Using technology to mimic guru investors (Future of Investing)

This post was originally included as part of an ebook that I published alongside the launch of my book, Tradestream, entitled “Tradestreaming and the Future of Investing”. The content was so good I wanted everyone to have access to it. 🙂

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Piggyback investing is about following the “right” people.  In a lot of ways following overall sentiment of an online community is exactly what you want to avoid. The simple premise is that “crowd sourcing” is only valuable when you are able to accurately define and isolate the right crowd.  Accepting this as essential first, then any application that then can overlay real-time information about the “right crowd’s” moves is valuable. Here are just a few applications that can benefit from real-time information gathering:

  • Manager selection:  The AlphaClone platform allows you to tap the collective intelligence of groups of managers that are either predefined by us or defined by the use.  Some of our groups are dynamic in that the list of managers that make up the group change ever quarter based on some criteria. Take our High Concentration fund group: it selects the 25 managers each quarter that have the highest disclosed market value spread over fifty positions or less.  I could see a dynamic group that is constructed of the 25 managers that have garnered the highest votes for inclusion amongst the AlphaClone user community or the 25 managers whose fund page has had the highest visitor traffic over the past 30/60/90 days.
  • Stock selection:  our platform uses quarterly public filings to select the holdings that make up clone portfolios.  A real-time overlay that precipitates intra quarter changes in portfolio weightings for securities in the clone would be really interesting.  Real-time sources could be intra quarter public filings from the manager or managers in a clone (13G/13D filings), real-time analyst consensus recommendations (especially upside and downside “surprises”), or real-time events (bankruptcy, M&A).
  • Strategy selection: our platform allows investors to create and backtest clones based on different “clone strategies” (Top Holdings, Best Ideas, Popularity in top 20) and customize clones by employing hedging options and rebalance options.  We consider that simply a starting point.  I can see our community providing feedback on new clone strategies they’d like to see as well as tips on implementing clones.

I see the real time web as a new communications medium that definitely has relevance for investors and investment services but just like any new communications medium, how useful it will be will largely depend on how it is applied and by whom (i.e. yahoo stock message boards vs. twitter feed from “pro investor here”).

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Mazin founded AlphaClone in 2008 with the simple purpose to empower the average investor by giving him intelligent, instant and transparent access to the world’s best fund managers.  Mazin was a 12-year veteran of technology-driven media businesses including roles at Time Warner and OpenTV.

Top 6 resources for piggyback investing

Piggyback investing is the art/science of building portfolios based on mimicking the stock picks of some of the best superinvestors — asset spyingmanagers who have exhibited long term market-beating results.

Early research (check out some here) has shown that investors can achieve similar returns by piggybacking as the can by investing directly with the asset managers themselves (something only a very wealthy investor can do).

Here are a few of the best resources I’ve found for piggyback investing:

  1. AlphaClone: My personal favorite (read my review of the site as a cure to investor insanity).  Beyond just tracking the portfolio moves of top asset managers around the world, AlphaClone has built a full-blown research platform that allows investors to test piggybacking strategies to optimize returns.
  2. MarketFolly: Great site with ongoing commentary on what guru investors are buying and selling and why.  You can get investor letters as well as some analysis on the stocks themselves that investors are buying.
  3. Manual of Ideas: You should be reading this as well as subscribing to the premium newsletters.  Great stuff here that analyzes top investors’ moves and puts together screens and portfolios of some of the best picks of superinvestors like Warren Buffett, Bill Ackman, and Joel Greenblatt.
  4. Covestor and kaching: Two leading investment communities where both professionals and arm-chair portfolio managers manage real (Covestor) and virtual (kaching) portfolios where outside investors can use to generate new ideas.
  5. GuruFocus: Interesting free and premium offerings that track top guru buys as well as insider transactions.  Can download results into spreadsheets for more analysis.
  6. HedgeFundLetters: This site links out to the monthly/quarterly/yearly letters top hedge funds and other asset managers send to their investors.  Reading the wisdom of guru investors — what they’re buying and why — and how they describe the investment process in general is an amazing educational resource.

Anything I missed?  Have your own favorite piggyback investing resource? Let me know in the comments below.

Additional Resources

You too can be the fund manager of the decade (kinda)

Morningstar announced yesterday its nominees for a new award Morningstar Fund Manager of the Decade.

According to Morningstar:

The Manager of the Decade award is not just about returns. We consider the risks assumed to achieve those results and take into account the strength of the manager, strategy, and firm’s stewardship. We also think it’s a greater feat to make a lot of money for a lot of people than to earn sky-high returns on a tiny pool of assets, so asset size factors in.

Morningstar created 3 strategies for the award:

  1. Domestic
  2. Foreign
  3. Fixed Income

The usual cast of characters made finalists.  So, you’ll see names like Fairholme’s Bruce Berkowitz, Don Yacktman, Fidelity’s Low Priced Stock Manager Joel Tillinghast, and PIMCO’s Bill Gross.

This is a great list and in spite of the terrible decade we’ve experienced as investors, there are some pretty impressive numbers from 1/2000 until now.  Many of the funds still put up double digit average annual returns.

Investors can use this list and bet that previous performance turns into future performance.  Or, they do it themselves and mimic the every move of these star asset managers.  Investors can tap the SEC’s IDEA database to read monthly regulatory filings of these investment advisors.  Through these disclosures, investors can piggyback the investment returns of the Morningstar finalists.

More enterprising investors may want to head over to Alpha Clone, a site developed to make piggybacking a whole lot easier.  For more on AC, check out my piece, Alpha Clone: The Cure to Investor Insanity.  AC users can not only track changes in thousands of professionally managed portfolios but they can backtest results of how best to mimic these investors.

[HT: The Reformed Broker]