No offense to taxi drivers and maids and shoeshine boys who talk about the stock market nowadays. For sure they too have the right to invest in the stock market. Just like everyone else.
It is actually just an expression, a belief that once more and more of the masses and generally those who are less exposed to financial literacy, once the stock market gains so much media buzz that even the common people are talking about it and wanting to have a piece of the action, then it is time to sell. There comes a point when the stock market has gained much popularity that understanding of the risks involved is greatly diminished, and we just choose so see the rewards that the market can provide.
A related saying is that dumb money buys from the smart money. When dumb money starts to enter the market given all the media buzz, with all the euphoria and hype and numbed sense of risk and loss, that is the time stock prices go further to unrealistic accelerated levels, driven by dumb blind demand and not by underlying fundamentals. That is the time when smart money starts to sell to the dumb money. And then the eventual correction. Smart money gains. And those who joined the action too late get burned.
Be a Sheepdog, Not a Sheep
John Mangun in his article It is dangerous to be a sheep does not really talk about an impending collapse meant to scare us. But rather, a realistic sense of caution and preparation. An acknowledgement of the ever present risk of loss. A reminder that the stock market is cyclical and that time and time again, there will be bearish trends, there will be corrections. In spite of the uptrend and substantial gains thus far, the risk of loss is ever present.
Non-Discriminatory But Responsibly
Again, this is not to isolate or discriminate anyone, not to discourage anyone from investing in the stock market. If all of us can do so armed with the right understanding and strategy, then why not? But all of us should be armed and informed. Do so responsibly. In times like this, more and more people are just blindly entering the stock market without proper education, mindset, research and strategy. Only to fall victim to those just waiting to sell high to the dumb uninformed money. Hard earned money invested blindly just like that, just like in a pyramid scam.
Investors must understand that the stock market operates in a very real sense like a pyramid scheme. That is, investors that buy into an issue early are able to profit because of buyers later in the game. There is nothing wrong with that. All buy low and sell high in every business works that way. The first investors who started selling pearl shakes made a fortune; the ones who opened stores a few years later probably lost money. However, you do not want to be the last one in on a fad or the last one buying at the stock-market price top. (Mangun)
Even in stock market forums, more and more people are choosing to stay at the sidelines nowadays. Not participating in the gains of late, but waiting for the cleansing, the correction, the normalization of prices when they can buy cheaper issues. It’s like waiting for the mall’s annual sale. They say it can happen this February. Who knows?
Whether bullish or bearish, the RISK is always there. “The sheepdog is prepared for those events by understanding the potential for loss. The sheep believes it will never happen.”
Be the smart money. Be a sheepdog.
Source: It is dangerous to be a sheep