Piggybacking the Gurus Intelligently

Institutional investment managers with investment discretion over $100 million or more in equity securities must report their holdings (long-only) on Form 13Fs with the SEC within 45 days of the end of a calendar quarter. This has given rise to the strategy of piggybacking the Gurus. However, like every other investment strategy, it is not the strategy per se that determines your investment success, but more importantly how well you understand and execute the strategy.

I will like to highlight a few points here for guru followers to consider when they implement their piggybacking strategy.

Time is of the essence in any investment strategy, and 45 days seem like an eternity to some. By the time the gurus disclose their holdings, the stock prices and investment considerations for the companies they bought may have changed considerably. In a worst case scenario, the guru may be reducing his position in the stock at the exact same time when you are buying, after he acknowledged a mistake with his earlier investment thesis. Investors should look at the share price change of the company over the past three to six months to see if the stock price has factored in the guru's endorsement and other positive factors.

The next thing is to look at the entire holding history of the guru in the particular stock. It is easy to get excited to see the share price of the company staying at the same levels as what the guru bought at in the last quarter. However, it could be the case that the guru has started buying into the stock a year or two ago, with the bulk of his position bought at much lower prices at an earlier time. You should feel more comfortable buying a stock at a price that is close to the average purchase price of the guru, so that both of you are on the same footing. It is also important to note if the guru averaged down on his position when the stock price fell, which is a sign that the guru shows conviction in this particular stock.

While there is absolutely nothing wrong in having a diversified portfolio if that is part of your investment strategy, a guru with a concentrated stock portfolio has more skin in the game with any single position. You should calculate the percentage that the particular stock you are interested in makes up as a total of the guru's entire portfolio.

Also, it is one thing to get the answer right, but another thing to get the reasoning right. This reminds of my mathematics test, where you only get full marks if you get both the answer and working right. Read the guru's newsletter for his investment thesis on the stocks that he is buying. If both of you are interested in the same stock for totally different reasons, the case for owning the stock may be weaker unless you have full confidence in your analysis.

Investment philosophy matters as well. If you see a stock with value stock gurus reducing their positions and growth stock gurus adding to their positions, coupled with a strong share price surge, a value investor may consider locking in gains. Activist investors also have a bigger (potential) impact than passive investors on stocks. Activist investors closing their positions after a long prolonged holding period may indicate that they are giving up the battle with unfriendly management.

Multiple guru buying acts as a strong buy indicator, if the gurus have similar investment philosophies. For example, quant funds and value investors getting into the same stock does not add cumulative value. Insider activity needs to be assessed as well. In certain cases, the guru may be the "dumb money," with the "smart money" insiders cashing out after gurus have come in. Strong insider buying, coupled with guru investors with a long term investment horizon, augurs well for the future of the stock.

Filings could work well for investors either in the generation of investment ideas, or the validation of their existing investment thesis of a stock they are interested in, if they pay attention to some of the above-mentioned factors.

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