PSSST! Are you looking for an easy way to make money in the stock market? Of course you are! Well, here’s a three-step plan that can’t go wrong.

First, identify those people who are well-known for being good at picking winning stocks and investing in them.

They can be gifted fund managers; tycoons who occasionally like to buy and sell small stakes in companies, presumably to buy rojak at the weekend (as Tun Daim Zainuddin famously put it); or anybody else who is known to have an uncanny knack for buying shares in companies just before the prices shoot up.

A keen observer of the corporate scene won’t have any trouble spotting such people. Alternatively, just zoom in on anybody whom the media labels as a savvy investor or as smart money.

Next, watch these guys carefully. Keep track of their transactions in the stock market. And finally, mimic their every move. When a savvy investor buys a stock, you immediately do the same. And when he disposes of that investment, you rush for the exit door too.

Does that sound like flimsy advice to you? The thing is, many people do exactly this. Often, after news has come out that a certain individual or fund had bought a significant amount of shares in a company, the counter is heavily traded and the price soars.

Investor education website Investopedia has quite a bit to say about this strategy of shadowing savvy investors. It defines smart money as “cash invested or wagered by those considered to be experienced, well-informed, ‘in-the-know’ or all three.”

“Although there is little empirical evidence to support the notion that smart-money investments perform any better than non-smart-money investments do, many speculation methods take such influxes of cash very seriously,” it adds.

“Because insiders and better-informed speculators typically invest more, smart money can sometimes be spotted by greater-than-usual volume, especially when little or no public data exists to justify it. Knowing who the smart money is and when and where they’re investing can be of great benefit to retail investors who want to ride the smart money’s coat-tails.”

So yes, some people love riding the slipstream of the smart money. But the problem is, you’re as good as riding blind, and your bicycle is a boneshaker compared with the sleek and expensive racing machine that the smart money is pedalling furiously. When an express bus is barrelling down the wrong side of the road, guess who will struggle to get out of harm’s way?

Retail investors must understand that in stock market investing, the game of follow the leader (in this case, the savvy investor) is dangerous and the odds are stacked against them. Here’s why:

l Not in the same league: The savvy investors and the retailers have different risk appetites and investment horizons. The former typically can stay invested in a stock for a long time and can wait out a storm if necessary. They’re not easily spooked by volatility and may even be willing to buy more shares when the prices are plunging. They have deep pockets and can thus spread their risks. And they’re unlikely to let emotions get in the way of selling to cut losses or for narrow gains if they feel there’s no longer any upside. How many retailers can say the same about themselves?

l They know more: Savvy investors are savvy because they have better access to information. They can pay for solid research support. Their networking brings them insight and knowledge usually unavailable to other investors. Given their size and reputation, savvy investors often get to engage with the management of listed companies. In fact, the management sometimes courts these investors.

l It may not be just about the share price: When a savvy investor acquires a sizeable stake in a company, it’s not necessarily true that he has uncovered an undervalued gem. There may be other reasons for the investment. For example, this may be a prelude to a deal that benefits another business that he controls. Or the savvy investor is merely making a strategic move in a large and complex chess game.

l Savvy investors don’t have to share: There’s nothing to compel savvy investors to reveal their investment plans. This lack of transparency is a huge risk to other investors. The retailers may know when the savvy investors have bought shares and for how much – which can serve as a useful benchmark – but there’s no telling when these shares will be sold and the target price the savvy investors have in mind. A sudden disposal by a savvy investor may trigger a sell-off, and the unlucky retailers who are slow to react may be left holding the baby.

In some cases, the savvy investors have agreed to buy more shares at prices lower than those of their initial acquisitions, thus bringing down their average cost. This too will be an unpleasant surprise for investors who have bought shares soon after the savvy investors’ original purchases.

Source: http://www.thestar.com.my/Business/Business-News/2014/05/10/Be-savvy-about-savvy-investors-Why-its-not-always-smart-to-follow-the-smart-money/