The Stupidity of “Smart Money”

Calpers, one of the largest and most respected pensions in the world, is sounding desperate. At a recent board meeting, their Chief Investment Officer said, “We need private equity, we need more of it, and we need it now.”

Why do they need more private equity, and right now? Because they are facing a potential funding shortfall. In other words, they had rosy assumptions of returns that haven’t come to pass. And being the astute investors that they are (note the sarcasm), they are looking at what performed best in the past and investing more in it.

The Wall Street Journal reports that private equity has been Calpers’ best performing asset class over the last decade.

The Insanity of This Thinking

The urgency is concerning. The desperation in their words is typical of novice investors, not the big “smart money”. The Chief Investment Officer went on to explain, “We need more of it to increase our probability of success, and we need it sooner rather than later.”

The board recognizes that this increases their risk, but they have to try for it…at least that is the thinking. Large pensions and endowments don’t have specific maturity or retirement dates as do individual investors. This is a significant reason why individual investors shouldn’t mimic the “smart money” – they are on different playing fields.

Controllable vs. Uncontrollable

Whenever we face funding shortfalls, we have two main options. One of the options gives complete control to the investor, the other is like playing craps…you cross your fingers and hope. Hope isn’t a good retirement plan.

With a shortfall, we can either increase our savings (and/or decrease our future living expenses), or we can hope for better returns in the future. And the pursuit of higher returns comes with a greater chance of loss. Calpers is choosing the uncontrollable route. Perhaps it is too difficult for them to go back to employees and ask that they put more toward their retirement. Maybe, politically, this is their only choice.

This is an example where an investor has a leg up on an institution, and should not follow the smart money. Sure, the average investor may not have access to exotic investments such as private equity, but an investor can reduce their current living expenses to save more and/or reduce their need for future income.


And that is the great tradeoff. You face shortfall. Do you want to be in control of your future or not? Sure, it won’t be easy nor will it be fun. But it will be a sacrifice that will literally pay dividends in the future.