Colin’s note: Earlier this week, I sent out an investor Q&A-style video responding to some of the most common questions my team and I get in our mailbag.
One of the topics I covered was insider selling… And we got a follow-up question from one of your fellow readers on something he calls “legal insider trading” – or investing where the big-name investors and Wall Street institutions do.
There are pros and cons to following the lead of the big hedge funds and the Wall Street giants… And we’ll get into all of them in today’s video.
Just click below to access it… or read on for a transcript my team and I have edited for flow.
What’s going on, investors? Hopefully, you guys are doing well out there. Today’s video is somewhat of a response to the video we sent you all earlier this week addressing some of the questions I get most often in the Brownstone mailbag.
One of the topics in that video was insider selling… And I said that when you have executives selling their stock, it’s not really a cause for alarm. That’s how executives are compensated.
They tend to have what we’ll call “low base salaries.” Then, to make their millions and millions of dollars, they’re awarded shares or equity in the company. And to cash out those millions, they have to sell the shares.
In response to that issue, I got some feedback from a viewer…
So what if we trade and invest based on what I call ‘Legal Insider Trading’?
In other words, why not follow the smart money of Wall Street’s institutional investors, and hedge funds – the likes of Vanguard, BlackRock, Warren Buffet, Citadel Advisors, Millenium Management, Renaissance Technologies, Point 72, etc. Why not just piggyback on the shoulders of these giants knowing where they are investing their money?
– Benjamin S.
So, there are pros and cons of this type of investing.
First of all, this method is a great starting point for deciding where to invest. I’ll talk more about it here in a second.
So, everybody has their specialty. In fact, it’s a huge red flag to me when I’m looking around Wall Street – and looking for people to listen to and get advice from – and someone claims they’re a crypto expert… a healthcare expert… also a tech expert… and by the way, they know everything about oil and gas.
That’s a huge red flag to me. Everybody finds their lanes. There’s the bond king. There are energy guys. There are tech guys. I would consider myself a tech guy. I can tell you everything about software, everything about semiconductors. But guess what I can’t tell you much about? Biotech and healthcare. I just haven’t spent a lot of time researching those companies.
So if I needed to get a short list of healthcare companies I wanted to invest in, I’d find the best actively managed ETF. On the ETF’s home page, you can find all the holdings.
In healthcare, it’s typically Pfizer or Eli Lilly… the big names we all know. But as you scroll through, there will be a lot of names that you probably don’t recognize. This is a great starting point.
These websites also give you a track record of the manager. So if the manager’s been there 10 years, you can see if they’ve outperformed not only the healthcare sector but even, say, the S&P 500 over that 10-year period. So you can get a really good sense of if this fund and this list of stocks is a good starting point for you.
Now, as it relates to what the reader identified – as it relates to hedge funds… Every hedge fund managing $100 million or more has to file something called a 13F form.
13F is just the name that the U.S. Securities and Exchange Commission (“SEC”) gives this specific form. Different forms have their own identifying code. And a 13F is just a filing that any hedge fund or any financial institution managing more than $100 million has to file. In that file, they have to disclose many – but not all – the positions they’re invested in.
Now, there are a couple of things to understand about these 13F filings… First, they’re already 45 days old by the time they’re posted.
For example, we all know that Q4 of last year ended on December 31st. That would cover the months of October, November, and December. But the filing to show what positions the hedge fund held over those three months doesn’t have to be filed until February 14.
So you actually don’t find out what the hedge fund was holding for the last three months of last year until the middle of February.
Now, this creates some complications. If you follow the investment advice of these 13Fs, sometimes it can lead to investing without having the full story.
For example, Warren Buffett made headlines when he bought about $4 billion worth of Taiwan Semiconductor stock last year. Everybody was really excited about it, particularly people who were invested or wanted to be invested in Taiwan Semiconductor Manufacturing Company (TSM) stock.
What’s interesting is almost immediately on the subsequent 13F filing, Buffett disclosed that he pretty much sold out of that entire stock. So by the time you heard Buffett had bought TSM, he had already sold it.
He likely got spooked by China potentially invading Taiwan. Maybe Warren Buffett should check out issues of The Bleeding Edge since we’re not overly concerned about that risk. And over the past year, TSM shares have outperformed the broader markets.
As for other ways 13F filings can lead you astray… You might recognize Michael Burry’s name from the famous book The Big Short – or the movie by the same name. It’s an easy read written by Michael Lewis. Now, Burry made waves initially in The Big Short by shorting the housing market and predicting its demise.
But ever since then, his radar’s been off. He’s been short at the broader equity markets… and that hasn’t worked out.
In the second quarter of last year, he started shorting the semiconductor ETF SOXX. And you can imagine if you started shorting semiconductor stocks really at any time over the last year – but particularly in the second quarter of last year – you lost a big time.
Over the past year, SOXX is up about 50%. So needless to say, that short position hasn’t done well. And if you followed Michael Burry into that position, your account probably isn’t looking too good.
Now, probably the biggest downfall of these 13F filings is filers don’t disclose short positions. So, for a hedge fund, this is meaningful because that’s like the definition of a hedge fund… you’re often long and short the same equity, stock, or investment.
So for example, a 13F filing could show a fund is long 100,000 shares of Apple. And you might say, “Wow, they’re incredibly bullish on Apple.” But what it doesn’t have to disclose in that 13F filing is they’re short a million shares of Apple too for a large net short position.
So these 13F filings are a good starting point and give you some good ideas. But there are limitations. It’s just something you need to keep in mind as an investor.
But when these 13F filings come across, I certainly glance at them. I look at the movement. I look at the stocks and sectors these large money managers are moving into… and then potentially moving out of. And I keep that in the back of my mind as I’m going through the rest of my investments.
Now, one thing you don’t hear much about is the lack of institutional ownership in a stock. When you see a lack of institutional ownership, it can show you that once the stock becomes better known – maybe puts up better financial numbers – big money could pile in and drive the shares even higher.
Recently, in our Exponential Tech Investor advisory, we recommended a $2 stock with very little institutional ownership that got us excited.
Part of this is because shares of the stock were under $5 and a lot of these hedge funds, ETFs, and indexes likely have rules against actively owning shares under $5.
So, we felt once shares push over $5, then the institutional money could come in and push a stock from $2 all the way up to $10. It gave us confidence that the company could benefit once the institutions finally caught on.
We’ve got a few hundred thousand subscribers across all of our advisories. And this is why, believe it or not, institutions subscribe to our paid research… that many investors can really move the needle.
And in many ways, a few hundred thousand active investors can move the needle more than large institutions can.
So, that’s a shameless plug for our Exponential Tech Investor and Near Future Report services here at Brownstone Research. Hopefully, you guys have a wonderful day. I’ll be back again on Friday.
I’ve got a fun video planned on Friday, kind of off-topic, and kind of fun. We’ll see how it goes. But until then, my name’s Colin Tedards, and this has been The Bleeding Edge. Enjoy the rest of your week. Bye for now.