From time to time, articles talk about following the "smart money". My question is:
- What indicators or sectors do we look at that is considered the "smart money"?
- If everyone is following the smart money, wouldn't that not work anymore?
"Smart money" (Merriam-Webster, Wiktionary) is simply a term that refers to the money that successful investors invest. It can also refer to the successful investors themselves. When someone tells you to "follow the smart money," they are generally telling you to invest in the same things that successful investors invest in. For example, you might decide to invest in the same things that Warren Buffett invests in.
However, there are a couple of problems with blindly following someone else's investments without knowing what you are doing.
First, you are not in the same situation that the expert is in. Warren Buffett has a lot of money in a lot of places. He can afford to take some chances that you might not be able to take. So if you choose only one of his investments to copy, and it ends up being a loser, he is fine, but you are not.
Second, when Warren Buffett makes large investments, he affects the price of stocks. For example, Warren Buffett's company recently purchased $1 Billion worth of Apple stock. As soon as this purchase was announced, the price of Apple stock went up 4% from people purchasing the stock trying to follow Warren Buffett.
That having been said, it is a good idea to watch successful investors and learn from what they do. If they see a stock as something worth investing in, find out what it is that they see in that company.
To supplement Ben's answer:
Following 'smart money' utilizes information available in a transparent marketplace to track the holdings of professionals. One way may be to learn as much as possible about fund directors and monitor the firms holdings closely via prospectus.
I believe certain exchanges provide transaction data by brokers, so it may be possible for a well-informed individual to monitor changes in a firms' holdings in between prospectus updates.
An example of a play on 'smart money': S&P500 companies are reviewed for weighting and the list changes when companies are dropped or added. As you know there are ETFs and funds that reflect the holdings of the SP500. Changes to the list trigger 'binary events' where funds open or close a position. Some people try to anticipate the movements of the SP500 before 'smart money' adjusts their positions.
I have heard some people define smart money as people who get paid whether their decisions are right or wrong, which in my opinion, best captures the term.
This Udemy course may be of interest: https://www.udemy.com/tools-for-trading-investing/