Smart Money Makes Another Dumb Mistake

Institutional and professional money managers are sometimes referred to as “smart money.” I honestly don’t know what qualifies them as “smart.” Maybe its because of experience, depth of an in-house research team, or maybe the amount of assets they manage. It certainly is not based on performance. The vast majority of “smart money”, over time, performs no better than an index fund.

I have heard “smart money” mention that they are not affected by behavioral biases, whereas they influenced many retail investors to make hasty and costly investment decisions. That would be a differentiator if it were true. Unfortunately, it is not true. We are all influenced by biases. Some acknowledge that and set the proper defenses to help them make wiser decisions, but many just pretend they are immune to them.

SoftBank’s Huge Loss

Every investor, every institution, is going to make an investment mistake at some point. The question is how quickly we recognize it, remedy it, and whether we learn from it. This is a tale of “smart money” not learning their lesson.

SoftBank recently announced staggering losses in its behemoth Vision Fund. It lost $23 billion this last quarter. That is billion with a B. What went wrong? The chief executive, Mr. Son, said that they went too big into tech. He said, “When we were turning out big profits, I became somewhat delirious.” In other words, his investment strategy was fueled more by FOMO than discipline and an investment policy. While he is well-respected, that didn’t make him immune from the euphoria our brains feel when making big money.

In the wake of these losses, Mr. Son said that they are going to pull back on future investments and exercise more discipline. That sounds like a decent remedy to ensure it doesn’t happen again. But if he doesn’t create a proper defense to his own bias, a plan to ensure this never happens again, it will likely happen again at some point.

SoftBank Didn’t Learn Its Lesson

In 2019, SoftBank made a similar large blunder with its adoration and multiple investments in WeWork. I wrote a blog almost three years ago about it highlighting the stupidity of the investment. Mr. Son lost a ton of money on the WeWork investment, again because he let emotions and the lure of profits cloud his decision-making process.

After the huge losses in 2019 from WeWork and other investments that went south, Mr. Son promised a pullback in investments and to be more disciplined. Wait, isn’t that what he just said after these current losses? If he had executed on his original plan, maybe his investors wouldn’t have lost $23 billion in the 2nd quarter. The question is, what will prevent Mr. Son from getting delirious again at some point in the future and making poor decisions?

The greatest predictor of future behavior is past behavior. And this is a lesson for all of us. It doesn’t matter how much we regret a decision or how strong our intentions. If we don’t do something materially different, and create a defense to what led to past mistakes, we will most likely repeat the mistake in due time.

The Value of an Investment Plan & Accountability

An investment plan that accounts for our weaknesses and proclivities can be immensely helpful. We need to be real with who we are, and what mistakes we have made in the past. Outlining specific steps to take when we feel a certain way (that got us into trouble) can be immensely helpful. But no matter how good a plan is, if we can’t maintain discipline and be accountable to follow it, we are likely to abandon it at some point.

Biases, especially emotional biases, are very strong. We may not have the willpower to outlast their influences. But a specific plan, complete with a decision-making process when we are feeling especially giddy, can help us remain disciplined. Sure, investing may not be as exciting, but at least it will be more disciplined and thoughtful.