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if so, why then did the markets spin out of control? Perhaps these rational investors experienced the same huge losses as the rest of us. But if they somehow escaped, we should study the analytic tools, the investment philosophy, that enabled them to see through the speculative pyrotechnics that benumbed the rest of us.

Who are these “smart” investors, and how do they operate? Are they short-term traders? Are they simply better diversified than the rest of us?

This may not sound particularly brilliant, but there is little, if any, academic dissent from the proposition that, at the end of the day, the most efficient investment portfolio is fully diversified. Indeed, some scholars have suggested that for a variety of retirement plans, we consider making full diversification a requirement.8 A younger generation of economists have carefully scrutinized the various psychological and sociological biases that distort how investors make their decisions. Even this group, however, readily concedes that when attractive investment opportunities come to light, it is hard to believe they are not quickly exploited;9 investors should, therefore, thoroughly diversify.10 But is that how the smart money manage their portfolios or, conversely, do they focus on only a relative handful of carefully selected companies? It would help to know.

Particularly troubling is the assumption throughout the literature that the smart money – those who on Wall Street and in business schools, too, would be called “value investors” – are merely traders, focused on the very short term.11 It is blithely assumed that value investors measure risk by the short-term volatility of a stock, and that having found a price discrepancy, seek to capture it before the underlying fundamentals change. Are value investors in fact fearful of holding a stock for the long term? It would help to know.

As the reader may have suspected, no one has looked. It’s a paradox; so much scholarly work premised on the role of rational investors, yet no one bothers to study them or seek them out. There is the occasional reference to Warren Buffett, but no close examination. One recent academic paper concluded that “financial economists have been generally unable to identify any reliably ‘smart’ investors.”12 Gosh, perhaps they’ve been hiding. While there are casual


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