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Play the Stock Market Like the Wealthy

NEW YORK ( TheStreet) -- A good friend of mine, who calls himself "The Parrot Investor" because he likes to copy the investing behavior of the notably successful, wrote me after reading one of my missives.

"Polly has a problem," he confessed. He explained he had received contradictory messages from two of his investing mentors. One said now was the time to be cautious and stocks were about to correct. Another was saying, in essence, "Don't worry, keep buying."

"Is the message that I cautiously pile into stocks right now? At times it's hell to be an imitator. Is it easier to pick an adviser or a stock? Maybe it's time to lose my bird brain before I lose my shirt. Now if I could just pick the right mentor," my puzzled friend lamented.

Perhaps I answered too hastily, but here's a portion of how I replied. "The right mentor isn't someone selling newsletters or a zillionaire like Warren Buffett. It's someone just like you who has your level of investment resources and is consistently employing the wisest and most relevant (that fits this time of program trading and flash crashes) strategies, disciplines and lessons learned."

Then I waxed metaphysical and wrote, "A hint: It's not your ego or mine, but if you look in the mirror and stare into your eyes you'll see him. He's your best self, your wise, observing, peaceful, soulful intelligence. It is with us always and it makes the best mentor possible."

My "best self" is telling me to study the behavior of wealthy investors. A study heralded in financial journals of late reveals the findings of three economists from three well-respected business schools (Columbia, Harvard and NYU's Stern School of Business).

The economists analyzed the positions and trades of more than 260 of the super-wealthy between the years 2000 and 2009 (a harrowing period of time for traders and investors). The data came from an undisclosed private firm that consolidates account info for the super-wealthy.

The results confirmed that the wealthy capitalize on their "comparative advantages" and the strengths they uniquely possess. Since they're very wealthy they have access to special offerings like private placements and longer-term investment opportunities.

The study determined the uber-wealthy park about 20% of their investable capital in hedge funds and various types of venture capital deals and private equity opportunities. These rich people don't flip their holdings much and they tend to choose carefully and hold on for longer periods.

The super-rich rebalance their accounts (or pay an adviser to do it) by taking profits on a portion of their "winners" and allocating the proceeds to other asset classes that haven't fared as well. Yet, during times like late 2008 through March 2009 they acted like most humans and froze in fear and uncertainty.

It interested me greatly to read that the total value of stock positions held by the rich families in the study plunged from $8 billion in mid-2008 down to $3 billion in March 2009. That's even worse than the 36% drop in the major market indices during that same period of time.
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