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Play with the big boys with the Hedge Fund Wisdom newsletter

Posted on September 13, 2010 at 2:42 pm

Awesome hedge fund and piggyback investing blogger, MarketFolly, just launched a subscription newsletter, Hedge Fund Wisdom (HFW).

image courtesy of Greenbackd.com

A take-off of his great blog, Jay at MarketFolly has produced a quarterly newsletter that looks at entire portfolios of hedge fund gurus (like Seth Klarman, Bill Ackman, Warren Buffett) and analyzes their quarterly moves.  The premium newsletter also identifies 3 different individual stocks and breaks down the thesis, examining why the guru investor is buying a particular stock, what the catalysts are and importantly, what’s the bear case. These stock picks are the hidden gems of the newsletter and are written up as a hedge fund analyst would present these ideas to a portfolio manager.

Research shows that piggybacking certain professional investors does work and investors who subscribe to this methodology will find the Hedge Fund Wisdom newsletter a good resource.

All in all, you’re looking at 75 pages of investing goodness — priced for early sales at a nice introductory offer.

Check it out at hedgefundwisdom.com

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  • How to trade like insiders: building an insider trading strategy

    Posted on November 3, 2010 at 1:32 pm UTC

    In Tradestream your Way to Profits, I wrote about an investment strategy that follows the moves of corporate insiders.  I’ve explored tracking insider trading at a high level and have provided a list of resources for the Follow the Insiders strategy.

    One thing is clear, the insider trading anomaly is alive and well in US markets and abroad (Insider Monkey) and investors can build profitable portfolios by creating a strategy that mimics specific insider trading activity.  Insiders have great information at their disposal and investors should take notice when they put their own money to work in their own companies.

    The 2-tier Tradestream Model: How to Build a Profitable Insider Trading Portfolio

    I created two models in Tradestream:

    1. The Muzea Behavioral Model: this is based on broker-cum-insider-trading-strategy guy George Muzea, author of The Vital Few vs. The Trivial Many: Invest with Insiders, Not the Masses.
      1. this model segments insider trading activity by looking at the behavior of the insiders and trying to get into their heads to better understand the rationale behind their trades
      2. focus on who is doing the trading: what Muzea calls Value Insiders (70% of trades done by insiders with a long-term view on their firm) and Catalytic Insiders (corporate types not concerned with book value — the insider version of a momentum trader)
    2. The Seyhun Information Model: based on researcher/professor H. Nejat Seyhun, author of Investment Intelligence from Insider Trading.
      1. Seyhun creates a hierarchy of insiders, ranking in order of their access to higher-quality, tradable information
      2. Senior Management: C-level execs who have their management finger on the pulse of their firms
      3. Officers: employees of firm but not senior enough to make decisions that affect the company as a whole
      4. Directors: Insiders who hold seats on the board of directors but are outside the firm
      5. Large shareholder: typically, institutional types who own more than 10% of the stock

    The Strategy

    • Focus on active vs. passive insider transactions: insiders add/subtract to their positions for a variety of reasons and we want to differentiate between transactions based upon long-term views or merely rebalancing of existing positions
    • Buys, not sells: Selling happens all the time — insiders are always liquidating and legging out of their stock holdings (esp in tech stocks where large options rewards are common).  When this trend reverses and insiders put their own cash to work is when investors should perk up.
    • Clustering and consensus: Insider trading activity is a better indicator of future movements in the stock price when multiple insiders are buying and the same time (clustering) without a conflicting trade (consensus). (3 or more)
    • Small caps: Mirroring corporate insider buying stock in small capitalization firms is more profitable a strategy than in larger firms. (<$1B)
    • Earnings surprises: It’s a good idea to look for insider buying activity in firms that had recently reported a positive earnings surprise.
    • Bigger is better: Larger purchases are better signals than smaller ones.  (>10,000 shares)

    While all of these methods improve returns, the 3 most important determinants of quality are top executives, small firms, and large trading size.

    We find strong evidence that insider trades are associated with the firm’s future earnings performance…consistent with insiders trading on the basis of both security misevaluation and private information about future cash flows. — Piotroski and Roulstone, “Do Insider Trades Reflect Superior Knowledge about Future Cash Flow Realizations?” (January 2003)

    How to do this

    You can use some free services but it’s going to take some leg work.  Here are some great resources to monitor insider trading activity:

    There are numerous others.  Let me know what you use.

    photo courtesy of The Library of Congress

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  • Brokers keep developing tools but can investors handle them?

    Posted on November 1, 2010 at 12:39 pm UTC

    Good piece by David Bogoslaw at Bloomberg Businessweek on all the new technology/trading development going on in the online brokerage space.  It’s a well-researched piece and does a great job of going through each online brokerage (including the smaller startups) and outline what they’ve been working on.

    Some of the interesting functionality profiled in the article includes:

    • shareable, backtestable stock screeners (TradeKing)
    • expanded 3rd party research (RiskMetrics available at Fidelity, Seeking Alpha at E*Trade, Ned Davis at Schwab)
    • Exceptional volume scanners (LiveAction at tradeMONSTER polls for unusual activity in the options market)
    • more complicated buy/sell triggers (a few brokers)
    • social media integration (most of them)

    The Bloomberg Businessweek article ends with

    With individual investors still spooked by the market meltdown of 2008-09 and by the sudden plunge in major indexes on May 6, the advanced tools that online brokers are providing could be a carrot that draws more people back to stocks—and gets them back in the habit of trading online.

