smart money investing

Smart money investing is described by many as making rational assumptions on risk and return and acting on these assumptions.

There is a whole chapter of finance on how human behavior sometimes leads to irrational financial decisions.

Recognized experts in this field (behavioral finance) include professors Daniel Kahneman (Princeton), Meir Statman (Santa Clara), Richard Thaler (University of Chicago), and Robert J. Shiller (Yale).

To get a more comprehensive grasp of their thinking on how human behavior affects investment outcomes, there's a lot of material on and offline for each of the professors.

Smart Money - How to

Oftentimes, smart money investing is based on rational assumptions on risk and return.

These rational assumptions make the basis of the efficient markets theory, which says that market prices for financial instruments always reflect all available information.

However, that ideal state does not always happen, and there are market fluctuations that smart (informed) money takes advantage of.

So, the first step to beginning on the way to smart investing is to get informed.

Informed about the fundamentals of investing (risk and return), how the financial markets work, what types of investments are available, and what information is available that can and will affect the investment outcomes.

Second step on how smart money behaves is to act. That is to say, take advantage of situations where the markets behave irrationally.

One often quoted example of smart money investors is Warren Buffett of Berkshire Hathaway.

Even though he often buys whole companies instead of purchasing stock from the exchange market, his smart money principles, as laid out in his letters to Berkshire Hathaway investors, can provide good food for thought to those aspiring to invest the way smart (informed) money does.


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