“Smart Money” — Fact versus Fiction

CIO Chris Perras gives an update on the markets and then explains all about the”Smart Money,” and how the term can be misused in the financial media today…

Chris Perras: Hey, I’m Chris Perras, chief investment officer at Oak Harvest Financial Group. Welcome to the July 19th edition of our weekly Stock Talk Podcast: Keeping you connected to your money. This week’s episode is going to expand in our new educational section on our website that we titled Fictionary, your Oak Harvest guide to financial terminology commonly used in the financial press. Today’s segment is entitled Smart Money, Fact First Fiction.

Before we get to our topic, a recap on the markets this week. The S&P 500 peaked a week ago today around 30/30 on the S&P 500. It’s not a coincidence that that was the mid-month payday timing of passive investment flows entering the market by way of 401(k) contributions. We now sit around 3,000 on the S&P 500 and are entering the meat of the earnings reporting period. As we expected, financial stocks like JP Morgan and Charles Schwab have mostly reported better than expected earnings.

Over the next 12-18 months, we expect these financial institutions’ earnings to accelerate, their valuations to expand, and investors to return to the group that they are now underweight after touting it for over a year as long-term interest rates fell. Management teams in the semiconductor space think of stocks like Applied Materials and Texas Instruments express renewed optimism for a pickup in their business in the second half of 2019, and even further in 2020 on continued data center build-outs as well as initial equipment purchases for fifth-generation wireless infrastructure build-outs.

This will be followed then by a 5G cell phone purchase cycle in 2020 and beyond. Apple as well as other semiconductor companies will be the beneficiary of this secular technology build-out that should last two to three years. Now, onto our topic for the week, the financial press often-used term “Smart Money.” This term is used almost daily on a well-known TV financial news network. For the next few minutes, we will explore a few questions. Where does it come from? What does it mean? Who does it refer to? Finally, what does it mean to me as an investor?

First, what does it mean? Historically, the term smart money was meant to refer to investors who manage large pools of institutional capital for other people. This is often referred to by the acronym OPM that is short for Other People’s Money. This group of investors included managers of hedge funds, pension funds, and active mutual funds. This was considered “The smart money.” Prior to both the internet technology accelerating information dissemination and, in 2000, regulation FD, which is short for Fair Disclosure, being instituted by the securities and exchange commission, these big investors often had a time and information advantage over small investors.

In fact, I recall my time managing a large $30 billion mutual fund during the late internet bubble. I was attending a technology conference in California where hundreds of publicly traded companies would gather, tell their stories, then after, entertain prospective institutional investors in additional questions and the answers sessions and what is now commonly referred to as breakout sessions. I sat there and I took notes with about 50 other investors interested in a top momentum telecom equipment stock that traded at over 15 times revenue and 60 times earnings.

Besides Cisco, this stock had been the poster child for the early infrastructure build-out of the internet. Toward the end of the Q&A session, someone in the senior management team made the comment that “Business was so good and we are so confident in our position in our markets, we are offering a two for one sale on new orders in front of our new product launch.” I looked up for my note-taking, got out of my seat, and quickly headed for the exit. I saw about 45 other people nodding in agreement and only 4 or 5 other portfolio managers and analysts headed out the door.

I called up our trading desk and we sold 100% of that stock, one that we had held for years, we sold the whole thing that day. That stock like many others during the internet bubble has never seen that price again. No one in their right mind offers two for one sale when business is booming. Back then, there was valuable information in this call because it was generally disseminated slowly throughout the markets. Today with internet technology offering real-time speed and Regulation FD in place offering a playing field that is more evenly distributed, today everyone can be smart money and do research on a level playing field.

However, today, even though the rules have changed to level the playing field, the financial press still constantly refers to certain investors as “Smart money.” They’ll bring on TV an individual who sits on top of a large investment institution, maybe a big brokerage firm, perhaps a large mutual fund, a big hedge fund, or even worse, just a multi-billion dollar net worth and refer to them as smart money.

They then quote their assets under management or maybe they quote their personal net worth with, of course, the implication being the more money that is managed or the higher someone’s net worth, the smarter they are. Then they will proceed to ask their opinion or forecast on different financial markets. Listeners, just because someone manages a lot of money or has a billion-dollar net worth, it doesn’t necessarily make them smart money. You don’t have to listen and act on their opinions. You must first check your own emotions and ask yourself a few pointed questions.

First, “What does this person’s opinion mean to me?” Second, “Am I listening to this show for entertainment, for education, or for advice?” The team at Oak Harvest implores you to listen to these speakers for their education and entertainment value only. These shows are not advice shows. They are opinion shows. Your financial advisor knows you and knows your financial situation, not that talking head on TV. I quote this from experience. I’ve been a talking head on TV in the past.

Secondly, do they have any credibility in the subject they’re discussing? These shows are notorious for putting someone on TV who manages fixed income or bonds and asking them their opinion on the stock market. Why in the world is anyone listening to an expert in the bond markets pontificating about stocks, commodities, or currencies, or likewise, why is anyone listening to someone talk about bonds who’s an expert in stocks? What is their area of expertise, and are they sticking to that topic?

