13F Idea Generation: A Value Investor's Guide
I have heard the saying many times when it comes to value investing- "whoever turns over the most rocks wins". You can only hope to do as well as the best of the opportunity set you investigate, so getting the most quality ideas through your funnel is a vital skill, especially for those of us who are outside the industry.
Even though most of my holdings would show up cheap on many traditional value metrics, I don't personally screen, because I believe there is a much more effective and time-efficient "screener". The simple criteria- Is someone I respect bullish on this idea?
We live in an age of information overload. Where Buffett could go door to door in the '50s buying National American Fire shares at a fraction of their value from farmers who wouldn't have even known where to get a quote, today you can be pitched disruptor stocks and alt-coins at your next family reunion and I'm apparently one of the few people over 12 in the western world who has never traded an option.
We only have 24 hours in a day, so the ability to filter out the unimportant and focus on the promising investments is paramount. For me, this means voraciously reading quarterly investor letters, investment theses on Seeking Alpha and Corner of Berkshire and Fairfax, a wide array of investment blogs, subscribing to weekly round-ups (the Acquirer's Multiple being one of the best I have found) for content I may have missed and scanning/forging networks over Twitter.
All of these have been very effective sources of leads, but the one that gets the information straight from the horse's mouth are 13Fs. For those unfamiliar, these are the regulatory filings every fund managing over $100m in the US must file quarterly, outlining their holdings and providing a direct view to what many of the value greats are buying and selling.
Filers include Buffett, Seth Klarman, Howard Marks, David Einhorn, Jim Simons and Mohnish Pabrai (himself a great proponent of 13F analysis and what he calls "cloning") to name but a few, but not all 13Fs are equally useful and I often hear about them being used in an illogical or rigid way. So below, I have broken down my common sense guide to reviewing 13Fs for initial idea generation:
1. 13Fs only disclose US holdings, so for global funds you must be aware you are not getting the whole picture. This doesn't have to be a disadvantage, as long as you realise the weightings you are seeing don't necessarily carry over to the portfolio at large. Also, for multi-asset managers (such as Klarman's Baupost) you must dilute any conviction you perceive again, as this adds another veil to their true portfolio.
Consider Klarman's latest holdings here (courtesy of Holdings Channel). While the assets under 13F jurisdiction are around $11b, we know that Baupost has AUM of around $30b, so can assume lower conviction by roughly two-thirds on any positions. The large new purchase of Intel stands out here, along with the new smaller position in Marathon Petroleum and additions to several portfolio names.
2. The biggest holdings are not necessarily the most bullish. This is perhaps the most oft-repeated analytical error when reading 13Fs. They are a snapshot of a portfolio taken four times a year and you need to read them in the context of past quarters to get a full appreciation.
For one, there is no secret formula, because all holdings evolve differently at different funds. In my experience, the largest holdings on a 13F are the ones that have gone up the most, but haven't been sold yet as they are still short of intrinsic value. Consistently paying x% higher than your favourite investor is not going to be a winning formula, in my view, and unless said investor has been adding heavily to the investment recently at similar prices, these successful legacy holdings would be a pass for me.
Consider Tom Russo's latest filing here. A follower of Russo will know that he has a legendarily long investing horizon and many of his top holdings- Berkshire, Mastercard, Nestle, Alphabet and Heineken have been very long-term positions. Simply put, we don't know whether Gardner, Russo and Gardner would be establishing positions of this size today, at current prices. In my opinion, the most interesting of all these ideas is the large new position in Unilever established over the previous quarter. While not the biggest, it has been seized on from the current global opportunity set.
3. You can't have hard and fast rules for 13F analysis, otherwise algorithms would be scraping them much more effectively. I heard some misguided tips or rules on a popular podcast recently including looking for smaller holdings that seem out of place, as they are more likely to have had a junior analyst fight to get them in the portfolio, but again, this approach is flawed when attempted to use as a systematic rule without examining nuance.
Large funds take small positions for many different reasons over varying time-horizons. for all we know, these could be tester positions, arbitrages or hedges, none of which are the candidate I am chasing. Self-evidently, it pays to search through the holdings of companies you admire and whose style you consider similar to your own.
