I’ve been thinking a lot lately about the “smart money”. I think it’s a really interesting term because it implies a group of people, in the know, making moves that are supposedly a step ahead of the rest of us. While this elite group is on one hand smart enough to be making moves that wouldn’t occur to the rest of us, their moves somehow get picked up and repeated by the sort of people who might be prone to say “Well, the smart money is doing X right now.” To go one step further, when you hear someone say that the smart money is doing something, don’t you immediately look at the person saying it and wonder how they would know because they seem like the kind of person who would have the least clue of what smart money is doing?
If you can’t tell, I don’t subscribe to the notion of the existence of smart money. Sure, at any given time there are people who have a market figured out and can tell where it is going. But the list of people who have every market figured out is small to non-existent.
Based on what I see on a daily basis, the smartest people do dumb things on a pretty regular basis. When I say that, I’m not even knocking them. Everybody has their own biases that make them more likely to catch certain trends, and more likely to miss others. You could say that someone is a really smart investor, but maybe they’re just a really conservative investor and as a result they’ve looked pretty smart lately. That same investor wouldn’t have looked that smart when the market was running up.
This is an interesting exercise. Take every investor you know. Count all of the investors who were aggressive in the 2002-2006 time period. Then count out all of the investors who sold heavily in the 2007-2008 time period. How many of the investors you know hit 2 for 2 over that stretch? How many hit 1 for 2, and how many went 0 for 2?
On one hand, the investors that went 2 for 2 have shown themselves to be smart lately, but the thing about real estate is that there are such a limited number of observations, that you can’t even say conclusively that those investors are necessarily any smarter than they are lucky.
An interesting thing happened recently on Wall St. One of the primary “geniuses” made by the subprime explosion, Paolo Pelligrini, decided to unwind his fund. After having been right on one of the most important things to happen to our economy, Pelligrini is throwing in the towel, perhaps because his most recent trades haven’t panned out yet.
It’s a really difficult proposition to be not only right about the market, but also right as to timing. Truly being the “smart money” is an elusive thing.
