What is smart money? How do we know which is smart money? When do we know smart money has started buying? Also, how do we know that the smart money is really “smart”?
What is smart money?
Smart money is a fund that is supposed to be influential and has a strong impact on stock prices. It is supposed to be well informed and know exactly when and what to invest.
Its actions may also move prices. Because of its reputation as a market mover, it is able to attract many followers who also join in the purchases, causing stock prices to move further. If smart money can make money most of the time, then tracking the investments of smart money and following its footsteps can be a profitable strategy.
In this article, we will discuss several types of smart money, some of which are really “smart” but some may have limited impact on the market.
Accumulation by owners
Purchases by owners of listed companies are deemed to be influential. As owners, they are required to make disclosures to the exchange after each purchase, and their transactions are regularly monitored by the market players.
Owners are supposed to know what happens in their companies. They know the prospects of the company. The future direction of the company is literally in their hands. There are many plans that they have for the company, which may not have been brought to the board for consideration. In many instances, preliminary discussions on deals are engaged by the owners privately.
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On the other hand, if there are troubles ahead, owners are definitely the first to sense them. If the company is not doing well or if its earnings are not improving, it is unlikely that the owners will buy the stock. They will probably wait for a better time to buy. At least, this is the perception of investors.
Investors will also feel more confident to participate in the stock if the owners have the confidence to buy the stock. Even if the stock price does not go up after a series of purchases by the owners, there is no pressure for other shareholders to sell.
On the other hand, if the market comes to know that an owner has been disposing of his stock in the market regularly or in large quantities, they may become very uncomfortable and wonder what’s going wrong. Is there something that the owner knows that the public is not aware of? As such, disposals by owners will have more impact than their purchases.
However, owners of listed companies may have multiple objectives and it could be difficult to read their minds.
• First, the owners may own a big percentage of the company and what they are buying could just be a small fraction of what they own. They may just want to support the share price to instil confidence in the market.
• Second, if the owners pledged their shares to banks (owners’ shares under nominees are likely to be pledged), they may need to support the share price to prevent force-selling by banks if the share price falls below a certain level.
• Third, owners prefer to invest in their own shares. Even if their stock is undervalued, there is no guarantee that it will go up, as there could be other stocks that are more attractive to fund managers.
• Lastly, owners may also give a false impression of their action, as they may buy smaller quantities under their names but at the same time sell larger amount using nominee names, which is not uncommon in this part of the world.
As such, following this type of “smart money” may not be very reliable. Therefore, we need to know the character of the owners and whether they are credible or not.
Purchases by the EPF
The Employees Provident Fund (EPF) is the largest local equity investor in our stock market. It was reported that the EPF accounted for as much as 50% of the total traded volume during certain periods. Since the EPF is a large player, its actions have far-reaching impact on prices of many stocks.
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