    Online brokerages misguided

    I’m not so sure about this.  The online brokerages continue to develop tools and underinvest in education.  It makes sense — frequent traders are their bread and butter and in a commoditized space of trading, tools are one way (services are another) that help to differentiate.

    Still, the average investor will never use these advancement and even if he/she could figure out how to use them, he still can’t answer whyAutomated professional-grade advice is what these platforms should be advancing if they want to really capitalize accounts leaving traditional brokerages.

    Source: Online Brokers Upgrade Retail Investor Tools (Bloomberg Businessweek)

    photo courtesy of D’Arcy Norman

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  • Buffett successor’s investors ‘happy for Todd’

    Posted on October 31, 2010 at 3:48 pm UTC

    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)

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  • Groupon-like buying opens up new investable markets

    Posted on October 28, 2010 at 12:11 pm UTC

    This is a far-fetched idea but run with it a bit.  We’re already seeing the creation of secondary markets in groupon deals.  These are eBay-like exchanges like Lifesta where customers who bought a coupon can sell it to someone else looking for access to that particular deal.

    Taking this further, what would happen to these secondary market if they matured?  They could potentially morph into real-time exchanges, like the stock market, where customers call transact with one another but more interestingly, vendors (supply-side) can essentially bid on where a particular customer will dine on a particular night (demand).  Supply and demand meet and prices determined in real-time.  It could allow small businesses to manage their yield, selling excess inventory at a discount to recoup costs.

    Anyway, the idea wasn’t mine but it got me thinking about it.  Matthew Ingram on GigaOM discussed this in a post on the future of local social buying:

    Right now, Groupon-style group buying is more or less just coupons that get sent to you via email to entice you to sign up. What if you could look at a real-time, auction-style exchange of local offers from merchants or retailers or restaurants in your vicinity — maybe even on your mobile device — and pick the offer you wanted for dinner that evening? You can’t do that now, but that’s one vision of where the local group-buying phenomenon is headed in the future, according to Don Rainey, a partner with Grotech Ventures and an investor in LivingSocial, the number two player in the U.S. group-buying market next to Groupon.

    Rainey said he sees a day when merchants and potential customers interact through a kind of real-time exchange — like a stock exchange, with buyers and sellers, but for local offers on meals or other goods. “I can see local retailers and consumers bidding in a real-time system for where that consumer is going to go for dinner,” says Rainey. If a merchant is having a slow night, they can put an offer into the system and users can choose between that and multiple other offers, based on location and the time they want to go out. As someone who is constantly looking for new options for places to eat in my local area, this sounds like a winner to me.

    Local deals become an investable asset of sorts.  Investors could speculate on in-demand seats at swanky restaurants finding liquidity in these platforms (whether they profit or not).  Fixed supply (like art) and fluctuating demand could influence big rises and falls in the prices of these assets.

    Like I said, far-fetched but interesting to think about.

    Source: LivingSocial and the Future of Local Group Buying (GigaOM)

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  • Raising the roof with recent housing sector insider trading

    Posted on October 27, 2010 at 11:54 am UTC

    Insider trading — particularly when clusters of executives are buying their own small-mid cap stocks — can be useful in forecasting future stock movement (in this case, up).

    The Motley Fool ran a really good article detailing all the insider purchases occurring in the housing sector (or ancillary sectors that might rise in sympathy with a rebound in housing).

    Company Industry Insider Trend
    Cousins Properties ($CUZ) Real Estate Investment Trust Insiders like Lawrence Gellerstedt (CEO) and Taylor Glover (Chairman) bought $709,733 worth of stock between 8/12-8/24
    Winthrop Realty Trust ($FUR) Real Estate Investment Trust Insiders like Michael Ashner (CEO) and Lee Seidler (Director) collectively bought about $2.46M worth of stock between 8/13-9/27
    Gordmans Stores ($GMAN) Home Furnishing Stores Insiders like Debra Kouba (Officer), Richard Heyman (CTO), Jeffrey Gordman (CEO), Johanna Lewis (Officer), Michael James (CFO), and Michael Morand (Officer) collectively bought $532,221 worth of stock between 8/11-9/27.
    Lennar ($LEN) Residential Construction Sidney Lapidus (Director) bought $97,500 worth of stock on 8/19
    La-Z-Boy ($LZB) Home Furnishings & Fixtures Edwin Holman (Director) bought $20,568 worth of stock on 8/31
    MFA Financial ($MFA) Real Estate Investment Trust Insiders like William Steven Gorin (President), Robin Josephs (Director), and Timothy Korth (General Counsel) collectively bought $136,778 worth of stock between 8/5-8/26
    Select Comfort ($SCSS) Home Furnishings & Fixtures Jean Michel Valette (Director) bought $130,000 worth of stock on 8/27

    Source: 7 Insider Executives Betting on a Housing Recovery (Motley Fool)

    photo courtesy familymwr

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About Tradestreaming

Tradestreaming is a community of investors learning directly from experts. I’m Zack Miller, investor, entrepreneur, and founder of Tradestreaming.com and I literally wrote the book on how to invest in the age of Facebook and Twitter. Tradestreaming is the resource I’ve created to help me become a better investor.  I believe it will help you … Continue Reading