My understanding is: Smart Mode means you know what you're doing, kinda.
For an example, you have a hotkey for Energy Ring , and in the middle of the hunt, suddenly 5 creatures turn on you, what you do? You press your hotkey for energy ring, right? But in desperate moments, you can press it several times, because you're nervous, etc etc...
Smart mode means you meant to press it several times, so the game will understand it as a conscious choice and will equip/unequip every time you press.
Not using smart mode means you "aren't sure" so, pressing the hotkeys several times will not remove the item, it will just equip once. The game allows you to be desperate and press hotkey several times without getting urself killed.
haha thats basically it... :)
Most items that are time based can be set as smart mode, like energy rings, skill rings, skill amulets, blister ring, etc...
Items that are charge based cannot be used with smart mode, like magma amulet, garlic neckalce, glacier amulet, etc...