There is a reason investing is called a zero-sum game.
In the last decade, 99% of all equity-based mutual funds made little or no money. Retail, do-it-yourself traders made no money. Meanwhile a small group of billionaire investors took billions out of the markets.
These investors did not use leverage. They did not short stocks -- necessarily. They simply bought huge stakes in undervalued stocks, and then imposed their will on the company to create instant shareholder value.
It’s a strategy that I follow too. But I don’t have to be a billionaire. And I don’t have to build a huge stake in a stock, nor impose my will on the company. I just copy the billionaires that do.
Let’s be honest. You have to have an edge to consistently outperform the general stock market year in and year out. Simply picking stocks with the same formula that every Wall Street analyst has been trained to follow is a recipe for mediocrity. That’s why mutual funds and investment advisors continually give little to no value to their investors.
So how does the average investor win in this game? Well, it’s simple. Follow the folks that have the most power and most influence on Wall Street.
These investors are generally called "activists."
Activist investors buy 5% or more of a company’s stocks, or controlling interest. Then, they do whatever it takes to create shareholder value. They might use their power and influence to force a company to sell poor performing units or to buy back their own stock, or they might just simply put the company up for sale to the highest bidder.
These are generally not complex actions, but ones that only the biggest and wealthiest hedge fund managers can execute. For those that follow them, they get to go along for the ride -- for free.
How Do You Find Out What They’re Buying?
My investment research firm follows only the best billionaire hedge fund managers and studies the stocks they are buying.
I have built a database of these managers over the past decade, intensely studied every manager’s tendencies, picked through their returns with a fine-toothed comb, and have developed a strategy that produces outstanding long term returns, right alongside the folks that have amassed billion-dollar fortunes executing it. And I only buy or recommend these stocks when they are selling at a 25% to 30% discount to what the billionaire hedge fund managers paid for them.
So let me walk you through an example of how this strategy works.
WebMD (WBMD) is the leading online health-care company. But due to the economy and weak online advertising trends, the stock price has dropped sharply from $40 to $15.
Yet one famous billionaire hedge fund manager has been buying this stock consistently throughout the year, and at prices much higher than current levels. That investor is the infamous Carl Icahn, a man who has averaged 26% per year for 50 years and has a net worth of $20 billion.
But Mr. Icahn has an average cost in WebMD around $25. That’s almost 70% higher than what the stock is trading for now. Still, he owns all his shares. He hasn’t sold one. That gives him a 13% stake in the company.
Now, Mr. Icahn is extremely competitive and does not like losing. Most importantly, he is a mega billionaire with unlimited capital. To be sure, he is going to get his money or at least break even on this investment.
So how is he going to do get his money back? Simple. He is going to force the company to sell itself to the highest bidder.
And this is exactly what is happening. In the past two weeks there have been numerous rumors that WebMD has put itself up for sale and that numerous private equity firms have shown an interest in buying it.
Even better, based on industry comparisons and analyst estimates, the company is probably worth on average $25 to $30 a share on any buyout.
That would be a 66% to 100% return when the company is sold for anyone who buys the stock today!
There are several ways to get this billionaire information. The do-it-yourself investor with time on his or her hands can troll through the 13F and 13H filings posted daily by the SEC. The former are the quarterly holdings report filed by institutional managers and the latter large trader registration for large positions.
With tens of thousands of filings each month, most investors following insiders choose certain criteria to sift actionable insider transactions from the more routine. These signs include huge transactions, multiple insiders buying, and activist investor buying, such as following Carl Icahn as above. Then the results would be filtered by a second criteria, such as insider buying at a 62-week low to help identify investment opportunities.
The regular Minyanville reader is often presented with updates on the activities of several insiders and hedge funds within minutes of their postings on the SEC including, most recently, Philip Frost, Lazard Asset Management and Cavalry Asset Management.
Next, there are various websites which track insider purchases and sales including Open Insider. These typically lag the SEC filings by a few business days.
Finally, there are several dedicated newsletters and services which troll the filings and present them for a fee.
It all boils down to (1) how much time an investor is willing to invest in doing primary research, and (2) how much he or she is willing to pay to have a service do this instead.