Who Is the “Smart Money”?

Last week was a spectacular one.  After the S&P 500 (SPX) kicked it off with a -2.4% drop on Monday, four successive rallies saw the index close the week +4.6% higher.  That was a stellar turnaround!  There was no shortage of chatter about retail overwhelming the “smart money” to push stocks higher.  But I think it’s become unfair for market pundits to use that reductive terminology.

Certainly, individual investors were net buyers as the markets sank earlier this month.  There is also no shortage of evidence that foreigners were selling US assets.  Thus, in the short-term, who was “smart” and who was “dumb”?  That too is simplistic, however.  Investors can and do have different motivations, mandates, timeframes, and risk tolerances. 

A global asset allocator, particularly one based outside the US, could have easily decided that they wanted to lighten their long-term exposure to US assets.  Many have been overweight, which has generally worked to their benefit, and are taking profits while repatriating capital.  Even if the exact timing might be incorrect, that hardly disqualifies them as smart money.  Conversely, an individual investor who actively trades his account, who spots opportunities while carefully monitoring risk tolerances and levels, is by no means dumb money.  That sounds quite intelligent, frankly.  Neither has a monopoly on being right or wrong, or “smart” or “dumb”, especially when considering their potentially divergent approaches to investment success.

I have become a big fan of the term “protail”, which I think defines much of Interactive Brokers’ customer base.  The Cboe’s Henry Schwartz, a friend of mine, coined the term after noticing how many individual accounts trade options regularly, consistently, and intelligently.  They might not be institutions, per se, but they approach markets with a similar mentality.  I think of two other friends (IBKR clients, btw) who very specifically fit this mentality.  One is a college friend in Denver who has made a living for years by utilizing options strategically, another trades actively in (early) retirement managing a multi-billion dollar bond portfolio.  They may be individuals, but they are by no means “dumb money.”  “Protail” is a much more apt description of these individual investors and so many more like them. 

Yet there is a key differentiating factor between many individual and institutional investors.  Many have vastly different histories.  Decision makers at institutional accounts tend to have several years of experience.  One typically doesn’t get to manage significant amounts of other peoples’ money without a track record.  Meanwhile, millions of people became investors in the five years since Covid.  Among the latter group, they have benefitted from a remarkable investment climate.  The immediate post-Covid period saw the most massive monetary expansion in history, which propelled stocks and a wide range of other assets from washed out levels to all-time highs.  Except for a few months in 2022, almost every dip has been a buying opportunity, and almost every rally deserved chasing.  Over the longer term, that has not always been the case, and investors of all types with a longer set of market experiences recognize that.

Sure, smart people do dumb things and vice versa.  But it is incorrect to characterize one class of investors differently than another simply because of their size, or even their experience level.  Assigning market performance to one group or another in that manner is incorrect.

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Originally Posted on April 28, 2025