There’s a so-called term in the Wall Street lexicon called “Smart Money.”
Smart Money are institutional investors, endowments, pension funds, ultra-high net worth individuals, etc. Supposedly these institutions, organizations, and people, know more than everyone else in the room. They believe they can see around corners; they understand the markets at a deeper level and are better informed. And the media is constantly parading them around as such.
The insinuation is that if you’re not “Smart Money,” then by default, you must be “Dumb Money.”
Some other definitions of Smart Money
Investopedia says, “Smart Money is the capital that is being controlled by institutional investors, market mavens, central banks, funds, and other financial professionals.”
Jason Zweig of the Wall Street Journal wrote in his somewhat satirical book, The Devil’s Financial Dictionary, that “Smart Money” is defined as, “those investors who know which stocks to buy, when to sell them, every tidbit of information that can influence the price, what the companies’ executives are thinking, how geopolitical events will affect every market, and so on – as in “the smart money isn’t buying yet” or “the smart money is dumping emerging market stocks now.”
He goes on to say, “the Smart Money is in fact an imaginary being, something like the three headed hydra of Greek mythology. Cut off one of its heads and two will grow back although both will be empty as “the smart money” is nothing more than an illusion fabricated by people who enjoy picking others pockets.”
Let’s review just a couple of recent happenings that prove Jason’s Zweig’s point.
FTX
FTX had a who’s who of finance and celebrities pushing this as a great investment. Well known venture capital firms like NEA, Sequoia Capital, Softbank, and celebrities like Tom Brady, Shaquille O’Neil, Seth Curry, and billionaire investor Kevin O’Leary all got fleeced. They invested hundreds of millions of dollars, and it’s gone to zero.
The FTX fiasco is still unfolding, and it will probably be months if not years before all the details emerge and we learn how deep the rabbit hole goes.
Theranos
This company was touted as a breakthrough health technology company when it was founded back in 2013. Founded by 19-year-old Stanford student Elizabeth Holmes, Theranos ended up raising more than $700 million from venture capitalists and private investors. At one point it was valued at $10 billion. Theranos had a who’s who on their board, this included: U.S. Secretary of State George Shultz, William Perry (former U.S. Secretary of Defense), Henry Kissinger (former U.S. Secretary of State), Sam Nunn (former U.S. Senator), Bill Frist (former U.S. Senator, senate majority leader and heart-transplant surgeon), Gary Roughead (Admiral, USN, retired), Jim Mattis (General, USMC), Richard Kovacevich (former Wells Fargo Chairman and CEO) and Riley P. Bechtel (chairman of the board and former CEO at Bechtel Group).
The company claimed that it had developed a quick, inexpensive, and easy way to test blood. These claims were later proven to be false and a fraud. Elizabeth Holmes has recently been sentenced to 11 years in prison. Investors lost all their money.
This so-called term “Smart Money” is a farce. They would like you to believe that they are so much smarter than everybody else and they’re working in a higher dimension of space-time that only they and Einstein can comprehend.
The truth is, you’re smart if you:
- Avoid blindly following the so called “Smart Money.”
- Ignore the media hype machine.
- Have a well-designed plan that you understand, and
- You stick to it.
Don’t get pulled off of your strategy by others, whoever they may be, and whatever background they may have.
Peter Lynch said it best in his book, One Up On Wall Street, “Dumb Money is only dumb when it listens to the Smart Money.”
-Paul R. Rossi, CFA