By Scott Phillips
I'm going to let you into a little secret. There's no such thing as "smart money". Oh, sure, there are the Warren Buffetts and George Soros' of the world – they're super-smart guys who've made a pile from investing well, but that's not the "smart money" we're talking about.
This "smart money" is the mythical "big end of town", that – in some people's imagination – trades in and out of companies before you and I have a chance. They, so the story goes, get all of the easy pickings, and leave the dregs (if there are any) for you and me.
Except that it's not true.
Take, for example, the call by RBS in January this year to "sell everything" that was trumpeted throughout the world's media. We were told to "brace for a cataclysmic year". Well, don't tell them, but the Australian Securities Exchange is up 9 per cent (plus dividends) since then. Oops.
"Ah, but it's not the investment banks that are the 'smart money', it's the hedge funds…", comes the refrain.
Well, no – at least not on average and not recently. As Neil Chriss, founder of Hutchin Hill Capital told a funds conference recently: "The problem is, since the [global financial] crisis, a lot of hedge funds have not been delivering. Returns have been mediocre."
So the smart money isn't the investment banks and it's not the hedge funds.
Now, I do have to say, some institutional investors are given a leg up over us mere mortals. Priority access to capital raisings are common, for example. But then again, ask those institutions how "smart" they feel having participated in the Surfstitch capital raising at $1.50 per share back in May 2015. The shares are now trading at 20¢ each – for good reason.
They're not the devil – but nor are they infallible
All of that said, I'm not here to pick on investment banks, hedge funds or institutional investors. There's a role for those guys in our market, and they're entitled to make money, as long as it's done legally. But it seems pretty clear to me that there's not a great deal of evidence to support the fact that they're overly "smart" – at least not on average.
But there's a more important angle here – those who are genuinely smart, and who regularly deliver impressive gains rarely do so in a way that excludes regular investors like you and me.
We could have bought any of the ASX success stories at any time over the last few years and done very nicely. I'm thinking about Cochlear, Corporate Travel Management, NIB and Bellamy's, just to name a few. Indeed, most of those companies spent much of their lives without significant institutional ownership – meaning that retail investors like us actually did better than the big boys.
These companies weren't hidden from view. They weren't available only via back room access or nudge-nudge, wink-wink, say-no-more deals. And remember, the "smart money" also owned BHP shares when they were in the mid-$30s.
Corporate Travel Management chief executive Jamie Pherous has delivered good returns for investors.Credit: Glenn Hunt
Foolish takeaway
Put simply, there's no evidence that the big end of town gets better investment results than are available to you and me. And certainly no reason to believe that they take opportunities away from you and me.
If you'd have bought an ASX index fund on the day RBS made its "sell everything" call, you'd have enjoyed a return of about 13 per cent, once dividends are factored in, and you can add another 1.5 per cent for franking credits. That's a good return. And those that sold everything? Let's just say they wish they were "dumb money", like us.
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Demand from China has sent Bellamy's stock soaring, making it one of the ASX's recent success stories.Credit: Kate Geraghty
Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).