Is it Time to do a Templeton?

From Investopedia:

"In 1939, with Hitler’s Germany ravaging Europe, John Templeton bought $100 of every stock trading below $1 on the New York and American stock exchanges. Templeton’s trade got him a junk pile of some 104 companies, 34 of which were bankrupt, for a total investment of roughly $10,400. Four years later he sold these stocks for more than $40,000!"

If you ran that screen today it returns about 300 stocks from a list of 2500.  

If you then sort the stocks by # of insider buys it returns the following symbols:






















Some truly nauseating charts in there!  Strong caution – a lot of these funds are teeny microcaps with little volume. . .values ranging from $150 million to $5 million.


Some of the big boys not adding a lot of value.  Data from SGAM.



Closed End Funds Puking

What public funds out there specialize in closed-end fund discounts or arbitrage? My list is below that I will add to:

GCE (No volume, ETN)

Leave a comment if you know any others.

Tracking the Hedge Funds with the Biggest Cojones

"Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and watches the basket." – Andrew Carnegie

One of the coolest features in AlphaClone is the ability to view dynamic groups.  One such group we call "Concentrated Funds".  Concentrated Funds are managers who have a large overall portfolio value but spread across a small number of equity holdings. Translation – they have high conviction in their picks.

This group combines the 25 funds with highest total market values but who have less than 50 total equity positions in their most recent filing.  The list of managers can change quarterly, but there isn’t that much turnover Q/Q.  Notice that the strategy makes no distinction regarding the style of the manager, or to their value added (destroying) abilities. 

Taking the top 3 holdings from each fund, equal weighted and rebalanced quarterly, outperforms the market by 11% a year since ’00. 

Taking the 10 most popular stocks from these funds, equal weighted and rebalanced quarterly, outperforms the market by over 15% a year since ’00.  These 10 holdings are beating the market in 2009 by 20%.  Yes, 20%. 

You can view the current holdings here.  When you type them into the Morningstar X-Ray it spits out on aggregate that they have valuations in line with the S&P 500 but growth rates 2X the S&P.  On average the stocks are 43% from their 52-week highs vs. 58% for the average stock in the S&P 500.

Below are the current funds.  Out of curiosity I took a look at the funds back in Q4 2001, and only the funds in bold were on both lists:

Baupost Group

Berkshire Hathaway

Blum Capital Partners

Bridger Management


Chieftan Capital Management

Eminence Capital

Eton Park Capital Management

Fairholme Capital Management

Glenview Capital Management

Highside Capital Management


Lone Pine Capital

Longview Asset Management

Paulson & Co.

Pershing Square Capital Management

RBS Partners

Relational Investors

Sands Capital Management

Southeastern Asset Management

TPG-Axon Capital Management

Tremblant Capital

Tiger Global


Viking Global




AQR launches the diversified arb fund (ADANX).  The Fund invests in a combination of arbitrage strategies such as merger arbitrage, convertible arbitrage, and (one of my favorites) closed end fund arbitrage.  But seriously, talk about a low benchmark! 90-day Tbills…


Embarrassed to work in finance?


Great PDF here from Witney Tilson – "Words of Wisdom"

"One way of dealing with information being more available is to stop playing the game and seek out securities or asset classes where there’s less information or competition."
Seth Klarman, 9.30.08

"There’s a clarity that comes with great ideas: You can explain why something’s a great business, how and why it’s cheap, why it’s cheap for temporary reasons and how, on a normal basis, it should be trading at a much higher level. You’re never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not."
Joel Greenblatt, 10.31.06

"We use a lot of grapevine ideas, asking people what they’ve finished buying that might be interesting. Why not look at what other great investors have found?"
Bruce Berkowitz, 4.28.06

[Hey you know I agree there!]



Following Hedge Funds Through 13F Filings is a Terrible Idea

Okay, maybe I should be more clear.  Blindly following hedge funds through 13F filings is a terrible idea.  There are countless sites that focus on hedge fund filings and they are not going to tell you they offer little value, because then they have no reason to exist.  Building a backtesting engine is not a trivial exercise (believe me it is incredibly non-trivial to do it correctly). Some of the i-banks offer products based on hedge fund tracking, but most base their data off FactSet/LionShares which has survivor bias rendering it dangerous.