Time and time again, I see former and retired CEOs, politicians, or academic educators interviewed on their outlook for the market. Listeners, exactly why are you listening to those opinions? Is it for education or entertainment? It shouldn’t be for advice and direction. Almost always, those individuals’ careers and net worths had absolutely nothing to do with financial markets and managing your money. It had to do with creating and running businesses, managing the government, or managing and teaching students in school.

Why would these individuals’ opinions on the direction of the economy or markets be better than the financial advisor that you entrusted your retirement with? Finally, and as important as the first three, what is their track record on the subject they’re discussing? Lately, I’ve seen two highly respected financial managers quoted on their market outlooks. One is a super successful hedge fund manager and the other sits on top of a prominent investment organization. The hedge fund manager, he almost never talked publicly up until about three years ago. He’s brought on TV and his opinions are publicized like their investment gospel.

Unfortunately, if you review the timing of these public opinions, you would find they were horribly timed if you listened and acted upon them. In late January 2018, after the stock market was already up 20%, in 2017, and up about 6% midway through January, he came on TV less than 4 days before the market peaked, and essentially market peaked for 18 months. The manager came on TV and he told the world, “If you’re holding cash, you’re going to feel pretty stupid.” He basically said, “Cash is trash.” One guess at what the only financial market in the world in 2018 with a positive return? Anyone? Anyone? Bueller? Bueller?

Yes, you guessed it. Cash. Cash was the only positive returning asset class in the world in 2018. So much for that cash is trash, but wasn’t that the smart money opinion expanded on TV in January? Fast forward to late November of 2018, this same hedge fund manager, who in late January was expounding to investors not to miss out on the forthcoming melt-up right before the S&P 500 dropped 12% in one month, he was out calling for returns, just like the 1930s. Well, the market since November of last year has risen close to 15% since that call and it’s done so in 8 months. Another smart money miss.

Recently, the financial press has made a lot of noise about big firms’ calls and the S&P reaching 3,500 this year on a euphoria melt-up. While bullish on the economy and stocks, the investment team at Oak Harvest finds these near-term targets flat-out fanciful. No one seems to care that this same individual has consistently in a rally called for a looming recession in the past three years as well has consistently called for down moves in the stock market of 30% to 40%, which, of course, neither have happened. Is that opinion the smart money opinion?

All we have done in the last five years, since the summer of 2014, is compound at a growth rate of slightly over 10% per year. What’s the takeaway from this discussion on the bastardized fictional term smart money Listen, we all made mistakes in the financial world. I’ve made a ton for myself, I’ve made a ton for my investors. However, the takeaway is this, neither size of assets or size of someone’s net worth make someone smart money from an investment standpoint. You and your financial planner or the team that best knows what’s smart for you and you to do with your money.

On a final note, returning to our weekly segment of the podcast, I don’t want to invest now in a rational and excuse segment. Unfortunately, I have to return to the same old excuse. I don’t want to invest now because I read a bunch of doom and gloom articles and now is not a good time. Once again, I’m going to refer listeners to our website and the piece penned by our Senior Portfolio Manager, James MacFarlane on March 12th of this year. To find it, go ahead and Google Oak Harvest FG, as in Financial Group, I don’t want to invest now.

Take a look at the reasons over the last 85 years that we are in the market. There were wars, there was inflation, oil embargoes, the 911 terrorist attack, and then go ahead and look at the compound annual return of stocks over the long term. As I’ve discussed previously, if these articles that you’re reading if they’re coming from investment newsletters, they are practically useless. These newsletters are unregulated, and the individuals behind these articles rarely, if ever, manage other people’s money or advise clients. They write sensationalized, largely unsubstantiated opinion articles to do one thing: sell subscriptions.

A good analogy would be buying a vitamin or energy or testosterone supplement from a local vitamin shop. First going into a Walgreens and getting a prescription from the pharmacy. The claims at the vitamin shop have little to no academic backing or substance, but man, they sound amazing. Meanwhile, you go to a pharmacy that has been vetted by regulators and billions of dollars of testings that have occurred to make the drugs safe and effective but the accompanying four pages of legal-mandated medical warnings are outright terrifying.

We at Oak Harvests operate as a financial fiduciary. We act first and foremost in our clients’ best interests. If I, as the chief investment officer at Oak harvest, see the dark clouds for a session looming, we will move your allocations tactically into safer investment vehicles. As noted by both our first and second half outlooks for 2019, both of which can be found on our website at oakharvestfg.com, we still do not see this outcome happening this year or next.

Please, listeners, try to turn off the TV, try to put down the newsletters and newspapers. Please relax and try to let the US economy and stock market compound your money over time. That’s what investing is about. In closing, if you find this content helpful, please forward it to friends, have them give us a call at 281-822-1350, browse our website at oakharvestfg.com. Our main job at Oak Harvest is to have you retire only once in your life with a customized retirement planning. Many blessings. This is Chris Perras.

Speaker 2: The proceeding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, statistics, and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax, or legal advice, or an offer, or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.