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It's Dumb To Buy 'Smart Money': Wall Street's Rules, Part 5

This is something that often escapes many investors who seeks to play "Simon says" with their holdings by buying whatever some "smart hedge fund" manager has bought - particularly those investors who are of novice status.

What's more, Wall Street preys on this weakness. Think about it: How else can the value of an investment be immediately raised if not by retail investors buying right after a fund has invested millions? It makes absolutely no sense to me.

Do we really need to know the holdings of "smart money" in order to determine if Apple (AAPL) is a good investment and why Research in Motion (RIMM) should be avoided?

After all, wasn't it "smart money" that was so instrumental in Facebook's (FB) hype-filled IPO? How's that working out? For that matter, Facebook, which continues to battle both fundamental and valuation concerns, represents just how dumb smart money might actually be.

While Facebook is a good concept, its 955 million users just aren't enough to justify its high trading multiple, which remains more expensive than both Apple and Google (GOOG).

But if investors believed in their own due diligence and placed less value on those they think are smarter than them, Wall Street would not be the scary place that many perceive it to be. But so it is.

By contrast, these same smart-money bears continue to attack Amazon (AMZN) suggesting that it is overly expensive. This is insisted upon even as the company continues to prove why valuation does not matter. In terms of reported sales, there aren't many companies of Amazon's size that are producing the level of growth it has demonstrated.

As a result the stock is up 35% year to date and more than 170% in the past three years. "Smart money" has likely missed a considerable amount of these gains.

Clearly, retail investors were the smart ones in this case while "smart money" was left on the sidelines fighting the Amazon story at their own peril.

Bottom Line

I cringe each time I read a headline about some hedge fund manager eyeing a certain stock because I know there are suckers out there who think they should do the same.

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