What is Smart Money
Smart money is the capital that is being controlled by institutional investors, market mavens and other financial professionals. Smart money was originally a gambling term that referred to the wagers made by gamblers with a track record of success. Usually these gamblers had deep knowledge of the sport they were betting on or insider knowledge that the public would be unable to tap into. In the investing world, the implications are the same. The smart money in the market is perceived as being invested by people who have a better understanding of the market or access to information channels that a regular investor can't easily access. As such, the smart money is seen as having a much better chance of being correct when the trading pattern of the institutional investors diverges from retail investors.
BREAKING DOWN Smart Money
Smart money is cash invested or wagered by those considered to be experienced, well informed, "in-the-know" or all three. Although there is little empirical evidence to support the notion that smart-money investments perform any better than non-smart-money investments do, many speculation methods take such influxes of cash very seriously.
Identifying Smart Money
Because insiders and better-informed speculators typically invest more, smart money can sometimes be spotted by greater-than-usual volume, especially when little or no public data exists to justify it. Knowing who the smart money is and when and where they're investing can be of great benefit to retail investors who want to ride the smart money's coattails.
To this end, many tracking methods have been developed to group transactional data from commercial and non-commercial traders in various assets and markets. These "smart money vs. dumb money" charts can show a stark difference in how two groups are positioning themselves in the market, but the smart and dumb labels are probably being overplayed. On an individual basis, most professional portfolio managers and traders struggle to match the returns of blind index investing over time.
The Scale of Smart Money
Investors with large followings, like Warren Buffett, are definitely considered smart money but the scale at which they work is not always taken into account. When the cash reserves at Berkshire Hathaway start to build rather than being invested, it is definitely a sign that Buffett doesn't see many value opportunities in the market. The important thing for retail investors to note, however, is that Buffett works on a different scale. A $25,000 investment is not something you bother with in a billion dollar portfolio.
This is why Buffett's smart money has been making outright purchases of companies rather than taking positions. He needs scale to have an impact on his overall portfolio, and so do many of the other institutional investors that make up the smart money. So even when the smart money is out of value picks in the current market conditions, that doesn't necessarily mean that there are no opportunities, particularly in the modestly sized stocks that these investors are less focussed on.