The term “dumb money” is often used as a derogatory label for the retail investor, that includes high net worth ones. I am of the opinion that the term is generally not broad enough, I would even consider myself as “dumb money” to a degree even though I am so closely tied to the markets in my work.
What are we talking about then? The concept of persons being classified as “dumb money” implies that there is also a “smart money” class, does it not? If so, what does smart money look like?
The first thing most people assume is that smart money has enhanced access to information. While that may be true at least to extent, information is generally available to everyone at the same time, as mandated by law. The fact of the matter is that smart money is emotionless.
When a natural born person think about the money they have available for trading, there are at least a dozen (if not many many more) things attached and influencing those thoughts other than, how to increase return.
Here is an example, you are at the grocery store getting all your necessities for the week. You pre-planned your meals, made lists, and budgeted for the shopping trip. You have a plan and you are executing it perfectly. You got some good deals from the weekly store ads, and you found a few other sales while you walked the store as well. Everything is going according to plan and you are proud of the hard work you put in to make that happen. On your drive home, sometimes without even consciously thinking about it, you give a passing thought to your savings and make a quick projection on what that will do to your budget, or all the neat things you could buy with those savings if you continued to save.
Did you see it? The issue is incredibly nuanced. Any single one of those thoughts listed during that short shopping experience have made a tangible impact on the psychology of your investments or trading. The smart money class would silo these things away in compartments. There would be a budget function, whereby the only role of that function is to budget and plan expenses. There would be an operations functions, who’s only function would be to identify and eliminate barriers to workflow and ensure that needs are being met for other units, and so on - and so on. Ultimately there would be the investment or trading function - with all barriers and needs met, they are abstracted away from the ledger impact in their moves. This removes the personal cost element of trading / investing.
A counter argument would say, “what about risk analysis, are these traders not taking into account their own risk profile?” Yes, of course they are. The key difference between them and us though, is that they are unburdened by score marks of outside thought. Their one job is to optimize even if its just by a penny per trade. Those optimizations stack. The risk is ever so slightly shifted away from personal risk and into profit risk. There is a big difference between driving a really nice rental car and driving your own dream car. The difference is subtle and you will still sweat big time while in the driver seat, but there is a small but significant difference for how it sits in your mind.