When dumb money beats smart money, it’s time to worry

LiveWire11-03

There’s a strange twist in today’s stock-market narrative: while some of the so-called “smart money” struggles, the “dumb money” - i.e. retail investors with a long track record of under-performance -...

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Lamont, Ph.D., of Acadian Asset Management, argues that when the crowd of amateur punters begins outperforming the institutions, the warning lights start flashing.This is not a mere quirk of luck. It may signal froth, feedback loops and a market tilting into bubble territory. As we digest the signs, the key question emerges: are retail victory laps a bullish anthem or the opening act of the next correction?When market prices get dumb, the dumb money gets rich. The initial success of the first wave of dumb money motivates a second wave of dumb money, which pushes up prices further. This feedback loop, Shiller’s “naturally occurring Ponzi scheme,” creates market bubbles. Lefèvre  writes:. This retail success couldn’t last, because prices e","collect":0,"end_time":0,"defaultTopTitle":"livewiremarkets.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU1066053197.SGD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM3\" (SGDHDG) INC","LU2237443622.USD":"Aberdeen Standard SICAV I - Global Dynamic Dividend A Acc USD","LU2236285917.USD":"ALLIANZ GLOBAL INCOME \"AMG\" (USD) INC","LU0348723411.USD":"ALLIANZ GLOBAL HI-TECH GROWTH \"A\" (USD) INC","LU1599440770.SGD":"FIDELITY GLOBAL DIVIDEND \"A\" (SGDHDG) INC","LU1674673691.USD":"HSBC GIF GLOBAL LOWER CARBON EQUITY \"AD\" (USD) INC","LU0889566641.SGD":"FTSF - Templeton Shariah Global Equity A Acc SGD","IE00BFXG1179.USD":"BNY MELLON U.S. EQUITY INCOME \"B\" (USD) INC","LU1894683348.USD":"AMUNDI FUNDS US EQUITY RESEARCH VALUE \"A2\" (USD) INC","IE00BVYPNV92.GBP":"GUINNESS GLOBAL EQUITY INCOME \"C\" (GBP) ACC","SFYF":"SoFi Social 50 ETF","VTI.AU":"Visioneering Tech","LU1674673428.USD":"HSBC GIF GLOBAL LOWER CARBON EQUITY \"AC\" (USD) ACC","LU0234570918.USD":"高盛全球核心股票组合Acc Close","IE00BGHQF631.EUR":"GUINNESS GLOBAL EQUITY INCOME \"C\" (EUR) ACC","BK4560":"网络安全概念","BK4581":"高盛持仓","LU2456880835.USD":"ALLIANZ GLOBAL INCOME \"AT\" (USD) ACC","LU1066051811.HKD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM2\" (HKD) INC","LU1235294995.USD":"FIDELITY GLOBAL TECHNOLOGY \"A\" (USDHDG) ACC","BK4020":"通信设备","LU2286300806.USD":"Allianz Cyber Security AT Acc USD","IE00B42XCP33.USD":"GUINNESS GLOBAL EQUITY INCOME \"C\" (USD) INC","LU1066051498.USD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM2\" (USD) INC","IE00B3T34201.USD":"BNY MELLON GLOBAL EQUITY INCOME \"B\" (USD) INC","IE00BFMHRM44.USD":"NEUBERGER BERMAN GLOBAL EQUITY MEGATRENDS \"A\" (USD) ACC","LU1430594728.SGD":"Eastspring Investments - Global Low Volatility Equity AS SGD","LU0868494708.USD":"UBS (LUX) EQUITY SICAV - US TOTAL YIELD SUSTAINABLE \"P\" (USD) INC","SG9999001424.SGD":"United E-Commerce Fund SGD","FDN":"First Trust Dow Jones Internet I","BK4533":"AQR资本管理(全球第二大对冲基金)","LU1221951046.USD":"NORDEA 1 STABLE RETURN \"HM\" (USDHDG) INC","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","LU1880398471.USD":"AMUNDI FUNDS GLOBAL EQUITY \"A2\" (USD) ACC","LU1032955483.USD":"NORDEA 1 STABLE RETURN \"HB\" (USDHDG) ACC","BK7126":"医疗保健用品","LU1221951129.SGD":"NORDEA 1 STABLE RETURN \"HM\" (SGDHDG) INC","LU1778281490.HKD":"HSBC GIF GLOBAL LOWER CARBON EQUITY \"AD\" (HKD) INC","SG9999015945.SGD":"LionGlobal Disruptive Innovation Fund A SGD","LU0792757196.USD":"TEMPLETON SHARIAH GLOBAL EQUITY FUND \"A\" (USD) ACC","CSCO":"思科","IE00BVYPNW00.USD":"GUINNESS GLOBAL EQUITY INCOME \"C\" (USD) ACC","LU2237443382.USD":"Aberdeen Standard SICAV I - Global Dynamic Dividend A MIncA USD","VTI":"大盘指数ETF-Vanguard MSCI","BK4515":"5G概念","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","LU2237443549.SGD":"Aberdeen Standard SICAV I - Global Dynamic Dividend A MIncA SGD-H","SG9999015986.USD":"LIONGLOBAL DISRUPTIVE INNOVATION \"I\" (USD) ACC","LU1585245621.USD":"EASTSPRING INV GLOBAL LOW VOLATILITY EQUITY FUND \"A\" (USD) ACC B","LU2237443895.HKD":"abrdn SICAV I -  GLOBAL DYNAMIC DIVIDEND \"A\" (HKD) ACC"},"translate_title":"当笨钱打败聪明钱时，是时候担心了","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VTI.AU":1,"VTI":1,"SFYF":1,"CSCO":0.9,"FDN":0.9},"content_text":"There’s a strange twist in today’s stock-market narrative: while some of the so-called “smart money” struggles, the “dumb money” - i.e. retail investors with a long track record of under-performance - is unexpectedly winning. \nIn his piece below, Owen A. Lamont, Ph.D., of Acadian Asset Management, argues that when the crowd of amateur punters begins outperforming the institutions, the warning lights start flashing. \nThis is not a mere quirk of luck. It may signal froth, feedback loops and a market tilting into bubble territory. As we digest the signs, the key question emerges: are retail victory laps a bullish anthem or the opening act of the next correction?\nDumb money triumphant\n\n\n\n\n\n\n\n\n\n\n\n\n\nThe article below was written by Owen A. Lamont, Ph.D., Senior Vice President, Portfolio Manager, Research at Acadian Asset Management\nIs the U.S. stock market in a bubble? I doubt we’re there yet, but one sign of speculative froth is the recent success of retail investors. On average, retail investors exhibit anti-skill in their stock selection decisions, meaning that their holdings underperform the market. So when retail investors are winning, that tells you that market conditions are unusual.