High Five! The top 5 fintech stories we’re following this week

5 trends we're tracking in finance

 1. Wall Street turns on the fintech heat

If 2015 was the year of fintech Star Wars, of the upstart firm taking on the big boys, 2016 could be the Empire Strikes Back.

The largest financial institutions are indeed rising to the occasion, developing new products, striking strategic partnerships, and advancing the ball.

Of global major banks, Spain’s BBVA is one of the most active investors and acquirers in the fintech space. Scarlett Sieber,who is part of the business development team for the bank’s digital business, joins us on the Tradestreaming podcast to discuss how (and why) she is building a financial technology ecosystem.

What happens when the largest credit card issuer partners with the largest gas retailer? JPMorgan’s Chase Pay landed a deal with Shell, giving the upstart digital payments platform access to 20 million daily customers.

Barclays revealed plans that showed serious intentions about banking Africa, bringing potentially 1 billion unbanked folks into the financial fold.

2. Fintech is competitive and, sometimes, destroys value
Wall Street has a lot of work to do – for example, today’s brightest are less likely to want to work at hedge funds. (That’s not deterring Goldman Sachs, though, from rolling out a new video format for on-campus recruiting).

Also, it can’t be easy heading up the largest player in the actively-managed funds space, either. BlackRock’s Larry Fink has a ringside seat, witnessing the outflows of actively managed capital, flowing into passive strategies. Active managers are feeling the pain of watching more productive revenue streams evaporate.

Right now, it seems servicing clients and protecting long term franchises is a good start.

3. Why video banking is the fintech trend to watch

More so than bitcoin or other sexy fintech technologies, video banking is already here and changing the way customers, and banks themselves, interact with financial services. We’re quick to (falsely) compare video banking to a Skype-powered teller, but it’s really so much more.

Video banking is about creating real experiences, putting a human face on digital banking. It’s good for customers and that shows — video banking still has some of the highest conversion metrics of all channels. So, in addition to creating operational efficiencies, video banking also has important security implications. Lastly, video banking technology is also helping some of the underbanked — like people with hearing disabilities — get serviced like other bank customers.

4. With new bank partnerships, TransferWise tries for transparency

As customers clamor for more from their financial service providers, small players of the big financial game are responding with their own versions of transparency. Transferwise is the horse to beat in the online money changing business with over 600 routes in 35 different currencies. The startup claims it has over a million customers conducting $750 million worth of transfers per month.

But that’s peanuts compared to the $5.3 trillion in forex transacted daily. Transferwise has big aspirations and to get there, the firm launched a new partnership strategy that would bring the company’s currency exchange tools to other online banking platforms. So far, it looks like that strategy is working.

5. The new virtual reality of shareholder communications

Berkshire Hathaway is known for its lively annual shareholder meetings, featuring everything from a ping-pong match between chairman and CEO Warren Buffett and Microsoft cofounder Bill Gates to discount jewelry shopping. A sign of the times, the firm live streamed its event this year. Communicating with investors has come a long way.

When it first launched its virtual shareholder meeting services in 2009, four companies held such meetings. This year, Broadridge Financial Solutions is expecting to facilitate meetings for 200 public companies, 80% of them virtual-only and 20% hybrid, or a mix of in-person activities and an online broadcast, like Berkshire Hathaway did.

 

When following the fast money can be a good long term strategy

Stone Street and The_Analyst had an interesting piece yesterday that appeared on Zero Hedge.  Entitled Financial Voyeurism, Why You Can’t Beat Fast Money, the piece took to task all the excitement surrounding hedge fund’s public 13F filings (.pdf) every quarter.

According to Stone Street:

funds and asset managers with greater than $100 million in assets under management are required to report their holdings. The list includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed in funds shares of closed-end investment companies, and certain convertible debt securities. Short positions are NOT included in the 13F. In addition, managers can request confidential treatment of their filing if they feel that their strategy would be compromised by the disclosure. This includes circumstances where the manager has an ongoing acquisition or disposition program. Confidential treatment can last for three months to one year. Lastly, it is important to note that the 13F must be filed no later than 45 days after the end of the quarter. Most funds wait until the deadline to report, as such they are lagging indicators.

The issue is that clearly, investors blindly following 13F followings in an effort to replicate hedge fund portfolios are missing crucial information.  Beyond the lag between buying and filing, not all the fund’s holdings appear in these filings.

