The Opposite of ‘Smart Money’

Article Excerpt

Rising stock prices inevitably lead some investors to get too confident and make dumb mistakes. I’ve seen it again and again since 1964, when I had the good fortune to stumble into an investing-related part-time job at age 16. Back then, investors were still shell-shocked at memories of the 1962 market collapse. But a great deal changed by the end of that decade. As the market rose, investors forgot the lessons and caution they learned from their 1962 losses. A new generation of money managers (the so-called ‘gunslingers’) rose to prominence. The gunslingers scandalized older money managers with tactics such as buying ‘letter stock’. This was an investment in junior companies that had no market for their common stock. The buyer had to send a letter to the securities commission, promising not to sell the stock until the company produced an acceptable prospectus. Of course, some companies went broke before they got around to producing a prospectus. The letter stock had an advantage…

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