It's Dumb To Buy 'Smart Money': Wall Street's Rules, Part 5
In other words, where Super Bowl championships were once dominated by the best running teams, it has now shifted to those better at passing the ball. Essentially every team now wants to do what last year's Super Bowl winner did -- which makes sense. There's no point in re-inventing the wheel.
In similar fashion, Wall Street has no shame in mimicking successful formulas -- except in this case it's more than just flattery, it's profitable.
I've never been the type of person who goes out of his way to give anyone more credit than deserved. However, in this case what Wall Street has figured out is that it is smarter than everyone else. But it's not just that: Its brilliance lies more in the fact that it also understands that you believe it.
Allow me to explain.
In the first part of this series , we talked about the importance of making investment decisions more about the bottom line and less about perpetuating the "rules of investing," or the sometimes unspoken myths that qualify your status as an investor but yield little in the way of results.
In the second part , we looked at the myths surrounding portfolio diversification, while the third part as well as the fourth part reminded us, respectively, that it is true there's a sucker born every minute and valuation often means nothing when assessing the investment worthiness of a company.
In this article, we are going to look at the myths associated with the so-called "smart money," a term that I've never liked; nor do I think such a group or entity exists.
It is said that "stupid is as stupid does." If that is true then the word "smart" should also be assessed based on one's results.
With that in mind, I think any investor is as smart as the net effect of his or her portfolio relative to the investment period. So that means the so-called "smart money" should not be based solely on the value of the investment fund or the portfolio but rather on the returns.
This is something that often escapes many investors who seeks to play "Simon says" with their holdings by buying whatever some "smart hedge fund" manager has bought - particularly those investors who are of novice status.
What's more, Wall Street preys on this weakness. Think about it: How else can the value of an investment be immediately raised if not by retail investors buying right after a fund has invested millions? It makes absolutely no sense to me.