Hedge funds and institutional investors must publish their investment activity each quarter for all the world to see. There are many websites which will give you access to various degrees of this knowledge for your potential gain. What I am sharing is my personal belief about how best to use this information. The two main factors I use are as follows:
1. Net Market Value Bought. This is the total market value of an individual stock purchased by the professionals less any market value sold. Obviously larger is better, as it shows that a great deal of money was bought in that stock vs. sold. Each quarter I rank stocks and assign them a score from 0-100%, with 100% representing the largest market value bought stock, and 0 the worst. I do the same scoring for the 2nd factor:
2. Price drop as % (relative to global stock index). Since our information is delayed by approximately 45 days, and also the 3 month quarter, I subjectively select the most likely average price that each stock would have been purchased at by the pros, calculate the change from that price as a percentage, then assign a score from 0-100%, where 100% is a stock that has dropped by the most. The bottom line is that I prefer getting a stock that's gone down 20% vs. one that has gone up 20%, since I'm getting a better value for my purchase price. I throw out many stocks that clearly have already taken off to the upside. I'm not a trend follower. I seek stocks that I can buy cheaper than the pros have.
As I've disclosed in previous articles, the following chart shows my purchases using an imaginary $300,000 portfolio, and 1% per position resulting in amounts centered around $3,000. I simply invest more or less than $3,000 in accordance with how well the stock does in the two factors listed above. I then compare the returns I get vs. those I'd have gotten in the Vanguard Total World Index (NYSEARCA:VT).
|Symbol||Bought||Position Size||Net Alpha vs "VT"||Sold Date|
New buys for this quarter are in bold. You'll note that several stocks have seen significant enough net market value sold that I've decided to sell from my portfolio (and therefore this portfolio). The following table shows the overall results of the entire portfolio:
|net alpha all:||$4,506.78|
|index "VT" return%:||4.69%|
|net alpha %:||3.70%|
In conclusion, the system continues to beat the world stock index soundly by a little under 4% overall. We are, however, still very dependent on the huge alpha generated by MMI. My confidence in the system remains extremely high, due not just to the portfolio beating the world index, but also the subjective data sampling that I take.
For instance, in looking through stocks where a lot of market value has been added, it's uncanny the consistency with which these stocks have exploded upward. This past quarter for example, more market value was purchased in AAPL than in all the stocks I purchased put together. In other words, hedge funds bought Apple like mad, but they did so at a much lower entry price than in presented to us right now: AAPL traded around $388 for much of the 4th quarter 2011. It's at $512 right now, a 32% increase vs a market increase of about 10%. Our delay inhibits our ability to follow hedge funds in stocks at their entry price, but also subjectively gives me confidence in the system.
Additional disclosure: I am long every stock mentioned in this article with the exception of the stocks listed with sold dates in the table. I am long: SLB, WFC, COP, GOOG, AAPL, CVX, JPM, PFE, DIS, COV, TEL, C, CTL, CSX, MDT, ESRX, V, LVS, VTR, BRK.B, BXP, BIDU, MSFT, PCLN, ECL, SNDK, VIV, MON, ABT, CMVT, LMCA