\nIt is fair to describe retail investors as “dumb money.” While some find this phrase offensive, I think it’s accurate. The word “dumb” is meant to describe their behavior, as opposed to their innate intelligence. Retail investors include highly intelligent and educated professionals, such as doctors and dentists. But they have a well-documented habit of making investment decisions that result in significant destruction of their own wealth, in other words, dumb behavior. Similarly, if finance professors ever try to perform surgery on themselves, it would be fair to call them “dumb surgery.”\nWhen market prices get dumb, the dumb money gets rich. The initial success of the first wave of dumb money motivates a second wave of dumb money, which pushes up prices further. This feedback loop, Shiller’s “naturally occurring Ponzi scheme,” creates market bubbles. Lefèvre (1923) writes:\nThe big money in booms is always made first by the public – on paper. And it remains on paper.\nAccording to this view, retail investors win in the initial stage of the bubble, but eventually lose when the bubble deflates. \nHere’s one story about the tech-stock bubble. Retail buying drove up the price of tech stocks such as Cisco, attracting yet more retail inflows. By the end of 1999, Cisco was one of the best-performing stocks, and retail investors, as a group, had outperformed. Call this retail outperformance “dumb alpha.” As of 1999, not only were tech stocks overpriced compared to other stocks, but the whole market was overpriced as its composition tilted toward tech. Thus, by late 1999, trailing positive dumb alpha coincided with an overpriced market.\nThis retail success couldn’t last, because prices eventually return to fundamental value. Thus, the positive dumb alpha of the late 1990s turned into the sharply negative dumb alpha of the early 2000s as the bubble deflated. Over long periods, retail investors lose, so dumb alpha is negative on average. However, during speculative episodes such as 1999 and 2021, dumb alpha can be positive.\nAs of today, unthinking fools are once again flourishing while those who follow reason’s rules are not. We see ample evidence of positive dumb alpha in the U.S. stock market, as retail investors have outperformed the broad market over the past year.\nFigure 1 shows cumulative returns on two ETFs reflecting retail investor holdings of U.S. stocks, one for U.S. investors and one for Korean investors. For U.S. retail investors, the SoFi Social 50 ETF consists of the top 50 holdings of clients of SoFi, a brokerage primarily serving U.S. customers. For Korean retail investors, the Samsung KODEX Investor’s Choice ETF consists of the top 25 U.S. common stocks held by Korean retail investors, as reported by the Korea Securities Depositary. In the past year, both of these ETFs have greatly outperformed, with total returns more than double those of the broad U.S. market, as measured by the Vanguard Total Stock Market ETF.\nFigure 1: Smart money vs. dumb money\n\n\n\n\n\n\n\n\n\n\nTotal cumulative return  in the past year. Source: Acadian, based on data from Bloomberg. Most shorted is the Goldman Sachs Highest Short Interest Basket; U.S. retail is the SoFi Social 50 ETF (SFYF); Korean retail is the Samsung KODEX Investor’s Choice ETF (473460), USD return; Total stock market is the Vanguard Total Stock Market ETF (VTI). Past performance is no guarantee of future results. For illustrative purposes only.\n\nSince the dumb money is winning, you know that the smart money must be losing. Short sellers have been among the smartest money, historically. Typically, the stocks that short sellers sell are the same stocks that retail investors buy, as shown by McLean, Pontiff, and Reilly (2025). On average, short sellers win, since the stocks they short subsequently underperform. But lately, short sellers have been losing. Figure 1 shows the performance of the Goldman Sachs basket of most-shorted stocks. When these stocks go up, the smart money is hurting. The smart money has endured quite a bit of pain, especially in the past few months.\nDumb money winning, smart money losing—that’s a market heading down the road to crazy high prices for some popular stocks and possibly crazy high prices for the whole market. We saw a similar configuration of performance in 2021, which was followed by a decline in the whole market in 2022, but an especially severe decline in retail favorites, as the dumb alpha turned sharply negative.\nHistorically, stock market bubbles (and, more recently, crypto bubbles) have been fueled by stories about ordinary people becoming fabulously wealthy through their investments. \nOf course, it’s always possible to find winners in the stock market, just as it’s possible to find winners at the casino, so these anecdotes are only suggestive. That’s why the aggregate evidence shown in Figure 1 is helpful.\nSo, is it time to get out of the stock market? I don’t know, but maybe you should ask some retail investors!\n\n\n\nNever miss an update\n\n    Enjoy this wire? 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