SAFETY In numbers?

Information takes time to flow downwards from the top of the pyramid. At Time = T0, insider BUYS, soon after at Time = T1 knowledgeable investors or inner circle follows suit after learning of the news. (This is called following the smart money). At T2, Hopeful investors see that the market is moving gets excited and starts to get greedy.


Finally at Time = T3, every aunty and uncle up and down the street thinks that the stock is a great stock with great prospects.

Everyone is buying, so there is collective knowledge and courage.

As the cycle is at it’s end at T3, Insiders have either sold or moved on, knowledgeable investors, mostly hedge funds, smart investors have started to sell just before T3.

So let’s say insider constitute 3% of the buying public, knowledgeable investors 7%, the rest takes up 90%.

So while at Time = T2, some hopeful investors could still pocket some gains and get out unscathed, most of the clueless investors will be the ones holding on to the shares which they cannot find buyers. Simply because almost everyone has sold out leaving them the main holders.

So Safety in numbers?

I seriously doubt that.

If safety in number holds any water (at least in equities), then the world will not be in a situation where 10% of the people controls 90% (Percentages vary from country to country) of the wealth. Simply because of information asymmetry, some people will always get richer at the expense of others who holds on to the believe that there is SAFETY in NUMBERS.

I am just being cynical. I would be happy to be proven wrong.