To give you an example let’s take a look at the most viewed portfolios on StockPickr.  James is a friend of mine and I am not trying to pick on him here but his is the best of the free sites (including two that give me motion sickness).  The top five most viewed portfolios on StockPickr are:  Buffett, Soros, Ichan, Pickens, and Renaissance. 

But here is the problem – the investor has no idea if following these funds is worthwhile.  These five portfolios have been viewed over FIVE MILLION times. 

Here is the kicker:

If you take a simple portfolio of the top 10 holdings, four of the five portfolios have no excess returns over their benchmark.  On average these fund clones underperformed their benchmark by 10% (ie I used the S&P500 except in the case of Pickens where I used S&P Energy).  If you include transaction costs then it is even worse.  In other words, investors are wasting their time and their money.  In many cases it is costing them money by tracking funds that underperform the S&P 500.  On average these funds did about 10% worse than the S&P500 since 2000. 

Using AlphaClone I have been able to identify value added algorithms and alpha in the areas of:

1.  Persistence in Returns – Do top managers continue to outperform?  Are there factors that contribute to over/under performance?

2.  Manager Selection – Can you identify managers ahead of time that will outperform, and if so, how?

3.  Static Hedging – Is it possible to hedge the portfolios in a way to increase risk-adjusted returns, and if so, how?

4.  Dynamic Hedging – Is it possible to dynamically hedge the portfolios in a way to increase risk-adjusted returns, and if so, how?

5.  Security Selection – What holdings yield the best return for a manager?

6.  Custom Strategies -  Are there other strategies that can yield better returns?  What about the most popular stocks?  New buys from the manager?

All 6 of these valued added findings cannot be learned from sites that do not let you backtest properly to 2000 without survivor bias in filings and stocks (this is huge by the way).

No, I am not going to tell you what these findings are (they will be the basis for some upcoming funds), but if you are an AlphaClone user and find some gems drop me a line and I am happy to chat with you.  It is something I have not published nor intend to. 

And just so you don’t think I am grumpy I will throw all of these sites a bone – following the top holdings is not the best way to follow these funds. 

[And don't even get me started on the social investing sites -  I am biased here, but I would much rather Warren Buffett, Bruce Berkowitz, David Einhorn, and David Dreman manage my money than some teenager on his computer trading microcaps with 10,000 shares daily traded. Maybe a longer post on this topic later].

How about a little quiz?  The first correct answer in the comments will get a free copy of my book The Ivy Portfolio when it prints in a week…

What fund manager’s top 10 holdings clone beats the market by 10% a year since 2000 (and actually outperforms his fund)?  The current holdings are:













The Ball is Mr. Market

…and the people in this video are buy and hold investors.  A little humor for a nasty day. (Hat Tip: MK)



I’m at the DEMO conference in Palm Springs – if any readers are there let me know…

ETF Screener and Backtester

Ahhh, I was wondering when someone was going to launch one of these. . . nice job Marco!  Data back to ’00.

SSRN Download Working Again

for those having problems downloading my paper, the SSRN download is working again. . .


Nice AlphaClone mention in Value Investing Insight.  Also featured were excerpts from Seth Klarman and Julian Robertson. . .Check out the new lower pricing tier.


the Bespoke boys are depressing me today:

Since the bear market started on October 9th, 2007, the Russell 3,000 has lost $9.58 trillion in market cap, which is more than the index’s current market cap of $8.74 trillion.

Of the Russell 3,000′s current members:

– The average stock is down 53.16% during the bear market.

– Just 4.13% of stocks in the index are up during this bear, meaning more than 95% of stocks are down.

– A whopping 59% of stocks in the index are down more than 50%.




Prospect of Gain



Just re-read Zweig’s excellent book "Your Money and Your Brain".  This was prompted by a reader asking me to cite where I got the phrase in my paper that said "people use a different part of their brain when they are losing money."

A couple great quotes from the book:

"The neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine."

"Financial losses are processed in the same areas of the brain that respond to mortal danger."  Uncertainty and loss cause the amygdala to start firing, we all know what the result of that is

(Also read the paper, "Neuroeconomics: How Neuroscience Can Inform Economics" by Camerer.)

 In a related note, who is in for free pancakes tomorrow at IHOP?





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