting manoeuvres, the little guys who had fled in tatters in 2007-09 would finally be sucked back into the fray at cycle highs once more. Its a maniacal cycle to witness: central banks pump “free” (taxpayer-backed) liquidity into the investment banks and hedge funds off the market bottom, which allows them to buy (when price risk is the lowest) from all the retail investors who are selling in panic with huge losses. Then after these “strong hands” have enjoyed every conceivable concession and advantage, they take profits and raise cash by selling down their equity holdings back onto the retail crowd just as price risk moves back toward cycle highs. Waiting to repeat the cycle all over again. Seducing and then slaughtering sheep is a very lucrative business model indeed.


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  1. Kurt, correct me if I’m wrong, but aren’t most company retirement plans institutional investors? I realize that banks and such are probably the majority of the investors in that group but I’m wondering where the average company retirement plan falls. Since I think the majority of “average investors” have most of their savings in a company retirement plan.

    If that’s the case then perhaps the average investor (who has most of their retirement savings in a company plan) is hedged against their “private investor” tendencies to jump into the fire while the markets keep going higher and higher.
    I realize I’m making a lot of assumptions of the average investor here but I’m wondering how an investor with the majority of their money in a company retirement plan might balance out this trend in the graph.

    • Very good point Zee. Wikipedia gives these examples of institutional investors: “banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds”. Of these, I think only the buying and selling of stocks through the passive category of mutual funds, and perhaps ‘retirement funds’ depending on exactly what is meant by that term in this context, would reflect small investors’ market sentiment. I don’t know what fraction of all institutions that passive mutual funds and retirement funds would represent, nor do I know exactly how “institutions” and “private clients” are defined in the graph.

      That said, I don’t know why small investors buying and selling stocks through passive mutual funds would, on average, exhibit a dramatically different sentiment regarding stocks than would small investors buying and selling stocks directly (i.e., not through passive mutual funds). So my guess–and it’s only a guess–is that the “institutions” in the graph excludes passive mutual funds or passive mutual funds make up a relatively small fraction of all institutional investing.

  2. MoneySmartGuides

    Most investors invest based solely on emotion and buy and sell at the wrong times. If they had set up an automatic investment plan, they would just buy all of the time, during the highs and the lows and them losing money wouldn’t be such an issue.

    • Right on. Trying to time the market is equivalent to predicting a roulette wheel spin outcome. Everyone gets lucky sometime, but no one can repeatedly succeed at these sorts of predictions.

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