So, the incessant race in the blogosphere to analyze these reports for any changes in holdings appears to be somewhat futile.  Fast money momentum players look to piggyback portfolio changes of guru investors in the hope that the market has not fully incorporated this information into current prices.

But, it works

The thing is, with certain investors like Mr Buffett, this strategy actually works.  According to a study I quote in my book, Tradestream, a piggybacking strategy that incorporated only positions included on public filings would achieve alpha close to that of Buffett’s actual portfolio.

The researchers found that Buffett, although touted as the king of value investing, was actually running a growth portfolio.  From Martin and Puthenpurackal’s Imitation is the Sincerest Form of Flattery:

An investor who mimicked the investments from 1976 to 2006 after they were publicly disclosed in regulatory filings would experience statistically and economically significant positive abnormal returns using various empirical tests and benchmarks.  This indicates the market under-reacts to the initial information that Berkshire Hathaway has bought a stock and is slow in incorporating the information produced by a skilled investor.

I understand that Buffett takes larger positions and his holding period is longer than your typical hedge fund.  And that matters.  It would be harder to replicate portfolio performance in a fund like Renaissance that has huge turnover in its portfolio and very short holding periods.

But there are a lot of funds that take bigger, more concentrated positions, like some of the Tiger Cubs, Paulson, Ackman, etc.  Sometimes, even just mimicking a fund’s best idea works.  What these blogs and services are doing in scrambling to reveal and analyzing quarterly filings comes from a good place but needs to be put in context.

Do it, but with class and rigor

I think the point here is not to throw the baby out with the bathwater and poo-poo portfolio replication in general.  On the other hand, mimicking anything that moves — cloning any hedge fund manager — doesn’t make sense either.  That’s dumb money.

What I’ve done after publishing my book is move more and more into rules-based portfolio replication.  But I did it with rigor. I  identified firms that take concentrated positions and hold onto them.  I them backtested them using AlphaClone (see why I called AlphaClone “the cure to investor insanity“) to determine which strategies come closest to mimicking their own performance.  For some funds, it’s their largest holding.  Others performance comes from the largest new holding.  Other positions include the most widely held tech stock, for example.

These portfolios do work but they require vigilance and methodology.   See the performance of one of our portfolios, the Tradestreaming Guru Strategy.

Source

Financial Voyeurism, 13-F Chasers: Why You Can’t Beat the Fast Money (Stone Street Advisors)

Martin and Puthenpurackal: Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway (SSRN)

Cohen, Polk and Silli: Best Ideas (SSRN)

Buffett successor’s investors ‘happy for Todd’

The WSJ has the liquidation announcement from Stone Point, the fund that originally seeded Todd Combs’ Castle Point.  He’ll have 20x the amount of assets under management to play with at Berkshire ($BRK.A)

…The fund has also had strong relative performance during extremely challenging times in the financial services sector, outperforming its benchmark by roughly 80 percentage points since inception in November 2005 (positive 34% cumulative net return for Castle Point since launch vs. negative 46% for the XLF).

Nevertheless, we are happy for Todd, who has an incredible opportunity to work for Warren Buffett at Berkshire Hathaway. Todd is an extremely talented investor and we wish him much success in his new position…

Source: Read the Farewell letter from Todd Combs’ Hedge Fund (WSJ)

What is Tradestreaming: Screening 2.0

Top investment gurus like Benjamin Graham, Warren Buffett, Peter Lynch, and Joel Greenblatt didn’t only help investors enjoy huge market-beating returns in their funds.  They also left behind the keys to the (investing) castle: the methodologies they applied in their market-trouncing performance.  They’ve written books, complete with formulas and strategies, that propelled them to the top of their games and gains.  Tradestreaming aims to recreate these strategies as we pave our own way to outperformance.

Because a small number of expert investors wrote extensively about their investing techniques, we can now create complicated computer programs to reenact their strategies and apply them to today’s stock markets.  Screening 2.0 is all about using smart technology to bring history’s best investors back to life.

Technology-driven investing

Stock screens have been around for decades.  Using screens, we can filter through thousands of investment candidates on the prowl for the ideal investment.  Old screens merely searched databases of stocks using specific criteria (i.e. all large cap stocks with a p/e less than 20 and a growth rate over 7%). Unfortunately, for most investors, these screens fail — searching for specific stocks tells us nothing about the success of such a strategy.

Screening 2.0, lead by analysis and money management firm, Validea, allows us to recreate history’s best investment strategies, computerize them, and then look for stocks that guru investors like Ken Fisher and Marty Zweig would have purchased themselves.  Screening 2.0 is the marriage of search technologies and artificial intelligence with quantitative investing.

