Smart money refers to investments or transactions made by ‘expert’ investors who are said to have a comprehensive understanding of financial markets – they can identify or foresee trends before others.
Investors who do not spot or predict investment trends, i.e. those who try to ride the trend after the smart money has already made most of its profit, are called ‘stupid money’ or ‘dumb money’.
Many people believe that smart money is a myth. They say wealth managers – people who manage and advise on clients’ portfolios – perform no better (and in a surprising number of cases worse) than the overall stock market’s average trend over any given period.
Smart money may refer to either clever investors who can spot market trends before others, or the collective impact of big money that can move markets.
According to ft.com/lexicon, smart money is:
“Sophisticated investors who tend to pick the right moment to buy or sell assets because they can identify trends and opportunities before others do.”
Smart money can also mean the collective force of big money that can move markets. When it has this meaning, the primary force behind smart money is the central bank.
Smart money in venture capital
In the venture capital world, smart money is an investment term that includes money people invest in a business, plus the time, advice and know how which they put into the company. It is called ‘smart’ because the business receives the investors’ wisdom as well as funds.
In venture capital terminology, when just money is invested without the investors putting in any of their know how or time, it is called ‘dumb money’.
Smart money in gambling
In the betting world, smart money refers to gamblers who know what they are doing and manage to earn a living on their bets. Many use historical mathematical algorithms to decide where to place their wager and how much to bet.
“Smart Money approaches are one of the most powerful uses of Betting Percentages and SportsInsights betting information. Over the years, we have shown that Smart Money approaches have consistently achieved profitable results on the order of more than 55% (for spread sports), conservatively.”
Many gambling websites and individuals claim they have the best smart money system, with some saying their bets are over 90% accurate.
Smart Money Index
The Smart Money Index (SMI), also known as the Smart Money Flow Index, is an indicator of investors’ sentiment. SMI was invented by money manager Don Hays.
The SMI is based on price patterns that develop during the trading day (intra-day price patterns).
Most traders tend to overreact at the start of the trading day because their impulses are driven by overnight news and economic data.
Experienced (smart) investors begin their trading closer to the end of the trading day, after they have had a good look at market performance. The strategy is to bet against what happened in the morning, and follow the evening price trend.
Video – What is smart money?
In this video, the speaker explains smart money when the term is used to refer to market participants that drive the market higher or lower. Retail traders try to identify the trend that smart money creates.