You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

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'Smart Money' of Stock Market

On January 8, when the Jakarta Composite Index (JCI) was on 4,500’s, I wrote an article entitled ‘After the Despair, Then What?’, where the point is that JCI was in a period of consolidation, and this period can lead to a bull or further bear market. But considering the economic conditions etc., I said that the consolidation would lead to a bull market, or at least the JCI would move several percent higher (you can read again the article in here). And here we are: When this article was written, the JCI has gained significantly and is now on 4,800's.

But today we will not discuss about the JCI. In that January article, I displayed the following image, click the image to enlarge:

Now pay attention: In the picture above, it is mentioned that there are three groups of investors in the capital market. They are ‘smart money’, institutional investors, and public investors. Smart money has been buying stocks long before the two other groups, that is, when the stock index is still low, precisely below the line of the mean.

While institutional investors only start buying when the JCI has taken off, or in term of technical analysis, break out. Finally, public investors, they only start buying after the JCI has gained steadily until it eventually ignite the enthusiasm of the people in the market, or in other words, when the JCI has been in bullish period. From here it is quite clear that the group of investors who generate the largest profit is the group of smart money, while most of public investors only enjoy relatively little profits, because they only bought shares when the price of stock was not cheap anymore.

So who is this ‘smart money’? And how could they buying early when most people are still undecided about the direction of the market?

A smart money can be anyone, whether it be institutional investors with billions of asset under management, or individual investors with small funds. However, there is one thing that distinguishes them from most market participants: Smart money is able to focus on economic fundamentals rather than the JCI itself, just as they were able to focus on the fundamentals of a company’s financial performance, rather than the fluctuations of stock prices of the companies concerned.

While most investors and traders, they only look at the position of JCI and stock prices, often without looking at factor of fundamentals at all, that if the JCI was falling down they would panic and rushing out from the market, and conversely when JCI has gone up, they would enter the market again. Easy example, in March 2015, the JCI continued to break new high to a 5,400’s, so the stock market seemed good, so that the people kept buying stock although  the Rupiah continues to weaken, people's purchasing power fell, and any business started to slowing down (we once discussed about it in here). And when the market actually fell in late April 2015, only then the people rushed out, but it was too late!

A few months later, the JCI and also Rupiah continued to fall, until people began to worry that Indonesia could fall into serious crisis like 1998, whereas the economic slowdown that occurred was not that bad (we've discussed it in here in September 2015, in which I said that although the Rupiah continues to fall, but it wouldn’t lead into a crisis). The climax happened in August and September, where the condition of the market at the time was completely opposite to what happened in March: Panic selling!

Luckily, entering the third quarter of 2015 until the beginning of 2016, the economy is slowly but surely improving, the performance of listed companies also began to recover, and JCI are also slowly but surely started to rise although with several setbacks, one of them was in January in which the JCI is dragged down by a decline in Shanghai Stock Index and Dow Jones. And again, the people fell in panic just because the stock index fell slightly, without able to see that it was precisely an opportunity. The most recent, when several days ago a state official said that the NIM of Indonesian banks would going down, some good quality banking stocks like BBRI, BBNI, BMRI, and BBCA immediately dropped, and some people  instead selling those stocks at low prices when they should buy, just because they didn’t understand what happened!

In short, when most people only see the position of JCI and hence became optimistic/pessimistic, the smart money can always steal a start, where they sell early before the JCI fell, and conversely, they buy early before the JCI rose. When most people somehow see BBRI as ‘bad company’ when the shares are sold at a price of Rp8,000, ASII at 5,000, and UNVR at 34,000, then that's when the smart money secretly entered the market. And when a few months later people finally busy talking about the rise in certain stocks, and analysts began to say that ‘The JCI is going to 5,000', but the smart money has taken positions in advance, of course, at a much lower price, and consequently they generate much larger profit.

Going forward, regardless that the JCI is going to go up or down once again, but the smart money will always focus on fundamental factors, which, if the performance of the listed companies do not match expectations and the economic development seemed to worsen again, then even if the JCI is trying to break new high, they'll leave. But if there are no fundamental changes, they’ll hold their positions.

How to be smart money?

Now, how do we become smart money? Well, the key is that you should be able to resist the psychological current of the market. But it is not easy, and I myself is still learning to do that. But based on experience, here's what you can do:

The first, and this is the umpteenth time I say this, do not ever buy stocks without analysis.
And related to the movement of JCI, you should be able to analyze the fundamentals of the national economy, and able to do the field research on the development of business, able to identify important economic issues, then assess how they affect the stock market. Plus, you also must be able to identify issues of global economy, such as the decline in oil prices, the Fed Rate hike, the falling of the Shanghai Stock Exchange in China, and so on. In short, you must read a lot. As an investor, you should invest your time to broaden your horizons, instead of watching the ups and downs of the stock all day.

Second, enrich your experience. In above I said that most people only see the position of JCI in which they would be euphoric when stock index rose, and panic when the stock index sag, while the smart money is able to focus on something that far more important, namely the economic fundamentals.

But to be focus like that then you’ll need considerable knowledge and experience. If you have only been 1 – 2 years in the market, you will usually be easy to panic when others panic, and otherwise easy to feel the euphoria when others are euphoric, and it is completely normal, where all you have to do is to keep going, keep investing and learn everything about capital markets, until finally you will come at a position where you become more patient and not easy to panic.

Only indeed, if you've been long enough in the market, say over 5 years but until now you are still easy to ‘suffer’ a heart attack, then try to check, maybe this time you use the wrong method in buying stocks.

And third, be careful with the rise in stock prices that is not supported by fundamental factors. When the market dropped then almost all shares, no matter with good or bad fundamentals, usually also dropped, and some people might make the mistake of selling good stocks at a low price, just because of fears that they would dropped further.

Meanwhile, when the market is rising, then almost all stock, no matter with good or bad fundamentals, will go up. In this condition some people may buy a ‘bad stuff’ just because they amazed by its excellent rise (tens of percent, or even more) in just a matter of days. Actually, there are some speculators that are specialist of this kind of ‘flying stocks’ by completely ignoring the fundamental factors, and they might successfully generate large profit by swing trading. But like it or not, most of those speculators will suffer losses and also stress, because they have to keep watching their stocks at all times. Well, I do not suggest that you should feel stress like that because, trust me, the profit we gained from the stocks will be sweeter if we make it by way of sit back and relax all day, travelling, or while still doing whatever your activities in the office or at home as usual :)

Okay, I think it's enough. Unless there are interesting topics, next week we will discuss one stock that the market is still pay no attention to it, but based on the rule of value investing, it actually offers an opportunity of decent profit with a low risk plus in a medium term.

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