More Resources

Make sure you check out the Tradestreaming for the Internet’s best stock screening resources.

<– Previous: Crowdsource your portfolio I

Top Warren Buffett resources

Warren Buffett is an investing legend to almost 3 generations now.  Here’s the best way to learn from and about Warren Buffett.

About Warren Buffett

Wikipedia: Warren Buffett: everything you wanted to know about Buffett, the Oracle of Omaha
The Snowball: Warren Buffett and the Business of Life (book): written by Alice Schroeder, former director at Morgan Stanley, hand-picked Buffett biographer

Buffett on Forbes’ Richest People list

About Buffett’s investment strategies

Berkshire Hathaway’s shareholder letters: Go to the source for inside understanding of how Buffett looks at his own business and investing in others

MarketFolly: Buffett’s portfolio: Monitor the ins-and-outs of holdings in Buffett’s investment portfolio

Buffettology: the previously unexplained techniques that have made Warren Buffett the world’s most famous investor (book): Perhaps the best of the Buffett books, Buffettology is a great resource for investors to learn how Buffett values companies, complete with formulas

Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing (book): With Buffett Beyond Value, you’ll learn that, contrary to popular belief, Warren Buffett is not a pure value investor, but a unique thinker who combines the principles of both value and growth investing strategies.

Warren Buffett Resources

CNBC channel on Buffett

GuruFocus’ tracking of Buffett’s investment holdings

Validea’s Buffett Portfolio: Screening for Buffett-like stocks and performance

Videos


Buffett takes heat on ownership of credit rating agencies.


Warren Buffett speaks to a class of MBA students.

What is Tradestreaming: Piggyback Investing

Learn and invest like the big boys

Tradestreaming is about using social media and Internet resources to plug into the collective investment activities of the world’s best and most profitable investors.  Research has shown that by piggybacking these guru investors — investing in some of the same stocks they’re buying — provides us close to the same returns as we would rack up if the top hedge funds — people like SAC’s Cohen, Berkshire’s Buffett, Carl Icahn and George Soros — managed our portfolios directly.

How to piggyback invest

The great thing about today’s investing environment is that there is an increasing level of transparency to some of the top hedge funds’ activities.  They’re required (or encouraged) to file periodic reports of their holdings.  These reports are a gold mine of information as investors get a window into what these guru investors are investing in or selling out of their portfolios.

With Tradestreaming, we would need millions of dollars of investable assets just for these top funds to consider managing our monies.  Instead, by mimicking hedge fund activity, we essentially outsource our research to the brightest and most profitable funds and invest alongside them.

Sites like AlphaClone and Marketfolly help us decipher exactly what investment funds are doing. There are a lot of tools that can assist in this process.  That’s what Tradestreaming is all about.

<- Previous: Ride the Long Tail I Next: Follow the Insiders –>

Photo credit: theyoungones

The Web’s Best Stock Screens: Looking for the next winning investment

fish_netStock screens allow investors to sort through lots of different stocks in search for only the ones that fit certain criteria.  Investors looking for the next stock pick for their portfolios can use basic screening tools, available at both Yahoo! Finance and Google Finance. MSN recently retired its highly-regarded stock screening tools, leaving what’s freely available somewhat lacking.

Screening 2.0, something I like to discuss on the site, provides the same outcomes but incorporates more algorithmic know-how, some artificial intelligence (how do you deal with an infinite P/E one year?), better ability to backtest results, and preset criteria to match results of the world’s best investors.

I decided to piece together a list of some of the Internet’s best free and premium stock screening resources.

So, here goes:

