Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

AlphaClone: The cure for investor insanity

I’ve come to the conclusion that investors are insane.

Given who you are, you may have one of two responses to that statement of fact:

  1. you agree
  2. you say, “huh?”

If you find yourself agreeing that investors are insane, I’m preaching to the choir.  If you don’t understand what I mean by that statement, be patient.  I’ll explain.

I’m in the middle of writing a book (thanks, should be published this Spring by Wiley and incorporate a lot of the themes on this blog) and as I’m busy formulating my ideas, something hit me.  It was an epiphany of sorts, that type of “a-ha” moment that we all get once in a while.

I’m busy devising the various models of using new, free Internet tools to become a better, more profitable investor.  Sounds good and the truth is, there are various models that do just that — stack the odds in favor of the investor to beat the market more ofter and by greater percentages.  The research clearly demonstrates it.

But as I’m writing it, I realize that few of us could actually implement these models even if we know that they beat the market.  Most of the models that I’m describing involve following experts.  Mimicking or piggybacking their strategies and their actual picks to populate a portfolio that wins most of the time.

The winning strategy that’s just too good

Joel Greenblatt is a guru investor.  His 40% annualized returns for 20 years are a pretty high bar to beat, let alone even come close to emulating.  But that’s just it, Greenblatt has given away the store and explained to investors exactly how he’s done that.  He written a book on the subject, The Little Book That Beats the Market (Little Books. Big Profits), (that’s an affiliate link — I’d make some bus money if you decide to by the book from Amazon) and even built a website, MagicFormulaInvesting.com, to take all the heavy lifting out of the strategy.

Greenblatt is wise beyond his years.  He was asked if by revealing the magic in the Magic Formula for the masses to use, the magic may wear off and stop working.  He responded in the negative.  He said that even if investors know it works, few could ever stick lock-stock-and-barrel to a strategy and follow it blindly.  Especially when it’s throwing up really ugly stocks and underperforming for extended periods.

We’re smarter, right?

He’s built a strategy based on screening for two parameters and made it turnkey for the rest of us.  While there are certainly a lot of Greenblatt-groupies around on the blogosphere, most investors are not using the Magic Formula.  Which begs the question: if you know that there are simple things you can do to beat the market with confidence over the long term, why aren’t you doing them?

Are you insane???

And the answer, for must of us, is yes.

Um, we think we’re smarter

The data isn’t good.  As I’m researching my book, I’ve delved deeper into the numbers and they don’t look good.  While we all may think we can be part of an exclusive group that consistently beats the market, we can’t.  That’s just simple statistics. We win some, we lose some.  Most of it’s just noise.  The vast majority of us are not in the cool crowd and don’t get to hang out with the cool people.  At best, we’re probably in some remedial English class.

But there are the blessed few investors — those who have the secret sauce — who are able to scour the investment universe and find the best investments.

I’ve come to the conclusion that I’m never going to be George Soros. I’ll never measure up to Eddie Lampert and I’m no Warren Buffett.

The research has shown that there are a small percentage of investors who do achieve alpha with persistence and I’m not on that list.  I’m manning up to the fact and I’m not embarrassed to admit it.

Can’t-beat-them-join-them model

alphaclonelogoSo, I’m convinced that instead of thinking that I know better, that I can find the stocks that the top hedge funds can’t, I might as well outsource my investment process to ol’ Warren.  Buffett has been proven to generate long term alpha with persistence.   And in an instrumental paper by Martin and Puthenpurackal, portfolios built by piggybacking Buffett’s picks — through regulatory findings, building a clone of Buffett’s actual portfolio — also exhibit market-beating returns through skill.

So, I’m turning to the pros and using AlphaClone, a new platform built by two really smart guys, Maz Jadallah and Mebane Faber, that provides the institutional-grade research platform to clone just about any top investor portfolio. But it’s so much more than this.

AlphaClone: what to clone, how to do it and why I’m promoting it

Before I explain why everyone should get on the AlphaClone bus to begin mimicking the world’s best investment managers to own hands-down the best investments, I’m doing something I’ve never done before.  I’m a big fan of the work of founder, Mebane Faber and have been reading him for quite some time.  Faber’s been instrumental in providing the research framework to change the way I think about investing.

Instead of just some adolescent hero-worship of my hedge fund manager dream team, I’m beginning to outright piggyback their research and buy what they buy — without asking questions.  So, I’ve decided to start supporting AlphaClone and I wanted to explain to you why clearly, so that you can go and take a look for yourself.

What to clone

AlphaClone tracks hundreds of investment managers by monitoring their regulatory filings to get a front seat into what top hedge fund managers are buying and selling.  After signup (there’s a free trial going on, by the way), users can dive right in and begin searching for their favorite fund managers.  Or, users can head straight to the AlphaClone Leaderboard to see who ranks highest with the best performance over varying time periods or according to different investment strategies.

How to clone

Once an investor has located and identified a certain manager, AlphaClone provides all the tools to begin backtesting this investor’s performance and even better, tweaking the investor’s strategy to find a more optimal way to piggyback him.  As recent research from Cohen et al shows, many portfolios’ highest conviction ideas — those with the most money behind them — outperform the market and all the other ideas in the portfolio, as well.

Conflicting research from other groups of researchers shows that hedge fund portfolios perform best with multiple ideas in the portfolio.  Regardless, AlphaClone arms you with the research capabilities to determine which strategy works best and for whom.

Performance

YTDFolioperformance

Here is just a sampling of a couple portfolios, the Warren Buffett portfolio (with varying degrees of hedging) and the Tiger Cubs portfolio (best ideas spawned by portfolio managers who worked at Tiger one time or another).

Check it out

So, check out what Maz and Meb are up to.  Even if you browsed the site a few months ago, they keep adding more and more functionality.  It’s awesome. And if you do decide to sign up, do so by clicking through from my site.  I’ll receive enough lunch money to buy some fish tacos.

Check out AlphaClone and sign up for a free trial and test and apply the stock ideas of the world’s top fund managers.