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GuruFocus Strategies I: Are Guru Bargains Real Bargains?

April 13, 2007

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:

  1. 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.
  2. 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.


Rating: 2.5/5 (2 votes)


Ccyork - 10 years ago    Report SPAM
I always thought Mr. Soros seemed a little out of place amongst many of the other Gurus on this website.

I wonder what would happen if you tightened the portfolio criteria to include only gurus with 30 or fewer stocks in their portfolio. Bargains based on ultimate guru conviction!

-- ccyork
Recortes - 10 years ago    Report SPAM
yes, I strongly agree with the previous post. I think the ultimate criterion is to select gurus with low turnover and less than 20-50 stocks in their portfolio. For instance, I like very much Dreman, but this guy sport more thatn 500 stocks in his portfolio. He can't have made the same amount of research as Greenblatt with < 10 stocks in the portfolio.

Valuefan premium member - 10 years ago
Since we have the capabality to select which Gurus we want in

our own Guru list, I would prefer having the present universe

of gurus (or more) and letting people who want stricter

criteria use that criteria in making up their own list.

Valuefan premium member - 10 years ago
As far as Guru Bargains goes, I think it is a faulty premise.

To know whether the stock is more undervalued than where the

Guru bought you would have to look at how the company has

changed since that time vs. the price decrease. Maybe the

price is up since the buy, but the fundamental are up more?

I would use something like Morningstar stars. So if 3 stars

when Guru bought, and 5 stars now, then a good buy.

Vooch - 10 years ago    Report SPAM
> George Soros, which is not really a value Guru

I disagree with this statement. Warren Buffett tries to buy $1 for 50 cents, but George Soros tries to buy $2 for $1. Soros has more of a futuristic approach than Buffett.

Here's a great book which explains the two:


Soros is a value investor.

"All intelligent investing is value investing" - Munger

- Vooch

Heisenman premium member - 10 years ago
Why are the momentum investors and short term traders even in the pool of "value investor gurus" anyway?
Gurufocus premium member - 10 years ago
We have got a lot of suggestions to the list. Investors like Soros and Ken Hebner have higher turnovers, but their performances are really good. We added them in as references.

However, it is really hard to make everyone agree on the investing style of a Guru.

That is also why developed the feature of Personalized List of Gurus.
Brucelingle - 10 years ago    Report SPAM
Jeff Gendell of Tontine Partners is a possible add to your guru list.
Musto - 10 years ago    Report SPAM
I personally couldn't care much for the gurus choices anyways. Most of those guys have way too many stocks in their portfolios.

In general, I've reservations about following somebody else's investments. Whether they're called gurus or not.

Just as an idea, why don't you pool investment ideas from the members here, see if that beats the gurus choices or not. I wouldn't be surprised if the members do better than the so called gurus.

One way of doing this would be to ask each member to enter their single best idea (one only). By forcing each person to come up with a single investment would most likely result with better returns than the gurus..


Gurufocus premium member - 10 years ago
Thank you for the suggestions!

Some of our members will definately do better than Gurus in some time periods. Gurus manage too much money, and cannot put all their money into their best ideas. Gurus like Glen Greenberg and Robert Rodriguez run very concentrated portfolios and have been very successful over long term.

We will release a feature with which members can create their portfolio or watch lists. Then we can compare the overall performance of each one's portfolio. Currently Members can vote on stocks. The records are stored and will be used for comparisons too.

One of the difficulties to compare the best ideas of members with the Gurus will be the time span. Some good ideas may take longer time to work out than others.

As always, we suggest our members not buy a stock just because Gurus bought. If gurus bought a stock, it is a good place to start your own research. "Standing on the shoulders of giants", that is the idea behind GuruFocus.

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