Is “Smart Money” Really that Smart?


Ask ten people if they think they’re a good driver, and I’m willing to bet that most, if not all of them, will claim to belong to that camp. The other guy or gal is the bad driver, not me. But someone is causing all of those car accidents and traffic snarl-ups, so we can’t all be considered good drivers.

The same can be said about investors. We often hear financial pundits on TV talking about what the “Smart Money” is doing. Who are these smart people? What makes them so smart? And if they are smart, what are we? I won’t keep you in suspense: yes, you might be considered “dumb money”.

Defining “Smart Money”

Terms that Wall Street throw around such as “smart money” and “expert” can sound very alluring to us. Before we jump and listen to what they have to say, we should first find out more about what makes them so smart or deemed an expert. The truth is there is no standard definition.

In all my years in the industry, I still don’t know what makes someone a media proclaimed “expert” or “smart”. Based on my experience, an expert is someone who makes confident predictions and is right only about half the time. “Smart money” generally refers to a person/institution with a lot of money, but it can also be used to describe people who run complex investment schemes (so complex that we common folk can’t understand it).

Forget Smart Money; Be a Smart Investor

Historically, “Smart Money” has not translated into outsized returns. Their returns are often in line with straightforward (not complex) investment strategies. In fact, the Barron’s Roundtable of Smart Money in 2018 handily underperformed the markets (and that was not an anomaly).

Wall Street Journal personal finance writer Jason Zweig recently opined, “the only smart money is the money that knows its own limitations.”

Legendary investor Warren Buffett said, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”

As Zweig writes, it’s surprisingly easy to find instances where smart money managers can sometimes behave just as irrationally as individual investors who chase prices up to parabolic levels, and join in the panic at the lows. They are, after all, humans just like us, subject to the laws of fear and greed innate in all of us.

Let’s not forget that professional hedge-fund analysts, fund-of-fund managers and other such purportedly expert advisers, put thousands of investors into Bernard Madoff’s Ponzi scheme. They ultimately lost millions of dollars of clients’ money.

Another example: among the eager clients of the Foundation for New Era Philanthropy, one of the most notorious fraudulent investment schemes of the 1990s, were such billionaires and philanthropist as Laurance Rockefeller, former Goldman Sachs co-chairman John C. Whitehead and ex-U.S. Treasury Secretary William E. Simon.

Smart investors recognize that it’s OK they don’t know everything. And neither do the “smart money” nor the so called “experts”. Once we define the limits of our knowledge and understanding, we can focus our time and energy on what matters most – those things we can control.

As investors, we can control our decisions and reactions to uncontrollable market events. Following a disciplined and deliberate decision-making process is one of the smartest things investors can do. Working with a fee-only advisor can not only help you sort through all of the investment options and risks, but can also keep you from panicking at the lows, and feeling overly euphoric at the top.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: (c) 2019 The Behavioral Finance Network, used with Permission

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