Title: Why you are "dumb money."
Headings: You and Your Dumb Money
You and Your Dumb Money
Why you picked the wrong mutual funds—again.

Content: Dumb money (individual investors, the sort of people who casually watch CNBC for stock tips) generally fares poorly. Individual investors—that is, we—are considered such dumb money that many professional investors regard us as contrary indicators. The lemminglike masses get excited and overly optimistic when the market’s about to top, and they tend to get fearful and overly pessimistic when the market’s about to bottom. So, if you could just figure out what the dumb money is doing and zig when it zags, that may be a path to easy profits. Advertisement
Now a new working paper by two economists, Andrea Frazzini of the University of Chicago Graduate School of Business and Owen Lamont of the Yale School of Management, offers an excellent case study of dumbness: our incompetent investment in mutual funds. The paper also implicitly suggests how we can fix our own mistakes. Advertisement
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In theory, if investors picked and chose carefully from among the thousands of fund managers to place their money with great long-term stewards, then “flows should be positively correlated with future returns.” But as a class, mutual-fund investors are short-term return-chasers. If a fund puts up good numbers for a few quarters, it will attract lots of new cash. “