Famed Value Investor Mohnish Pabrai (read more about him here) is interesting:
He suggests looking at his own — and other funds — mistakes and trying to learn from them and then reverse engineer a portfolio that is built to avoid these. It’s like piggyback investing by following what not to do, rather than what to do.
“The most important thing I learned, when you look back at investing mistakes, the cause is elementary and can be prevented.”
For more on investing checklists, check this interview out.
Readers of this site have learned a bit about Screening 2.0 — the ability to use Internet tools (many of them, free) to recreate portfolios that conform to the investment criteria of history’s best investors.
Validea’s John Reese has done much of the research legwork on the subject and has produced a premium product to help investors create Peter Lynch, Ken Fisher, and Ben Graham portfolios (among others).
We see that the formula posted approximately a 19.9% annualized return from the beginning of 1988 through Sept. 30, 2009. Over that time, the S&P 500 Index returned 9.4% annualized.
Not too shabby.
But as a frequent shill for the mutual fund industry, Morningstar feels the need to compare this market-trumping return to top performing mutual funds. And that’s when things take an interesting turn: The article’s author, John Coumarianos, sounds surprisingly introspective in his (near) critique of active fund management.
The market isn’t efficient, as the indexers say, but its inefficiencies are apparently not easily exploitable for some of the finest pros either–at least given how many of them currently go about investing, trying earnestly to predict future profits and discounting them back to the present. Perhaps managers outthink themselves or have too much confidence in their predictive abilities instead of relying on past results.
Why funds may perform so badly as a class
The author also cites the mutual fund structure, size, and the legacy nature of a fund portfolio — making it so easy for investors to buy and sell an already outdated model — as an impediment. Does this mean that portfolio mirroring a la kaChing and Covestor (where investors sync their brokerage accounts up to a professional investor’s portfolio model) has another leg up on the industry? The separately managed account model (SMA) which institutionalizes this mirroring process does have its benefits, including better tax efficiency (all stocks are held in investor’s name and cost basis is individualized) and transparency (stocks in the portfolio are held in brokerage account).
Zack Miller is an excellent source when it comes to using new online tools to vet investment ideas. His first book is a broad survey of emerging investment strategies that take advantage of the wide array of financial tools and content that you can find online — from blogs to Twitter. There’s a lot of noise out in the tradestream, but this book helps you cut through that to find the information that’s truly useful. — Michelle Leder, footnoted.org, a Morningstar Company
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:
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.