Whale Watching
When investing for the longer-term a popular method is to copy the likes of Warren Buffett, or other high profile fund managers.
This was brought to mind last week with a report by Benjamin Stupples, for Bloomberg, regarding the first-time filing of a famous (but previously private) fund - Longbow Finance.
This fund has been managing billions of dollars for the likes of the Rausing family (who made their fortune with Tetra Pak) for generations.
While the list of 57 US stocks in this particular fund is interesting (for reasons we'll consider below) as this is a first-time filing we have no idea if these are new positions - or have been held for decades or more.
13F Filings
Each quarter all funds, which manage over $100 million of assets outside of a family firm, must file a 13F.
This shows everything they have bought and sold (for US equities) for the prior quarter.
View with caution!
As the Longbow Finance filing highlights, it is difficult to know when exactly - and at what price - a fund bought a particular stock.
Companies such as Warren Buffett's Berkshire Hathaway have been filing 13Fs for many years. This means we can track (on a quarterly basis) what's new (or added to) and what's been sold.
By following successful funds we can build a picture of mass exodus or mass accumulation - and follow suit. Or can we?
13Fs are only filed quarterly and relate to the prior quarters activities - which means the buys/sells could be up to 6 months out of date.
Copy-buying could get you in at a much higher price and copy-selling could result in much greater losses for you than the fund experienced.
Even if you copycat and get a lower buying price who's to say, by the time the next 13F is released, that the fund hasn't dumped the falling stock entirely?
Are there any advantages to Whale Watching?
Yes, there are definite advantages to following the whales.
Due diligence
Building positions
Reducing positions
In general, funds will have completed a huge amount of research on any new companies in which they decide to invest.
This due diligence phase can be over months or years (depending on the fund).
So we have a level of confidence that the companies have something about them worth consideration.
When we see a successful fund adding to a position on a consistent basis, they are clearly becoming more convinced that they have a winner on their hands.
If they are reducing a position this could be because they feel the stock is not performing as they expect - and are slowly selling so as not to spoof the market.
However, it should be noted that, if a stock has performed exceptionally well, it could simply be rebalancing their portfolio. Many funds set a percentage limit so that any future drawdowns are not damaging to the bottom line.
You may want to rebalance your portfolio, too, if you prefer not to withstand a potentially large drawdown.
Other disadvantages
Other than the time lag, there are a few disadvantages to copying the whales.
They can hold many more different stocks than a retail investor could manage
We have to complete our own due diligence
We have to decide on our own portfolio
Large institutions can have a number of funds under their umbrella. Even within one fund there could be a large number of stocks.
Longbow Finance reported 57 stocks and Berkshire Hathaway 49, for example, in their last filing.
Some popular funds, such as ARK Investment, have over 200.
As retail investors, without numerous specialist teams at our disposal, we would find it very difficult to track so many stocks!
Just because a well-known investor has put their (or their funds) money into a company, it doesn't mean it's a good company or a good price. Even the greats make mistakes.
There is a lot of information available these days for us to do our own research.
We can look at the metrics ourselves and have an idea if the company is proactive and evolving (if we're looking for growth) or well-managed with solid dividends (if we're looking for income).
Finally, it's doubtful that our outcome will be aligned with that of a fund. We have to devise our own plan to suit our own style and capital available.
Funds may be happy to sit on large multi-year drawdowns, we may or may not.
They often have to be diversified, we do not.
Conclusion
Whale watching can give us great ideas about where to invest our money. The whales are, after all, the institutions that move the market over the long term.
However, the make-up of our portfolio - and how we manage it - is unique to each of us. We have to be comfortable, and confident, that we are invested in the way best suited to ourselves.
Copying someone else is never a long-term solution - we each have to find our own way.
Let's go trade!
