I never recommend trading off tips. It doesn’t matter whether it’s your next door neighbour or Warren Buffett, if someone tells you to buy a stock you should always do your homework first before you put any of your own money on the line.
Whenever you trade off someone else’s tip you can’t be sure what their motivation is, what their exit price is, how their portfolio is hedged or where they bought in. It’s much safer to come up with your own strategies and ideas.
Now that being said, I recently came across a quantitative strategy on the excellent trading system site, Quantpedia.
While I cannot go into the specific system details (due to the site’s Terms of Service) it seems there is some logic to keeping an eye on what the world’s best investors and hedge funds are buying.
Why should you follow other investors?
One of the problems that large investors and hedge funds face is that they are ultimately measured against their benchmark indexes, as well as against each other. Larger investors do not want to take the risk of looking stupid among their peers and in many respects, this makes larger investors more risk-averse.
As a result, a common strategy among the largest investors and hedge funds is to hold similar portfolios but with a significantly larger portion of their capital in just one or two ideas.
Many famous investors stand by the principle that you rarely come up with more than one or two great investment ideas a year. So if you can work out where the larger investors are putting the most of their money, the chances are that these stocks are good ones to own. You can then do your own homework and see whether you like the look of them too.
How to follow the world’s best investors
The best way to keep track of what the world’s greatest investors are doing is to track the 13F filings that are published on the SEC website. Investment managers in control of more than $100 million in assets are required to report their long holdings within 45 days of the end of each quarter (short positions are not required).
Another good and quick option is to check the latest filings on the Whale Wisdom site and that’s another way to get some good investment ideas
Of course, the other site for following investor picks is GuruFocus and there’s a clever trick for seeing what the main investment ‘gurus’ are buying and selling.
Finding consensus picks on GuruFocus
If you navigate to the main GuruFocus homepage and click Gurus/Consensus Picks you can then see the most popular stocks being bought by the world’s best investors.
Then, if you navigate to Gurus/Hot Picks you can filter for the hottest stocks being bought up by the guru investors:
Unless you have a premium membership, these picks are blurred out so you can’t see which stocks are being bought up. However, there is an easy way round this.
Simply note down the closing price and the market cap and then put those values into the Google Screener. Once you’ve put those values into the Google Screener you can easily match up the values and see which stock it is.
So in this case, by putting in a couple of details you can see that the stock in question is $TSO and it’s been recently purchased by 8 gurus.
The interesting thing is, if you look at the chart, TSO seems to have responded to that over the last couple of weeks and was trading higher by 4% today.