4. Check the filing yourself- don't rely on the media! Last August, the financial media was breathlessly reporting Berkshire Hathaway's purchase of Barrick Gold. It made sense given Buffett's previous disparagement of precious metals investment, but the reality was it was a $700m investment for a company with a stock portfolio of over $200b and a market cap of $500b at the time. Similar frenzies have been whipped up over recent tiny positions in Amazon and the Snowflake IPO, certainly interesting, but not helpful as conviction ideas.
Barrick was actually my largest holding at the time and while the news was welcome, it didn't really change my opinion on the company and I trimmed the position down soon after. Luckily I hadn't become enamoured with Berkshire's entry, as they scaled out of the tiny position over the next couple of quarters.
The most recent Berkshire filing was noted for large purchases of Verizon and Chevron, but even then, it must be remembered that this activity is dwarfed by the legacy holdings in Coca Cola, American Express and Kraft Heinz, not to mention the $117b Apple position. So, while the Berkshire 13F is always interesting for Buffett watching, due to the size constraints of potential their investments and the complication of Ted and Todd having their own portfolios, it is just not a good one from an idea-sourcing lens.
5. Ignore giant quant shops. Readers will know I am a huge fan of the large value firms such as GMO, AQR, Causeway and Oaktree- it's just that their 13Fs are of no use to me. These firms are managing so much money across so many strategies that it would be hard to say they have huge conviction in any of the hundreds of stocks they end up holding. This is a perfectly valid way for them to build a quantitative portfolio, but is unlikely to help you or I identify a candidate for a concentrated strategy.
Consider the latest from GMO here. There are literally hundreds of stocks, clearly the top holdings are in a large cap strategy, but after that there is no rhyme or reason with few US listed value stocks not held in one form or another. Some holdings might appear higher on these multi-strat manager's lists than others, due to being held in more than one GMO fund and we will never know from this snapshot.
Unfortunately this also applies to Jim Simons unbelievable Renaissance Technologies (whose Medallion Fund has reportedly returned 39% pa since its '88 inception), whose holding are also indecipherable to an outsider. The fund's top 14 holdings were all trimmed last quarter- hard to get wildly bullish on those grounds.
6. You cannot "clone" someone's conviction! This is the most important takeaway to be had here. When a position falls, that you only bought because you saw it in David Einhorn's holdings and "he really knows what he's doing", you are going to struggle to hold on and it will also be quite possible that he has already sold it.
Your investing heroes ideas absolutely must be a starting point only and you don't have the right to invest in anything until you have made the argument your own, as you will need to look in the mirror in some pretty dark moments in markets and will be accountable to yourself at the end of the day. To stress again- finding a great 13F idea is a starting point only!
So negatives aside, what would my ultimate 13F idea look like? It would be a large holding at (hopefully) multiple firms that I admire, who initially bought at prices above today's and have increased their conviction as the stock price has fallen.
As an example, I propose Tidewater (TDW-holders here), who were a first-class 13F idea mid-late last year, despite not eventually making it into my portfolio (unfortunately- although I settled on other energy investments instead). Pre-pandemic, Tidewater was a decent sized position at Third Avenue, Robotti and Moerus, all of whom I admire greatly, and all three maintained or increased their conviction over the first half of last year.
All three funds run fairly concentrated portfolios and their presence alone made the stock interesting to me. After a quick five minute double-check Tidewater moved onto the watchlist and joined the line to have an hour or so work done on it to hold its place, waiting for a deeper dive if the market corrected or something interesting happened.
Of course, I also have my favourite funds to follow and these may not be what you would expect. Many are deep value firms and, consequently, not the strongest performers over the last few years or widely followed. They also tend to have fairly concentrated investments, but broad investing mandates, and I am particularly interested by ADRs given my current bias to non-US stocks, due to their valuations.
Further to those mentioned above, these funds include Oldfield Partners, Semper Augustus, Mittleman Brothers, Brandes Partners, Pzena and the Aussies'- Platinum and Antipodes.
As I only have 15 holdings, the above process is one facet of how I whittle hundreds of quick looks into the, hopefully, only handful of buys I will make each year. Please let me know if you would like to know more about how I manage my watchlist or other idea sources and I can tackle that in a future post.
I have a 4% position in Barrick Gold.
Guy
As always, this isn’t investment advice. Please always do your own due diligence and seek professional advice if you’re unsure about your finances.