Ever since I began paying attention to the so called “smart money”, I have been amazed at how many stupid decisions they make. They are clearly not void of biases
. In fact, their ego may actually cause them to make worse decisions
than us common investors.
Being Smart Doesn’t Translate into Good Decisions
Our education and intellect should help us make better decisions. But sometimes it can blind us
, because of their accompanying egos and overconfidence. Remember Long Term Capital Management? Some of the brightest PhD’s and investment gurus in the world. They managed to blow up a huge hedge fund, bankrupt a major municipality and almost derail the American economy.
Several months ago I wrote about
a similar topic regarding Uber. Huge valuations and expectations in the private markets, goes public at a discount and then trades below its IPO price. Meaning, us “common and inferior” investors refuse to pay what the “smart money” paid. If this were an anomaly, it would be one thing. But “smart money” continues to make costly errors.
Endowment Funds Underperform
We are in one of the largest bull markets in history. Where are all the “smart” endowment funds allocated?
Not stocks! The biggest endowments hold roughly 25% in stocks and over 50% in alternative strategies. And that has been costly.
Endowments do not have time constraints as we common investors. They don’t pay a mortgage, they don’t retire and they don’t die. In essence, their time horizon is infinite
. And yet, as of late, they have underperformed a simple 60/40 stock/bond portfolio. I guess they are just too smart to own stocks. They have been hedging away a lot of upside over the past few years. But I’m sure they feel good about the fact that many of their strategies are illiquid, complex and not accessible to you and me.
WeWork – The Big Blunder
WeWork, which almost went public in September 2019, seems to be the biggest joke of them all. WeWork was valued by “smart money” at $47 billion
at the beginning of 2019. Morgan Stanley and Goldman Sachs predicted
the valuation could rise to $100 billion shortly thereafter.
The reason the IPO was pulled was because we common investors wouldn’t even value the company at $15 billion
. Today, it is a question as to whether WeWork will continue as an on-going entity. They were reliant on funds raised from the IPO. Either good money will continue to chase bad money or they may not make it.
It seems like everyday additional information is coming out that makes one laugh
at how the “smart money” even valued this company. From money losing leases (to poach others from competition) to a mission statement that sounds like a yoga studio, “Our mission is to elevate the world’s consciousness.”
Don’t Follow the Smart Money
When I present to financial advisors, I will often jest that we should want to work with ignorant investors. Of course that is ridiculous, but the more uninformed investors are, the better they have performed.
Fidelity and Vanguard have both studied some of their best performing client portfolios over a period of time. They found two things in common with the best performers. The account owner had either died or completely forgotten about the account. In other words, the account owners were ignorant to market news and fluctuations, and therefore stuck with their strategy.
I wouldn’t go around marketing your business as one that seeks “ignorant investors.” But there is something about teaching clients the virtue of being strategically ignorant
. Some information is plain harmful to investors. And that is the information we choose
Related: How the Media Hijacked Your Mind in September