When it comes to our investing toolkit, all we really need at our disposal are the hammer and the nail.
In other words, you don't need fancy bells and whistles to find undervalued companies ripe for market-crushing profits.
You don't need a broker who's probably ripping you off, and you especially don't need a Bloomberg terminal that costs $24,000 a year and takes up half your office.
All you need are the basics, most of which are free, publicly available, and right at your fingertips.
That's right: Independent research does it every time.
I've mentioned here before that publicly available 13F filings are one of the best tools retail investors can use to find unreasonably lucrative investment opportunities and gain and hold a profitable, sustainable edge.
I like to dig through these documents filed by money management firms every quarter to see exactly what the Wall Street bigwigs are buying and selling, as well as measure how well they're performing compared to the previous quarter.
By doing that, you get an exact picture of what the best and, let's be honest, worst investors are doing with their clients' funds.
And over my more than 27 years in the markets, I've dug through enough financial filings with my shovel and hard hat in tow to understand the most important lesson in investing...
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Financial Filings Are the Keys to the Kingdom
When I started doing this back in the late 1980s, it took a little more work than just popping onto www.SEC.gov to get the information.
We had to make a list of the individual filings and send a request to the SEC using an ancient technology called a "mailbox." A few weeks later, we'd get one frustrated mail carrier delivering a giant pile of bulky envelopes containing the SEC documents.
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By the 1990s, a fellow named Henry Emerson in New York started a service where he did the work for you, compiling all the filings into one comprehensive report and charging the cost of one month's rent for it. His newsletter, Outstanding Investor Digest, was revered... but it was also inconsistently published - and eventually faded away as the Internet's advent made these documents instantly accessible.
Whether I did the legwork myself or swapped hot dogs for steaks to get the data, I always received it way before it reached the mainstream media circus or mutual funds' annual reports.
Ask any investor with half a brain, and they'll tell you that knowing what Warren Buffett or Carl Icahn were buying before anybody else did was pretty valuable information. I made enough money to reach the point where the cost of obtaining it no longer forced a decision between cabernet and cheap ripple with dinner.
Today, that information isn't as valuable since everyone can access it online.
Stocks bought by Buffett, Icahn, and other cult-worthy rock star investors start moving the nanosecond the data hits the airwaves. Buys and sells are all over the newswire and TV, with the stock already moving before you have time to say "brokerage."
Don't get me wrong, I still read the rock stars' filings. They offer no shortage of interesting info on sector valuation and possible pockets of opportunity.
But chasing the stocks these guys already own is a fool's errand. Disclosing their positions often pushes share prices higher, so chasing those stocks is never going to make me the unreasonably high returns I'm pursuing.
The days of coat-tailing the more prominent investors all the way to profits is just one more thing that has been killed by the damn Internet.
But there's one group of companies whose reports you should pay particularly close attention to every earnings season.
These firms are responsible for seismic shifts in the investing world, so digging through their 13F's and seeing their next moves can give you enough time to position yourself to benefit from those shifts...
...and set yourself up for massive windfalls in the meantime.
Never, Ever Miss Filings from These Four Companies
I'm talking about the quarterly 13F filings from... the smart money: Apollo Global Management LLC (NYSE: APO), KKR & Co. (NYSE: KKR), The Carlyle Group LP (Nasdaq: CG), and Blackstone Group LP (NYSE: BX).
These giants own a substantial portfolio of publicly traded stocks and bonds. Some of the holdings are companies they sold a piece of in an IPO, while others are just companies they find attractive and want to own in pursuit of long-term profits for themselves and their investors.
Keep in mind, though, that the execs at these firms are large shareholders, so it's not just client money. They have a ton of skin in the game, meaning they care even more about the company's performance than regular shareholders do.
And there was one particular fact that jumped out at me when I read their first-quarter filings last week...
The smart, patient, aggressive-conservative leaders of the private equity industry snatched up a ton of real estate in the first three months of 2018.
You see, REITs and other real-estate firms have sold their assets en masse due to concerns over higher interest rates. Many of them were and still are trading at a substantial discount to the value of the properties they own.
The PE guys caught onto this trend last quarter and have been buying up these undervalued assets ever since.
Blackstone just announced on May 7 that it was buying Gramercy Property Trust (NYSE: GPT) for $7.5 billion. Apollo is in talks to buy an Indian real estate portfolio from JPMorgan Chase & Co. (NYSE: JPM). And KKR just increased its investment in a company that provides house-flipping loans from $75 million to $250 million.
In fact, Ralph Rosenberg, KKR's Global Head of Real Estate, summed up perfectly why real estate is the best investment you can have: consistently rising demand.
He explained, "We fundamentally focus on themes that have really strong drivers for demand. So right now, we're really focused on all the housing themes - senior housing, student housing, multifamily housing, alongside the theme of looking at the Sunbelt states and the migration of population to the major cities in the South, where there's low tax jurisdiction and, obviously, great weather."
Catching this trend of buying real estate puts you ahead of the curve and gives you time to invest in companies set to benefit from this trend. All you had to do was read the filings to see this coming.
If you followed private equity funds over the last decade when they made big moves into undervalued sectors like banks and financial service firms in 2009, you have made an enormous amount of money.
And their latest filings indicate where their money is going next, making them the perfect resource for individual-minded investors such as ourselves.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.