What the Smart Money is Doing in the Financial Markets

If you want to find out what the smart money is doing, look at money managers. Not wealthy people, some of whom put their money with Bernie Madoff. But people who have successfully managed money for wealthy people.

This past week, Stanley Druckenmiller, a long standing hedge fund maven, announced he would return investor money from his firm, Duquesne Capital Management LLC, and close up shop. He was followed a couple days later by Paolo Pelligrini, a former sidekick of John Paulson who help to engineer the mother of all short sales--the 2007 thumbs down on the mortgage market--that made Paulson billions (and Pelligrini mucho millions). Pelligrini had left Paulson and set up his own fund. But now he, too, has decided to return investor money and manage only his own money.

There are a shipload of supposed experts on Wall Street who will tell you to do this or that with your investments. But just about all of them are looking for a way to pocket some of your money. Investors circa 2010, suffering from battered portfolio syndrome, have learned to be wary of people with sales agendas. Druckenmiller and Pelligrini are doing the exact opposite. They're returning investor money they currently manage--the anti-sales maneuver.

That's a sign of the times. One can infer that Druckenmiller and Pelligrini don't see a lot of low hanging fruit in the financial markets. Neither said they were ditching their personal portfolios and going to cash. But it's not hard to imagine that they expect to play more defense than offense in the foreseeable future. It's hard to explain to investors the pedestrian returns that playing defense produces. But the markets don't always cooperate when people want home runs. Sometimes, strong winds blow in from the outfield bleachers. A couple of home run hitters just took themselves out of the game. That may be a hint to be cautious about swinging for the fences.

Sunday, August 22, 2010: today comes the news that one of Warren Buffett's premier stock pickers, Lou Simpson, is going to retire soon. See http://www.cnbc.com/id/38807185. This is a guy who's usually beaten the S&P 500. And now he's opting for a retirement watch. One starts to get the impression that people who know where the top is are getting out at the top.