Making Money by Betting Against the Small-time Investor

It’s a tough world out there for the small, independent investor. With all of the insider trading indictments coming out recently, it’s hard not to feel like the big players have the edge over you. Well, in fact they do, in many ways. But the independent investor doesn’t help his or her cause by running on emotion. The fact is, independent investors tend to buy when prices are high (the market is booming, and you want to get in on the action) and sell when prices are low (panic selling, such as during the recent stock market downturn).

To capitalize on the poor judgement of small-time investors, a number of professional technical traders began watching what smaller investors did, and then bet the opposite way.  Based on odd-lot theory, traders looked for small purchases of stock (less than 100 shares) to gauge the sentiment of small-time investors.

This specific type of trading has fallen out of favor, not least because a lot of smaller investors are now concentrating in mutual funds and ETFs rather than stocks. Nonetheless, as a small investor, it has to be deeply disconcerting to know that traders were making money by countering your every move – fully confident that your emotions were leading you astray.