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If you have followed me at all over the years, you know I pay pretty close attention to the quarterly filings of leading hedge fund managers and institutional investors.
Back in the Stone Age when I began doing this, we didn't get immediate access to the filings. You had to write into the SEC and have them mailed.
Eventually, Henry Emerson, the publisher of the Outstanding Investor Digest, began producing a report each quarter that would come a few weeks after the filings deadline, so we all signed up for it.
Knowing what the very best and brightest of America's investors were buying and selling was a substantial informational advantage back then.
Of course, the advantage that comes from tracking these leading investors is gone now. The filings are live online seconds after being received at the SEC, and some paid sites have the analysis up in minutes. At worst case, the Nasdaq site has all the info up within 24 hours.
The advantage of having information no one else does, like so many stock market advantages, has been eliminated by the widespread availability of information.
Rather than providing an advantage, this widespread availability of information leads to crowded trades.
That's why we have to rely upon a totally different approach nowadays…
If a Rock Star Investor Buys or Sells It, Don't Even Touch It
Back before the widespread availability of information, the mutual fund managers were tracked since this was part of the mutual fund era. Superstars like Peter Lynch and John Templeton got all the attention, and their holdings list was mailed to shareholders every six months.
No one was tracking hedge fund investors like Seth Klarman at Bedpost, Richard Rainwater at Bass Brothers, George Soros, and Carl Icahn. They were not yet the superstars they would eventually become. But at the brokerage where I worked previously, we were tracking them – and we made quite a bit of money for ourselves and our clients by doing so.
Today, the portfolio changes for superstars like Warren Buffett, Icahn, Bill Ackman, and David Tepper, are announced to the world on CNBC and rise in price almost immediately. Trading on the filings of the rock stars is usually a losing proposition. Quick and dirty backtests show me that owning the stocks most widely held by the institutions has been a losing strategy in recent years. You underperformed the indexes in both up and down markets, in spite of owning the stocks everybody loved.
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This creates another informational advantage if you use it correctly. Everyone is going to be running to buy these market darlings, and if past history is any guide, lots of folks will be willing to pay stupid prices. It's not a bad idea to sell them some if you already own the stock.
The real advantage you gain from knowing what the crowd is buying is identifying what not to do. Crowded trades work until they don't. At some point, these great companies and brilliant ideas stop working and then it's a problem for those holding a stake in the companies everybody loved yesterday. The exit door is going to be very narrow as a flood of sellers is met with a trickle of demand. The end result of that is almost always dramatically lower prices.
To Outperform the Market, Skip These 10 Most Crowded Trades
So what are the crowded trades today?
Here is a list of the top 10 most widely owned stocks, ranked by the number of funds holding a stake in the company:
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 "Max Wealth" and Heatseekers.