Why ‘Smart Money’ Is Dumber Than You Think

I’ll concede my bias from the start: I find the term “smart money” to be off-putting. For one, the term is frequently the crutch of the lazy commentator. Can’t pull a convincing explanation out of the air for a notable market move? Blurt “smart money.” Up or down, all bases are covered.
Worse, the term “smart money” misleads. It implies an investing cabal composed of first-mover individualists possessing the most clairvoyant crystal balls. These elite few always get it right – in at the bottom and out at the top – with impeccable timing.
Nothing could be further from the truth. The case of Valeant Pharmaceuticals International (NYSE: VRX) and Bill Ackman of Pershing Square Capital is a revealing example.
Ackman runs a concentrated long stock portfolio – fewer than 10 holdings. Valeant had been Pershing’s largest holding, accounting for a third of portfolio value through mid-2015. By the end of 2015, Valeant had dropped to 13.5% of Pershing’s portfolio value. Today, it’s even less now that Valeant shares are down 70% year-to-date.
Ackman isn’t the only smart-money type to lose money on Valeant: Leon Cooperman (Omega Advisors), John Paulson (Paulson & Co.), Steve Mandel (Lone Pine Capital) and Glenn Greenberg (Brave Warrior Advisors) have all bet big on Valeant and lost.
This leads to another point: “smart money” is frequently herd money. Hedge fund managers are prone to pile into the same issues. What’s more, these issues are frequently as pedestrian as pedestrian gets. Look to any large-cap mutual fund and you’ll find the same stocks among its top 10 that are in many hedge funds’ top 10.
Nothing is necessarily wrong with these stocks. Microsoft (NASDAQ: MSFT) is a High Yield Wealth recommendation and Apple (NASDAQ: AAPL) is found in the Personal Wealth Advisor Total Return Portfolio. But when you’re managing hundreds of millions and, in many cases, billions of dollars, your only option is to think big. Much of the investing universe is off limits.
In other words, it’s tough to beat the herd when you are running with the herd. Look no further than the Global X Guru Fund (NYSEArca: GURU).
The Guru Fund enables you to invest in the top stock picks of the top hedge funds (more than $500 million in stock holdings). The Guru Fund parses SEC filings from the top hedge funds for their top stock picks. The stocks are then screened for liquidity, equally weighted, and adjusted quarterly.
When introduced in June 2012, Guru Fund impressed with its performance. Through the first three years of its existence, it beat the S&P 500 by 15 percentage points.
If the time frame is extended, though, the tables reverse.  From June 2012 though today, the Guru Fund is up 41%; the S&P 500 is up 54%.
Global X launched the Guru Activist Index ETF (NASDAQ: ACTX) this past September. The fund enables you to invest with the likes of Carl Icahn and Bill Ackman. Performance to date: ACTX up 6%, S&P 500 up 9%.
When confronted with “smart money,” one is inclined to self-depreciate: How can I compete with the billionaires? But you can compete, and you can win. You’re smarter than you think (read here and here). You also have advantages you’re likely overlooking (read here).
Infused with proper guidance, sound knowledge and a little confidence, you just might find the real smart money looking back at you from the mirror.