Cheating off the Smartest Kids in Class
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We learn young – if we don’t know the answer, sneak a peek at your neighbor's answer sheet. Ethical issues aside, there are a number of psycho-social tendencies that promote this behavior. The fear of disapproval, the innate desire to succeed and be valued, simple conformity to our environment; all these reasons we use to explain away our following what the other kids are doing.
With investing, we have these same tendencies, but we call it "research." We do what the successful investors are doing. That is why I predict that the stocks bought by top investors such as David Einhorn and George Soros will see a marked increase as other investors follow suit. These stocks include Google (NASDAQ: GOOG), Apple (NASDAQ: AAPL), and Dell (NASDAQ: DELL). I also predict that Amazon (NASDAQ: AMZN) will fall, based on the combined factors of this copy-cat phenomena, and current company strategy.
What Is Happening
This week, many investors released a list of their stock holdings as of the end of the most recent quarter. The 13f filings are required by law every three months, however, do not necessarily include options held by the investment moguls. These peeks into the portfolios of the most successful and closely followed investors in the world will send a shockwave effect through Wall Street as other investors make quick changes to conform their holdings to that of these titans.
David Einhorn, founder and president of Greenlight Capital, is credited for generating about a 22% annualized return for investors. According to a filing released yesterday, Greenlight added a 3-milion-share position in Yahoo (NASDAQ: YHOO) and a 14 million share position in Dell. His position in Microsoft (NASDAQ: MSFT) was basically unchanged, but he added to his Apple (AAPL) position, ending the quarter with about 1.5 million shares, up from 1.3 million.
Another investment guru, billionaire hedge-fund manager George Soros, jumped on board the technology bandwagon. Soros concentrated his stock portfolio with bigger stakes in Google. Currently, his stake of 259,900 Google shares, up from 1,126 shares last time around, is worth about $158 million, which is now one of the biggest positions in his portfolio.
Meanwhile, Amazon appeared to fall out of Soros’ favor. A stake of 206,000 shares disclosed in the third quarter was noticeably absent from the latest filing. This comes as no surprise when one looks at Amazon’s current strategy of opening brick and mortar stores. Analysts see this is a costly move for the company that specializes in online retail. It is my opinion that Amazon will cease to be as competitive as it begins to incur overhead costs and its stock performance will suffer. Apparently, Soros shares this view.
What Will Happen
Since my previous prediction of Amazon’s drop (valued at $192 on Feb. 14), its shares have fallen to $184. This will not be the bottom for the stock, as new costs of stores and compressed margins combine with countless investors abandoning ship along with Soros.
Alternatively, Google (now at $605), Apple ($498), and Dell ($18) should rise. Specifically for Dell, it is reported that the provider of integrated technology solutions is preparing to become a player in the software setup field. Dell has been consistently trending upward since late May 2011 and seeks to continue with this new venue.
Why it Will Happen
When it comes to investing, people want big reward with little risk. The savvy investor will educate him/herself on the almost infinite methods used today to achieve this. Reducing risk through diversification is the most universally accepted approach. Investing in different types of stocks or markets instead of buying only one type of stock spreads out risk and protects you should a certain industry experience a major downturn.
However, the most fundamentally sound (and by far the easiest) method is to play "follow the leader" with those successful investors who are making money.
Investors know this and practice it – both consciously and subconsciously. Some will accept these adjustments without question and change their own holdings. Others will pour over filings made by these men and add hours and dollars of their own research to reach the same conclusions.
What prevents identical investing? With the 13f filings, investors are allowed to omit some confidential information based on agreements made with the SEC in order to avoid this copycat phenomenon creating some catastrophic shift in the stock market. Even so, investors will find their way to similar investment patterns.
Another precaution that prevents a run is that funds are required to file the 13f within 45 days of the end of the quarter. Therefore, most wait the full 45 days in order to protect their movements. By the time the filing gets to the public’s eyes, the investor’s position may have changed.
There is some useful information, such as being able to tell which are new positions or large increases in the fund’s portfolio. This is usually a good indication of a stock's health, as smart and successful investors don’t buy into a dying company.
Summary
Investors can use the information found in the 13f filings in several ways. For some, it is a validation of their existing holdings. If investors such as Einhorn and Soros are loading up on a certain technology stock, other investors can be assured that they are on the right path. Others can use the information to create a short list of stocks they should watch or to determine which stocks to avoid or sell.
Google, Apple, and Dell are at the forefront. Amazon, however, is on the chopping block of at least two of the most successful investors in the world.
For the rest of us, we might want to take a peek at these 13f answer sheets and rethink our own.
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