Are Mutual Fund Investors Really 'Dumb Money'?

We are now in our third week of inflows into stock mutual funds. In the last three weeks, $14.9 billion has gone into equity mutual funds, the highest three-week move since January 2001, according to Lipper. That's pretty impressive volume.

Some have asked me if that is a sign of a market top, because, as we all know, mutual fund investors are dumb slobs that only invest when the market is at a top. Buy high, sell low. Hrumpf.

Please. Three weeks of inflows into stock mutual funds do not constitute a top.

First, it is way too early to make those kind of pronouncements. Compare the $14.9 billion in inflows to the $416 billion in OUTFLOWS from stock mutual funds from 2008 through 2013.

Some $416 billion in OUTFLOWS for four years versus $14.9 billion in INFLOWS in three weeks. Sound like a market top to you?

Second, it's way too early to call this a trend. Early year fund inflows have been common, but the flows fade later in the year. In 2011, we saw about $56 billion in inflows into stock mutual funds in the first four months of the year ... almost exactly what we are seeing now, assuming each of the four months had similar inflows. But that didn't last. We ended 2011 with an OUTFLOW of $98 billion.

The early part of 2010 also had inflows, and we ended the year with outflows as well. There were also inflows in several weeks during the early part of 2012 … and that faded fast as well.

And finally, can I question the prevailing theory that mutual fund investors are "dumb money"? I mean, really. Isn't this a bit insulting?

Want some academic mumbo jumbo to support my thesis? Andrew Clark of Lipper did a study recently about this old chestnut that mutual fund investors chase returns. His conclusion: "the results of our study suggest that mutual fund investors do not (necessarily) make "uninformed" investment choices or chase returns. Rather, they make investment choices based on their concerns about their future wages and future investment returns."

This explains, for example, why there were outflows in 2012, despite a handsome increase in stock prices. Investors saw the stock market rise, but were unimpressed because they still did not "feel" a recovery.

You can call this "dumb money" if you want. By the time investors "feel" a recovery, the market has already moved. True, some of these investors do miss the first part of a rally.

But waiting for signs of a macroeconomic turnaround — even if it just means waiting to see if your neighbor got a job — isn't exactly "dumb."