Investing In A World With No Smart Money

Tuesday, May 12th, 2009

Is the playing field now more level?  For thirty years, or at least since this writer has been in the investment business, there was always a lot of chatter about the smart money.   Smart money has been around a very long time-even in the pre-internet, blog and twitter days. The smart money did not buy tulip bulbs in the 18th century, bought the right railroad securities in the 19th, somehow did not get wiped out in the 1930’s, recovered  mid-century and invested in the new technologies in the 80’s and 90’s.  The smart money turned up in some unexpected places.  In the hit movie YOUV’E GOT MAIL (1998), the plot hinges on the inventive use of a technology which at one time made a lot of money for AOL. The heroine Meg Ryan, after losing her battle with a large chain run by Tom Hanks, her mystery email suitor, is forced to close the neighborhood book shop started by her mother. She is worried about her longtime book keeper, played by Jean Stapleton no longer having a job, but in a memorable line, Ms. Stapleton reveals that she is eager to retire and live off her investments:  “I bought Intel at 6!” she happily announces..  On the movie’s release date, December 18, 1998, Intel closed at 120. Peter Lynch, no doubt cheered loudly. In BEATING THE STREET, Mr. Lynch said that all of us, just like the book keeper in the movie, could be the smart money (since the book keeper scored a twenty-bagger in Lynch terminology–she had something to chortle about). But what a difference a decade makes: so far in 2009 the high for Intel is $15.75. After the dot-com bust in 2001, the smart money moved into alternative investments and private equity. A Barron’s article in June 2003, “Moolah, Moolah,” sang the praises of the Yale Endowment gaining stellar returns via its overweighting in alternative investments:

Is Yale really not that interested in the stock market?  Apparently so.

A look the university’s most recent data on asset -allocation shows just how

differently the smart money [emphasis mine] looks at prospects in the market.

Julian Robertson at Tiger Management (the yen-carry trade), George Soros at the Quantum Fund (macro currency plays) and David Swenson at Yale (see above) all seemed to posses the holy grail in the form of unusual allocations combined with  exotic trading strategies. Unfortunately as we now know, they spawned far too many imitators chasing the same strategies. Through all of this Sturm und Drang, legendary Graham and Dodd value investors, Warren Buffett and Wilbur Ross made immense fortunes sticking to their knitting.

But during 2008, the smart money vanished and has yet to reappear.  The mighty are still falling all over the place. Jim Simons, the highest paid hedge fund manager in the world is taking a major hit as his highly secretive fund for institutional investors, Renaissance Capital,  is reportedly underperforming the S&P by 19% in 2009.  In the meantime, hedge funds are under attack from all sides: Congress, State Attorney Generals, President Obama, the investing public and even some hedge fund insiders.   The  former CFO of one of the largest hedge funds which had not experienced a losing year prior to 2008 told me: “We are supposed to do three things:  invest in strategies which are not correlated to the stock market,  preserve capital and provide some liquidity.  We are 0 for 3.”  Ten-bagger-plus venture capital and new technology returns will have to wait for a return of a vibrant IPO market, which could be populated by companies developing green technologies, electric cars and the fruits of stem cell research.  But as former investment banker Frank Quattrone has pointed out, the Wall Street banking and research system that enabled the likes of Apple Computer and Cisco Systems has effectively ceased to exist.  Nevertheless, Mr. Quattrone who had the resources and staying power to reverse a guilty verdict following a draconian Dept of Justice prosecution has set up shop again as an investment banker focused on mergers and acquisitions. He is also a major donor to the Innocence Project. Peter Lynch is quietly hiding out as a consultant to his former employer, Fidelity Investments.  Warren Buffett proudly announced in an October 2008 New York Times Op-Ed article that “I’ve been buying American stocks.  This is in my personal account in which I previously owned nothing but United States government bonds.  My non-Berkshire net worth will soon be 100 percent in United States equities.”

Between October 2008 and March 2009 the S&P 500 dropped 30%, and while admitting that his call was pre-mature, Mr. Buffett can be seen fairly regularly doing lengthy interviews for CNBC, a division of NBC, whose parent company is GE, one of Berkshire Hathaway’s largest holdings. In 2008 Mr. Buffett lent the company $3 billion via a preferred stock investment with a 10% yield plus warrants.  Through all of this including his rather downbeat Berkshire annual meeting, Mr. Buffett is as cuddly and charming as ever, driving a succession of female CNBC reporters around Omaha in his Cadillac, waving to his longtime neighbors, stopping at the Berkshire owned DQ for a burger and telling us that he wishes he was 25 so he could be around for the most powerful recovery of all time.  But is he or anyone else still the smart money??

2 Comments to Investing In A World With No Smart Money

Kylie BattName
April 11, 2010

Не могу сейчас принять участие в дискуссии – очень занят. Но скоро обязательно напишу что я думаю….

  Smart money has been around a very long time-even in the pre-internet, blog and twitter days. The smart money did not buy […….

Kylie Batt
April 20, 2010

Любопытно, а аналог есть?…

  Smart money has been around a very long time-even in the pre-internet, blog and twitter days. The smart money did not buy […….

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