Where’s The Smart Money?

First of all, what is “smart money”?

Definition: Smart Money (smɑː(r)t ˈmʌni)

1. Money put into companies by serially successful investors, hedge fund managers, and institutions.

The opposite of that is “dumb money,” the cash that pours in once the investment gets plastered front and center in the financial press as “the latest hot secret” for millions to read—commonly followed by the investing herd stampeding into the sector and driving prices up into a bubble that bursts and leaves heavy losses in its wake.

Obviously we want to be the smart money. But what’s so smart about smart money?

1. Those in the know have better access to information, and access to better information.

If your job were to find the best investments and manage millions, perhaps billions, of dollars, wouldn’t you try to take every advantage the law allows? This could mean gaining access to policymakers, personally getting to know company management and technical experts, and thorough site visits.

Simply put, the smart money may know the news hours or even days before it hits the newswires: a level of access the average retail investor simply can’t get. Using this information, the smart money is able to make more informed decisions, and make them faster.

2. Serially successful people tend to continue to be successful.

The Pareto principle states that 80% of an event’s effects arise from 20% of its causes—or in financial terms, 20% of the people working in a given sector generate 80% of the wins.

I’ll take this one step further, stating that the top 20% of that group again generates 80% of the wins, which means the top 4% of entrepreneurs generate 64% of the wins. Those who have demonstrated that they have what it takes are the ones more likely to do it again.

3. Following the herd will get you trampled.

When you hear about the latest investment fad in the news, you can be pretty sure that idea has passed through hundreds of thousands of hands on its way to you.

By the time it hits the front page of the local newspaper, it’s usually too late: the real money, based on the company’s real value, has already been made.

Herd investing is one of the most dangerous things you can do as an investor. As the dumb money flows in and the share price begins to climb, it’s easy to get complacent and think that the shares will keep going higher, because you feel like you’re on the right side of the trade.

But that’s when the smart money strikes, pulling out their investment at the expense of the dumb money… and the price takes a nosedive under the selling pressure. It’s the herd that always ends up holding the bag.

What’s the Smart Money Holding Now? What Are They Buying?

If we want to follow the smart money, we first must know what they’re buying and holding. Fortunately, all institutional investment managers with at least US$100 million in assets under management must disclose what they bought (though they can hide what they’ve shorted) in their 13-F forms, a quarterly filing to the Securities and Exchange Commission (SEC).

We compiled the holdings of the 10 largest hedge funds in the world by assets under management, and then we extracted the energy-related companies. Here’s what we found:

I was pleased when I put together the above chart in early January 2014: Casey Energy Dividends was already sitting on a nice gain on ExxonMobil, and we closed the position at a great gain. All good news for our subscribers. So what do we look to next?

Investing in Big Oil is much lower risk than the speculative junior resource sector, but if you want exposure to big upside, the junior resource sector is where you want to be.

If you’re like me, you want the big gains, so show me the money!