This is a quarterly review of the performances of model portfolios and what we have learned from it.
When we started GuruFocus, the first questions we have were: does it really work? Does buying what Gurus buy generate comparable returns as the gurus’ portfolios? 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? We have created a number of model portfolios for this purpose. Here 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, Premium Feature Real Time Picks reports the Gurus’ large purchases with much less delay, which may give you some more conviction. We have recently added Insider Buys, which may also help you to gain more confidences, especially if you look at the stocks that both gurus and insiders are buying.
We have created Guru Bargains Portfolio to prove that you can do very well if you buy stocks at lower prices that Gurus have paid. 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 and they usually hold these stocks for very long time. 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. These gurus have relatively concentrated portfolio, as we believe that the level of confidence the gurus have in their research is proportional to the money they put in the stock. The bargain 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 19.1% with comparable volatility as the S&P500, which gained 6.47% as of yesterday, both excluding dividends. Out of the 25 stocks in the portfolio, 80% went up, only 20% went down.
6 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. To further prove Guru Bargains can perform better than the complete Guru portfolios and the market average, we have started a research in which we will backtest the concept with Guru Portfolios since year 2000. We will let you know as soon as we find something out.
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 Value Bargains, Free Members can go to here. Premium Members can also use Guru Screener to select bargains from their own List of Gurus.
To select the right value bargains for your portfolio, it is important to focus on the stocks that have been bought by concentrated gurus and the prices have went down after the gurus have bought. As always, do your research and understand the business. If you still need more convictions for your research, see what the insiders are doing with it. Also check the Real Time Picks if you are a Premium Member to see whether Gurus are adding or reducing lately.
When we started GuruFocus, the first questions we have were: does it really work? Does buying what Gurus buy generate comparable returns as the gurus’ portfolios? 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? We have created a number of model portfolios for this purpose. Here 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, Premium Feature Real Time Picks reports the Gurus’ large purchases with much less delay, which may give you some more conviction. We have recently added Insider Buys, which may also help you to gain more confidences, especially if you look at the stocks that both gurus and insiders are buying.
We have created Guru Bargains Portfolio to prove that you can do very well if you buy stocks at lower prices that Gurus have paid. 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 and they usually hold these stocks for very long time. 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. These gurus have relatively concentrated portfolio, as we believe that the level of confidence the gurus have in their research is proportional to the money they put in the stock. The bargain 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 19.1% with comparable volatility as the S&P500, which gained 6.47% as of yesterday, both excluding dividends. Out of the 25 stocks in the portfolio, 80% went up, only 20% went down.
6 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. To further prove Guru Bargains can perform better than the complete Guru portfolios and the market average, we have started a research in which we will backtest the concept with Guru Portfolios since year 2000. We will let you know as soon as we find something out.
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 Value Bargains, Free Members can go to here. Premium Members can also use Guru Screener to select bargains from their own List of Gurus.
To select the right value bargains for your portfolio, it is important to focus on the stocks that have been bought by concentrated gurus and the prices have went down after the gurus have bought. As always, do your research and understand the business. If you still need more convictions for your research, see what the insiders are doing with it. Also check the Real Time Picks if you are a Premium Member to see whether Gurus are adding or reducing lately.
