When we started GuruFocus, the first questions we have were: does it really work? Does buying what Gurus buy generate comparable returns?
Can we generate better returns than the Gurus themselves if we buy the consensus picks of Gurus? Or the consensus holdings of Gurus? Or buy the stocks that have been down in prices after the Gurus have bought? In the series of GuruFocus Strategies, we will review these strategies and help GuruFocusers understand what really works in tracking Gurus.
We have created a number of model portfolios for this purpose. The first one we would like to review is the Guru Bargains Portfolio.
As GuruFocusers know, most of GuruFocus reports on the Gurus’ picks and portfolios have a time lag of 1-4 months from time the trades are made, except the Real Time Picks we have created for Premium Members. Does it make sense to buy what Gurus bought several months ago? If you are a believer of value investing, it does. Sure, a lot of times the stock prices have gone up after the Gurus bought. But there are about equal number of times the prices went down. This means that you can buy the stocks Warren Buffett or Martin Whitman have bought and pay less than what they have paid.
Does that sound a good deal? It should. Can everyone do it? You do need some guts. By the way, Real Time Picks reported the Gurus’ large purchases with much less delay, that may give you some more conviction. We have recently added Insider Buys, which may also help you to gain more confidences.
We have created Guru Bargains portfolio to prove that. The portfolio was incepted in June 2006, and the stocks were selected from those Gurus have bought during the first quarter of 2006, and have the biggest price declines since the Gurus have bought. How did these stocks do? Miserably! By the end of 2006, this portfolio underperformed S&P500 by more than 20%!
What went wrong? Does Guru Bargains are simply Gurus’ mistakes?
Not so simple. We reviewed the sources of the portfolio and we realized that Guru Bargains can be bargains only if they are bought based on careful value research. George Soros, which is not really a value Guru and have very high turnover, have contributed many of the stocks in the original Guru Bargain portfolio. During the rebalances at the beginning of 2007, we did something differently:
We selected a group of 25 Gurus who have very conservative approach and the lowest turnovers. The picks generated in this group are used for all model portfolios.
We limit the market cap of the stocks to be at least $1 billion so that the volatility is smaller and it can be benchmarked to S&P500, which requires a market cap of at least $4 billion.
The results was great, at least so far! Since the rebalance on Jan. 4, Guru Bargains portfolio has gained 9.69% with comparable volatility as the S&P500, which gained 2.08% as of yesterday, both excluding dividends. Out of the 25 stocks in the portfolio, 80% went up, only 20% went down.
3 months is certainly too short for us to draw any conclusions, but one thing we learned is that, Guru Bargains can have great values, if they were bought based on careful research.
Guru Bargain portfolio is rebalanced once a year, the current portfolio is based on the purchases of Gurus during the third quarter of 2006. To see the most recent Guru Bargains, Free Members can go to here. Premium Members can also use Guru Screener to select bargains from their own List of Gurus.
Can we generate better returns than the Gurus themselves if we buy the consensus picks of Gurus? Or the consensus holdings of Gurus? Or buy the stocks that have been down in prices after the Gurus have bought? In the series of GuruFocus Strategies, we will review these strategies and help GuruFocusers understand what really works in tracking Gurus.
We have created a number of model portfolios for this purpose. The first one we would like to review is the Guru Bargains Portfolio.
As GuruFocusers know, most of GuruFocus reports on the Gurus’ picks and portfolios have a time lag of 1-4 months from time the trades are made, except the Real Time Picks we have created for Premium Members. Does it make sense to buy what Gurus bought several months ago? If you are a believer of value investing, it does. Sure, a lot of times the stock prices have gone up after the Gurus bought. But there are about equal number of times the prices went down. This means that you can buy the stocks Warren Buffett or Martin Whitman have bought and pay less than what they have paid.
Does that sound a good deal? It should. Can everyone do it? You do need some guts. By the way, Real Time Picks reported the Gurus’ large purchases with much less delay, that may give you some more conviction. We have recently added Insider Buys, which may also help you to gain more confidences.
We have created Guru Bargains portfolio to prove that. The portfolio was incepted in June 2006, and the stocks were selected from those Gurus have bought during the first quarter of 2006, and have the biggest price declines since the Gurus have bought. How did these stocks do? Miserably! By the end of 2006, this portfolio underperformed S&P500 by more than 20%!
What went wrong? Does Guru Bargains are simply Gurus’ mistakes?
Not so simple. We reviewed the sources of the portfolio and we realized that Guru Bargains can be bargains only if they are bought based on careful value research. George Soros, which is not really a value Guru and have very high turnover, have contributed many of the stocks in the original Guru Bargain portfolio. During the rebalances at the beginning of 2007, we did something differently:
We selected a group of 25 Gurus who have very conservative approach and the lowest turnovers. The picks generated in this group are used for all model portfolios.
We limit the market cap of the stocks to be at least $1 billion so that the volatility is smaller and it can be benchmarked to S&P500, which requires a market cap of at least $4 billion.
The results was great, at least so far! Since the rebalance on Jan. 4, Guru Bargains portfolio has gained 9.69% with comparable volatility as the S&P500, which gained 2.08% as of yesterday, both excluding dividends. Out of the 25 stocks in the portfolio, 80% went up, only 20% went down.
3 months is certainly too short for us to draw any conclusions, but one thing we learned is that, Guru Bargains can have great values, if they were bought based on careful research.
Guru Bargain portfolio is rebalanced once a year, the current portfolio is based on the purchases of Gurus during the third quarter of 2006. To see the most recent Guru Bargains, Free Members can go to here. Premium Members can also use Guru Screener to select bargains from their own List of Gurus.
