Andre J. Peschong

What is “smart money”?  Smart money is an age old question that many people hear but don’t necessarily understand.  Some people believe smart money is someone with a long term horizon who looks for stellar blue chip or branded companies such as Warren Buffet buying Coca Cola.  That type of smart money is long term value investing, which Warren Buffet has proven to be true through his Berkshire Hathaway company.  There is also the macro global view taken by some very large investors such as Julien Robertson and his Tiger Fund.  His form of smart money was taking a large macro view of economics, money supply and emerging markets, and discover meaningful trends.  Then there are the hedge fund superstars such as George Soros and John Paulson who understand macro trends but also were able to call large secular shifts in the market enabling their funds to make substantial returns on calling the direction correctly.  Smart money rarely advertises what it is going to do, save for maybe Warren Buffet who is long term anyway.  Having said that with the transparency and ubiquity of the web information can be found if one searches efficiently and effectively enough or better put has the ability to interpret “smart money’s” actions in the marketplace.  Case in point is the recent news that a band of substantial hedge funds, many of the aforementioned, are buying up strategic distressed banking institutions while concurrently finding immediate bolt on acquisitions for them.  The most recent and probably the most prominent acquisition is that of IndyMac Bank, who was taken over by the FDIC because of substantial exposure to the residential mortgage backed securities market.  The smart money quickly assessed the distress level while completing their due diligence and negotiated a very aggressive deal with the FDIC on many key points.  One of those points was the guarantee that the FDIC was willing to give the new purchasers on individual mortgage defaults, which was a 70% loss recovery on the original amount owed, not the current value.  I was recently interviewed by Thestreet.com in regards to this transaction and also a subsequent transaction when the new entity One West bank purchased First Fed, thus creating the largest independent bank in California.  This is a prime example of following smart money’s actions.  Does this mean we are at the bottom and it is time to pick up as many distressed assets as possible?  Probably not but what it does signal is that smart money is strategically dipping their toe back into the water and that the economy is closer to the bottom than the top.  Traditionally, smart money has also been longer term so even though we are recently seeing some interesting strategic positions being taken on by these groups their horizon is probably 3-5 years before real value can be garnered in these current transactions. 

I believe that many of these large smart money groups are in the positioning mode readying themselves for better liquidity and valuations in 2012 and beyond.  As an individual investor, regardless of size, it always is a good idea to see where longer term strategic capital is moving and glean some meaningful insight from those capital shifts.  That is where true wealth is built.

Bookmark It

Hide Sites