Friday Finance – is there more smart money these days?

This time was different

An interesting thing happened during the 2020 flash crash.

As soon as the market dropped, many people with cash on the sidelines poured into shares, quickly pushing the market back up to its previous level and then some:

It’s smart because many people knew that shares had been expensive for a long time and jumped in as soon as they saw bargains.

The reason it’s interesting is, normally people are too dumb to do that.

What usually happens

People tend to pile into the share market (and other investments) when things are going well, not wanting to miss out on the profits that others have enjoyed in the run-up. In other words, greed pushes people to invest in good times.

Then, inevitably, the market turns. When there’s a crash, the dumb money usually pours out way faster than it poured in because the dumb, FOMO crowd suddenly realises that investing is not all beer and skittles. ‘What, I can lose money? Someone should have stopped me!’

This leads to further market falls as the dumb people panic and sell, sell, sell. This is the dumb money’s flip side of greed: fear.

The smart money, meanwhile, is only worried about getting as close to the bottom as possible to buy in. The smart money that is already fully invested will calmly sit out out, because the smart money is there for the long term and ructions like these don’t matter much.

Nearly-dumb money

Often the smart money is only just smart enough and is in danger of becoming dumb at a moment of weakness. I was surprised to read the fear expressed on FIRE blogs in early 2020. Some of the most financially literate writers admitted their terror as they saw the numbers go down, even though they knew, on a very deep level, why holding is the only successful strategy in such a situation.

When the storm comes, you need to tell yourself: this is the moment I’ve been preparing for. All you need to do is to do nothing. Do that, and you can call yourself the smart money.

No doubt the super-smart money and the Nancy Pelosi money got out before the storm hit but don’t worry about them. You can only do what you can do. Recall what we said earlier about timing the market – leave it to quants and inside traders.

Why would money be smarter now?

I’m not sure, but there are other signs of it, primarily in the move towards passive investing.

Perhaps, as many countries move away from demographically-endangered state pension systems, people have an increased need to learn about finance and get their heads around their 401(k)s, personal pensions, superannuation or whatever.

I’m sure we can all agree that people have not become smarter in general since 2008. Perhaps they have at least learned the three basic principles of everyman investing: use low-cost index funds, invest consistently and hold for the long run.

When you think about it, that’s not much for an IQ 90+ person to get his head around. Even if he grasps two out of three, that ain’t bad.

A huge amount of money in the stock market these days is rich people’s intergenerational wealth and ordinary people’s retirement funds. As they don’t need most of it for decades, they have no reason to panic-dump it in a downturn. Maybe that is another relevant change.

Or is money dumber, but safely so?

The move from publicly-funded pensions to self-funded retirement has led to challenges for many countries. One of these is that the average person has never had to understand finance before, knows nothing about investing and is prone to scams or catastrophic mistakes.

Governments and retirement funds have attempted to ameliorate this situation by instituting a ‘default’ fund for those clients with zero engagement. That is, those who are vaguely aware that their employer is putting money into some sort of retirement fund but has never logged in to see what’s going on, much less spoken to an advisor about a long term strategy.

The default setting is usually something like a 60/40 split between shares and bonds, with the more honest or regulated outfits automatically placing people in index funds and the shitter ones putting people into high-fee managed funds.

Either way, perhaps these disengaged investors are not panic-selling their shares in a crash because they are barely aware that a crash is happening or that it might affect them. They pay no attention to their retirement fund until they hit age 55 or so. This is generally a bad thing but if it stops low-information investors from selling at the worst possible time then I suppose it can also be a good thing.

Never bet against the Fed

Another factor is that these days, every time the market gets the sniffles, the Federal Reserve Bank and its international counterparts print gazillions of new dollars to keep it afloat. People now expect this and buy during times of trouble in the expectation that rivers of gold will start flowing.

That can’t be a sustainable situation but for now the smart money has identified the pattern and is cashing in.

Every downturn, every new variant, every disaster means a likely cash bonanza and zero interest rates, plus a rise in inflation that further incentives stock market investment vs cash and bonds.

By now, the super-smart money is probably investing in bioengineering new viruses to release in order to take advantage of this policy addiction. It’s a joke. Leave me alone.

Conclusion

If money really is smarter now, or at least indifferent enough not to panic-sell, that is good news. Ordinary people will have better retirement savings which is good for them, good for the economy and also reduces stress on social security programs.

I’m not sure the hypothesis is right, though. There seems to be an awful amount of apparent FOMO money pouring into everything at the moment, although as I have said previously, this might be due do a structural change in the global economy and not a bubble.

The best test will be to observe a couple more crashes. If we experience two more downturns over the next decade or so and the market keeps on bouncing back rather than the usual, drawn-out bear market, that will be strong evidence for either smarter money or for Fed-induced unreality in the markets that will end we know not how.

  • This article provides general information. It does not take into account your personal circumstances and is not intended to influence readers’ financial decisions. Get your own, professional advice.

One comment

  1. Kentucky Gent · March 27

    Looks like you hit all the likely explanations, Nikolai.

    I will simply note that there is a lot more information available nowadays, written in plain language, by bloggers like yourself. Anyone who doesn’t get educated about investing can only blame themselves.

    Like

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