No vast cash 'on sidelines' to be spent

29 January 2012 - 02:03 By Jeremy Thomas
Bull's Eye

Sometimes fund managers say the darndest things. One of the best is that there are vast pools of cash "on the sidelines" just itching to flood into the stock market.

It sounds perfectly reasonable, but that's probably because it is so absurd that we don't think twice about it. Think twice about it.

The stock market is a zero-sum game. The only way "new" cash can enter the market is if "old" cash exits. At any given instant there will always be a fixed number of shares, after all.

The "cash on the sidelines" gambit is most often used to gull novice investors into shelling out on equities. The implicit suggestion is that they will be at the vanguard of a tsunami of "new" money that will gush onto the market.

What the shills don't tell you is that the clever boys will quite likely be delighted to offload their stale stock on fresh-faced rubes from the sticks who know no better.

All the big banks employ smooth-talking analysts whose primary job is to solicit new investors, from whom they will derive income in the form of fees, fees and more fees.

They win investors over by spinning a web of what appears to be arcane inside knowledge, but usually amounts to little more than flying guesses, most of which will be wrong. (Keep a tally on any big-name's forecasts and you'll see for yourself.)

Neither the analysts nor their banks are embarrassed about this. Once the investors are hooked, they're customers. And, since they're paying for expert guidance in the form of fees, are more likely to value any advice and unlikely to ditch the "relationship" unless severely provoked.

A market downturn can easily be explained away by analysts in a charm offensive that will speak grandly about vast pent-up demand just waiting for stocks to get cheap enough to rush in and . so it goes.

You can understand why the more cynical among us like the look of gold.

The exception that proves this rule is a former colleague who won a Krugerrand in a competition. Not a day later, he walked into a dealer's shop and showed him the coin. Next minute the dude was licking his thumb counting out R12000 in used R200 notes.

Something is happening with gold. The touts are everywhere, offering cash on the spot for broken chains, wedding rings, even tooth fillings.

They say you should only start worrying about an investment reaching the bubble stage when the oke who "does" your hair starts raving about it. It's true: I remember seven kinds of rot once spoken by investment novices about Dimension Data, at one time, and about flipping buy-to-lets at another. All ended in tears.

So is gold anywhere near a bubble? Well, put it this way: there certainly aren't any vast pools of cash "on the sidelines" waiting to be spent on anything, let alone gold.

Right now, some of us are still recovering from the last boom-bust and are in no mood to be sweet-talked.