If you have followed me at all over the years, you know I pay pretty close attention to the quarterly filings of leading hedge fund managers and institutional investors.
Back in the Stone Age when I began doing this, we didn’t get immediate access to the filings. You had to write into the SEC and have them mailed.
Eventually, Henry Emerson, the publisher of the Outstanding Investor, began producing a report each quarter that would come a few weeks after the filings deadline, so we all signed up for it.
Knowing what the very best and brightest of America’s investors were buying and selling was a substantial informational advantage back then.
Of course, the advantage that comes from tracking these leading investors is gone now. The filings are live online seconds after being received at the SEC, and some paid sites have the analysis up in minutes. At worst case, the Nasdaq site has all the info up within 24 hours.
The advantage of having information no one else does, like so many stock market advantages, has been eliminated by the widespread availability of information.
Rather than providing an advantage, this widespread availability of information leads to crowded trades.
If a Rock Star Investor Buys It or Sells It, Don’t Even Touch It
Back before the widespread availability of information, the mutual fund managers were tracked since this was part of the mutual fund era. Superstars like Peter Lynch and John Templeton got all the attention and their holdings list was mailed to shareholders every six months.
No one was tracking hedge fund investors like Seth Klarman at Bedpost, Richard Rainwater at Bass Brothers, George Soros, and Carl Icahn. They were not yet the superstars they would eventually become. But at the brokerage where I worked previously, we were tracking them and we made quite a bit of money doing so for ourselves and our clients.
Today, the portfolio changes for the superstars like Warren Buffett, Icahn, Bill Ackman, and David Tepper are announced to the world on CNBC and rise in price almost immediately. Trading on the filings of the rock stars is usually a losing proposition. Quick and dirty backtests show me that owning the stocks most widely held by the institutions is a losing strategy in recent years. You underperformed the indexes in both up and down markets in spite of owning the stocks everybody loved.
This creates another informational advantage if you use it correctly. Everyone is going to be running to buy these market darlings, and if past history is any guide, lots of folks will be willing to pay stupid prices. It is not a bad idea to sell them some if you already own the stock.
The real advantage you gain from knowing what the crowd is buying is identifying what not to do. Crowded trades work until they don’t. At some point, these great companies and brilliant ideas stop working and then it’s a problem for those holding a stake in the companies everybody loved yesterday. The exit door is going to be very narrow as a flood of sellers is met with a trickle of demand. The end result of that is almost always dramatically lower prices.
To Outperform the Market, Skip These 10 Most Crowded Trades
So what are the crowded trades today?
Here is a list of the top 10 most widely owned stocks ranked by the number of funds holding a stake in the company:
Johnson and Johnson (JNJ)
JP Morgan Chase (JPM)
Exxon Mobil (XOM)
Alphabet Class A (GOOGL)
Alphabet Class C (GOOG)
It should be no big surprise that these are the stocks everybody loves. They get talked about on TV and are the heart of the water cooler chatter in the office. Everybody owns them from Warren Buffett and T. Row Price right down to Grandpa and Aunt Nelly.
These stocks all share one other trait as well. The top owner of each of them is either Vanguard or Blackrock, the two biggest index fund firms in the world today. When the markets sell off these stocks get sold heavily, and it may take buyers some time to show up and stem the bleeding.
Does this mean that disaster will strike if you buy these stocks? Not necessarily, but I will tell you what will not happen if you own these 10 most widely held stocks. You will probably not outperform the market. You will not beat the average mutual fund or hedge fund. These stocks are the market right now. As John Templeton famously observed, you cannot outperform by doing what everybody else does.
Identifying what not to buy is one of the informational advantages we can still gain using the quarterly filings. We will hold off discussing the others for another day.