In investment lexicon smart money is referred to as institutional money of foreign financial institutions (FIIs) and domestic financial institutions (DIIs) which is invested in capital markets.
Investopedia explains smart money as
Because insiders and better-informed speculators typically invest more, smart money can sometimes be spotted by greater than usual volume, especially when little or no public data exists to justify it. Knowing who the smart money is and when and where they’re investing can be of great benefit to retail investors who want to ride the smart money’s coattails.
The highlighted part in elucidation got me operational, how can smart money help retail investors. If yes how do we accomplish it?
trGURU had an answer, he said why don’t you study what smart money is holding in equity markets.
SEBI , the capital market regulator does publishes a list on everyday investment by FIIs in capital markets however that doesn’t tell which stock they bought. So I fixated my attention to domestic financial institutions – MFs, LIC, GIC, SBI as they were few big players with deep pockets and highly paid staff. Observing their holdings could provide insights. But before beginning I wanted to be sure that this smart money is actually making some money, boiled down to Mutual Funds (MFs)
After a little research, was sure that at least top performing MFs are making money when last 5 year data (2006-2011) was used to see performance So started my exercise of digging details about mutual fund holdings, selected few MFs investing in equities (mostly mid cap and small cap) as these were the stocks I was interested.
This was the process followed …
Firstly, went to Value research website to identify the best 5 MFs which are investing in equity. Didn’t allow any biases (even though I don’t like reliance group of companies) and marked them out.
Secondly, I noted down there top holdings, the criteria I used the MF scheme should have invested at least 4 percent of their money in that company, Soon I had five sheets in excel each sheet telling me top holdings of respective MF.
Next, I earmarked duplicate entries across excel – This showed if there is a company that had investments from more than one of the top five MF scheme, Sorted companies with most occurrences at the top of list. This is what came out on 17/04/2011 as an outcome of exercise
Ipca Labs ,ING Vysya Bank ,Bata India ,Bayer Cropscien ,TTK Prestige ,Torrent Pharma ,Amara Raja Batt ONGC ,eClerx Services ,Federal Bank ,United Phos ,Tata Chemicals ,BhartiAirtel ,Union Bank ,SterliteInd
So smart money is invested in the above companies, how are they doing 2 years down the line?
Not bad a 1 share each investment in these got an investor a return of 31.31% while index (Nifty) gave a return of 0.2%
Can an investor reading this blog do a similar analysis today and get 30%+ returns in two years? – NO
The above analysis has inherent flaws –
1. We know what smart money is holding but we don’t know at what price they acquired it. Buying a good stock at wrong price and expecting profit is like trying to inflate a balloon which has holes , both exercises are fruitless.
2. Many of the stocks that we might find will be operating in businesses that we don’t have any clue, for example in above I don’t know what eClerx services does. If we don’t know a business we don’t invest.
3. Not all of them will click, a cyclical stock like Sterlite has lost 50 percent of its value in 2 years
So is this exercise pointless, absolutely – NO.
This exercise gives us another tool in our hand to identify investment opportunities like pause and play. I was able finish this in span of 60 minutes. Since most of the readers of this blog are blessed with sharper brain and swift computer skills than yours truly they would be able to finish this exercise in 30 minutes flat!
Imagine 60/30 minutes of work giving you 10 investment ideas; it enriched me as it got me interested in a stock that I eventually bought.
PS – It took me more than that time to write this post
What else can be searched – Holdings of LIC, SBI, GIC in equity markets if there balance sheet says that they are making adequate return on their equity investments.
Did you like this tool – Would like to do a similar analysis in 2013 and share with Tankrich community, please tweet or post in comments section, Will more than happy to publish that J
Read of the Fortnight – The classic by Napoleon Hill > Think and Grow Rich
PS : Stock discussed in these posts are for educational purpose only the author takes no responsibility for gains or losses made if investments are made based on above