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Bill Nygren, who runs the $6 billion Oakmark Select Fund, is not bashful about taking tips from competitors. Earlier this year he noticed in the shareholder reports of Longleaf Partners, Legg Mason (LM
), and Dodge & Cox that they were all accumulating shares in wireless telco Sprint Nextel (S
). "Many competitors we respected made it a large position," he says. "That suggested it was worth looking at." When the stock later dipped from 20 to 18, he swooped in. Today it trades at 22.
Investment research is tough, so why not build on a foundation laid by others? This piggybacking strategy makes sense. According to a new research paper, "The Investment Value of Mutual Fund Portfolio Disclosure," stock picks from top-performing funds beat those from bottom-performing funds by an average of 8% in the year after the stocks were purchased. This performance gap held steady throughout the study's period, 1980-2002. (The paper, by business professors at the University of Maryland and the University of Arizona, is available at ssrn.com/abstract=891728.)
Now there are easier ways to piggyback than poring over shareholder reports or picking through regulatory filings. Two Web sites, GuruFocus.com and Stockpickr.com, do much of the work for you. (Both are free, but GuruFocus also has a $249-a-year premium service.) The sites don't just look at mutual funds but also check in on the pantheon of superinvestors, including Warren Buffett, Carl Icahn, and Eddie Lampert.
GuruFocus publishes the latest buys and sells of 51 "gurus," investors who generally have at least a decade-long track record of beating the market, ranking their picks and synthesizing them into model portfolios. The "most weighted" portfolio holds the 25 stocks with the largest position in the combined holdings of the gurus. It has gained 30% since its January, 2006, inception, compared with the Standard & Poor's 500-stock index's 22%.CAN 19 HOTSHOTS BE WRONG?One current position is Home Depot (HD
). The retailer is what Charlie Tian, GuruFocus' founder, calls "a triple buy." Not only do 19 gurus own it, but the company is aggressively buying back stock and corporate insiders are purchasing shares as well. Other triples include car dealer AutoNation (AN
), financial software maker Fair Isaac (FIC
), and Rent-A-Center (RCII
), which sells furniture and consumer electronics on a rent-to-own basis.
Stockpickr has more breadth than GuruFocus, tracking more than 700 mutual funds and hedge funds. It also allows users to post their own portfolios and compare them with the experts'. But the site lacks the price data of GuruFocus, which shows the range in which its gurus purchased their securities—valuable if you want to compare your cost to theirs.
Of course, relying on portfolio disclosure can be problematic. Hedge funds file their holdings with the Securities & Exchange Commission once a quarter, and mutual funds every six months. But there usually is a lag between the date of the disclosure and the filing. That means the manager may already have sold the stock by the time you're aware of the purchase, or may have got it at a much lower price.
You can deal with that issue by piggybacking on investors who typically hold their positions for years. That improves the odds the stock will still be in the portfolio by the time you learn of it.
There's another reason to track long-term investors with large stakes. "When managers buy a big position and hold it for a long time, they have done much more research" than those who trade hundreds of stocks and turn the portfolio over two or three times a year, says Tian.
In addition to estimating what top investors paid for their shares, Tian's GuruBargains feature ranks a stock by how much it has lost after a top investor has bought it. This gives you a chance to pay less for a stock than some of the best minds on Wall Street. But you don't want to buy only the losers. "Even the most phenomenal investors make mistakes," says hedge fund manager Mohnish Pabrai, managing partner of Pabrai Investment Funds and early subscriber to GuruFocus. "Buying only their losers is like rooting out their flowers and watering their weeds."
The key is to springboard off these investors' work and do your own research on stocks they own. If nothing has changed at a company that has declined since Warren Buffett's purchase, then do what Oakmark's Nygren did with Sprint—swoop. By Lewis Braham