General Investing

  • Validea: One of my favorites and started by author of The Guru Investor, John Reese.  Validea is a premium service that tracks screens preconfigured with the investing criteria of history’s greatest investors, like Buffett, Graham, Peter Lynch, Ken Fisher, and more.
  • Finviz: Lots of stuff going on here. IMO, the most powerful, free screener available.  With fewer preset screens, Finviz is for more advanced investors who have specific criteria they look for in stocks.  A whole lotta descriptive, fundamental, and technical ways to sort for new ideas.
  • Manual of Ideas: Mentioned in my post from last week, Top 6 Ideas for Piggyback Investing, MOI has both free and premium screens like 10×45 Bargain Hunter, European Value Report, Equities and Tobin’s Q.  These screens come in form of subscription newsletters (again, some free, some premium) with more analysis included beyond the output of the stock screens.
  • AAII Screens: Blown away by how many screens the American Association of Individual Investors has on its website (you have to join AAII to access these screens).  You can find growth and value screens with preset parameters (like IBD Stable 70 and CAN SLIM) as well as guru screens that look for specific investment criteria established by famed investors like Graham, Buffett, Dreman, Lynch, Zweig, etc.
  • Zacks: Nice combination of some free screens (Earnings & Margins, Growth and Income) and premium screens (Zacks Rank 1)
  • CNBC: lets users save custom made screens and also has a few prepackaged screens for free
  • The Kirk Report: Couldn’t be remiss in mentioning the great screens Kirk puts together for subscribers to his service.  He calls his screens, the Stock Screen Machine.
  • The Motley Fool’s CAPS: Nifty free screener that incorporates the community’s CAPS ratings into the screens. Allows users to download results to spreadsheets.

Value Investing

  • Old School Value: Nice site with numerous free screeners for all kinds of value investing
  • MagicFormulaInvesting: Built by the man, himself — Joel Greenblatt, this is a nice free site to do basic screening for stocks that fit the criteria of the Magic Formula

Institutional Ownership

  • AlphaClone: Of course, this hedge fund slicer-and-dicer is a stock screen of sorts.  This premium product (read my review here) allows users to identify the top performing funds, peer into their holdings and backtest their strategies.

Insider Buying/ Selling

  • GuruFocus: Interesting free and premium offerings that track top guru buys as well as insider transactions.  Can download results into spreadsheets for more analysis.

Technicals

  • StockFetcher: Nice premium screen for technical investors encompassing Bollingers, Candlesticks, Moving Averages, and more. Output is downloadable to Excel.

I am SURE I left really good tools out — let me know in the comments if you think I should include something I’ve missed.

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

Bloomberg finds piggybacking analysts sucks

John Dorfman, investor and Bloomberg columnist, has been following the 4 most popular and hated stocks among Wall Street analysts for the past 11 years.

According to Dorfman’s research:

For 11 of the past 12 years, I have studied the performance of analysts’ four favorite stocks, and the fate of the four they most scorned…Their favorites, on average, were flat during those years while the four stocks they hated most gained about 6 percent annually. The Standard & Poor’s 500 Index had an average gain of about 9 percent.

Wall Street Stinks

winners-and-losers1Dorfman attributes this bad performance to the fact that analysts are “not all-knowing” and like most human beings,  “extrapolate the recent past as a guide to what comes next.” Check out the whole article to see which 4 stocks are currently most highly rated by security analysts and which 4 are currently the pariahs.

Dorfman concludes with a short review of each of the stocks.  I’d like to delve just a bit deeper here, though.  There is definitely a divergence in Wall Street’s sell side and Stamford’s buy side in the ability to accurately pick stocks.

Buy side vs. sell side: winners vs. losers

Whereas research like Dorfman’s show an inverse relationship of the best ideas in the sell-side community to stock performance, research like Cohen, Polk, and Silli’s “Best Ideas”  and Martin and Puthenpurackal’s “Imitation is the Sincerest Form of Flattery” indicate that investors have a lot to gain by piggybacking the best ideas and cloning guru investor portfolios.

So, why is Wall Street, which is just as smart IQ-wise as the buy-side, so bad at picking stocks?  I just don’t think Dorfman’s “they’re just human” critique is sufficient because buy-side guys are human, too.  In fact, I’d wager that the majority of good buy-side analysts cut their teeth on the sell-side.  Does moving to Connecticut improve stock selection (like to see that research paper)?

Companies like AlphaClone are entirely focused on helping investors exploit the alpha produced by certain professional investors (see my AlphaClone: The cure for investor insanity).  Why the divergence?

Rather, there are structural reasons why piggybacking the buy-side works, while aping the sell-side doesn’t.  Some possible reasons for this underperformance:

  • Wall Street analysts are reactive, not nimble enough with changes in ratings to make investors money on the way up or down
  • industry coverage structure requires that each analysts has to have some buys and some sells in an environment that a good portfolio manager may completely avoid such a sector
  • unlike popular folk wisdom, good companies don’t make good stocks and vice versa.
  • Analysts are trained like MBAs to take a more organic, longer term view on companies while the market continues to focus on shorter milestones

Thoughts?  Let me know in the comments below.

[Hat tip: My Investing Notebook]