Following the Smart MoneySubmitted by Miller Premier Investment Planning, LLC on June 15th, 2016
What assets should investors buy to enhance their returns and reach their goals? This is a question for every investor and financial advisor. You have your financial goals, now you need to select assets that will help you reach them. Which assets (and combination of assets) will be best for you? Can you identify a few “home runs” – which may allow you to reach your goals a few years ahead of plan? We all love an early arrival (whether that is a plane arriving ahead of schedule, a meeting that gets out early), but wouldn't it be great to arrive at our financial goals ahead of schedule?
What is Smart Money?
The term “smart money” usually refers to institutions and money managers with a great track record of performance. These individuals are usually very well known in the financial industry, and are often quoted and interviewed by the financial media. They may even be household names. They are very well educated, highly intelligent and manage billions of dollars. Access to them directly is usually reserved for only the super rich, and some of them may be completely inaccessible. Much of the “smart money" runs endowment funds, hedge funds and/or mutual funds.
Most investors can’t get access to their expertise directly through their fund, but since they are known through the media, you may be able to simply invest in what they are investing in (mimic their portfolio). It is not uncommon for their holdings to be made public as investors share the contents of the fund’s report online, or the media reports on when they take large stakes or “bets” in a company. And if a super smart and successful manager takes a large stake, they must have significant conviction. We may conclude, “I’ve got to get me some of that.” After all, if they are taking that large a position, it’s got to go up, right? Well, not always.
A Can’t Miss, Misses
Recently two respected and successful money managers invested in the same public company. These managers individually, and as a whole, represent the “smart money”. So not only do you have an individual manager investing in a company, but you have two different smart money managers taking significant stakes in the same company. This may appear to be a “can’t miss” strategy.
Bill Ackman of Pershing Square (hedge fund) has amassed a solid track record of outperforming major stock indices over many periods of time. Until recently. A few years ago he lost substantial money in JC Penney, and more recently he invested/bet a significant amount of money in Valeant. Sequoia, a mutual fund that runs itself like a hedge fund, also took a large position in Valeant - over 30% of the portfolio. Now that’s conviction! With this type of investment from the “smart money”, any investor may be influenced to buy the stock. An investor might say, “If these guys think it’s a home run, it probably will be. So I should buy some – it may help me reach my goals early or take out some money and have a fantastic vacation.” Sounds reasonable. The problem is the smart money in this case wasn’t very smart.
Valeant lost over 80% in one year. This is the kind of loss that is very hard to recover from, and more often than not, delays an investor’s retirement date and/or impairs the desired lifestyle. It may seem smart to follow the “smart money”, but that is seldom the case. The “smart money” can earn very high returns because they take significant positions in a few companies that happened to work out over a period of time. But no one is consistently correct. It’s not just Ackman and Sequoia who make costly mistakes; you can also ask John Paulson (Paulson Advantage Trust) and Bill Miller (Legg Mason Value Trust). When a big investment (or bet) goes right, it looks like they can do no wrong. But let’s remember that everyone makes mistakes at some time, and those mistakes can be devastating.
Which is more important to you, achieving your financial goals or risking your goals to try to arrive a bit earlier? Investing is like a marathon – sometimes we need just need to pace ourselves even as others pass us.
Where It Could Make Sense
You could certainly make a case for holding concentrated positions to increase wealth. Bill Gates didn’t become filthy rich because he held a diversified portfolio. Workers at Facebook and Google do not get filthy rich through their earned income. Significant wealth is often created through concentrated stock positions. But we don’t hear about all the stock grants and options - all the concentrated positions - that went bust. But they happen, and they occur more frequently than the grand slams. So if you are inclined to try for the fences, you may want to consider doing it in a separate “Mad Money” account where if you lost it all, it wouldn’t have a material affect on your ability to reach your goals.