Invest For Kids Chicago 2012: Mandel, Bass, Peltz, Zell & More

We wanted to give readers a head's up that the fourth annual Invest For Kids Chicago conference is coming up on November 7th in Chicago.  Tons of big name hedge fund managers will present their latest investment ideas and 100% of the money raised goes directly to children's charities so if you're in the Midwest it's definitely worth attending.  You can register for the event here.

Speakers List

Stephen Mandel (Lone Pine Capital)
Kyle Bass (Hayman Capital)
James Grant (Grant's Interest Rate Observer)
Nelson Peltz (Trian Fund Management)
Sam Zell (Equity Group Investments)
Steven Romick (First Pacific Advisors)
Jeff Ubben (ValueAct Capital)
Frank Brosens (Taconic Capital Advisors)
Alex Klabin (Senator Investment Group)
David Herro (Harris Associates)


Event Details

Date & Time: November 7th, 2012 from 1:30pm to 5:30pm
Location: Chicago, Illinois at the Harris Theater
Website: www.investforkidschicago.org
Registration Form: You can download the .pdf here

Over the past 3 years, the conference has raised approximately $3 million that has been donated to 19 separate organizations.  100% of the money raised goes directly to children's charities.

Embedded below is the event flyer for Invest For Kids Chicago:





As you can see, the speaker line-up is full of great managers and it should be a fantastic event benefiting great causes.  Click here to register for the event.

TrimTabs/BarclayHedge: Investors Flock to Fixed Income Hedge Funds

TrimTabs and BarclayHedge just released a report that in August, hedge funds saw $5.1 billion in inflows despite the fact that many continued to lag their benchmark indices in August. 

This reverses the $9.2 billion outflow the industry saw the month prior.  Year to date, the industry has seen net redemptions of $13.2 billion.  They estimate now that hedge fund industry assets stand at around $1.7 trillion in August, a decrease of almost 29% from the peak in June 2008.

Money Flowing to Fixed Income Funds

Given many investors' propensity to invest while looking in the rearview mirror and to go where the hot performance is, it should come as no surprise that fixed income funds have attracted the most assets both on a monthly and yearly basis. 

Their research finds that, "fixed income funds significantly bested the hedge fund industry average of 1.3% for the past 12 months.  Fixed Income funds also had the best 12-month returns at 7.1% and the second best y-t-d returns at 6.2%."


Survey of Fund Managers

"The September 2012 TrimTabs/BarclayHedge Survey of Hedge Fund Managers found that sentiment was evenly divided between neutral and bullish on the performance of the S&P 500 for October.  Conducted in late September, the survey of 81 hedge fund managers also found that a majority expect Barack Obama to be re-elected and an even stronger majority expect control of Congress to remain divided."

For more on the industry, check out our other recent post on how hedge funds are handling this market.

Citadel Boosts LSI Corp Stake

Ken Griffin's Citadel Advisors just filed a 13G with the SEC regarding shares of LSI Corporation (LSI).  Per the filing, Citadel has disclosed a 5.5% ownership stake with 30,389,218 shares.

This marks an increase in their position size of 22% as they purchased over 5.4 million shares.  This disclosure was required due to portfolio activity on October 5th.  It's also worth noting that in Citadel's latest 13F, the hedge fund firm also disclosed ownership of both puts and calls on LSI at the end of Q2, though there's no way to know if they still currently hold them.

Per Google Finance, LSI "designs, develops and markets storage and networking semiconductors. The Company offers a portfolio of capabilities, including custom and standard product integrated circuits that are used in hard disk drives, solid state drives, high-speed communications systems, computer servers, storage systems and personal computers. LSI provides products for original equipment manufacturer (OEM), companies, in the server, storage and networking industries."

You can see other SEC filing activity from Citadel here.

Warren Buffett's Berkshire Hathaway Files 13G on DaVita (DVA)

Warren Buffett's Berkshire Hathaway has filed a 13G on shares of DaVita (DVA).  Per the filing, they have disclosed a 10.8% ownership stake in the company with 10,197,569 shares. 

This is more of a formality as their position remains unchanged from when we detailed Berkshire's recent Form 4 filing where they disclosed they had purchased more shares in late September. 

This just goes to show why you should track all SEC filings instead of just focusing on the 13G's and 13F's.  The Form 4 was filed last week and already disclosed everything this 13G does a week later. The 13G was required due to portfolio activity on September 21st.

Hedge Funds Own DVA Too

As we mentioned when Berkshire was buying DaVita late last month, this portfolio activity is most likely attributed to new manager Ted Weschler.  DVA was one of his big holdings at his previous hedge fund.

Also, our premium newsletter flagged that DVA was a consensus buy among hedge funds back in August.  Other top holders of shares at the end of Q2 included Viking Global, Lone Pine Capital, Pennant Capital, and more.

Per Google Finance, DaVita is "a provider of dialysis services in the United States for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD)."

Paulson & Co Reveals Stake in Realogy (RLGY)

John Paulson's hedge fund firm Paulson & Co has filed a Form 3 with the SEC revealing a stake in Realogy Holdings Corp (RLGY).

Per the filing, Paulson has revealed its ownership in 11% Series A, B, and C Convertible Senior Subordinated Notes due 2018.  However, in the footnotes, Paulson has agreed to convert all of its notes into shares of common stock on the date of closing of the Realogy's initial public offering, where it has priced at the top of its range.

In total after conversion/exercise, it appears as though Paulson will own over 11.8 million shares.

Realogy is the owner of the Coldwell Banker and Century 21 real-estate brokerage brands. Apollo Global Management originally took the company private in 2007 and will now be public again.

Lee Cooperman on Hedge Funds, Investment Outlook & Life (Presentation)

Lee Cooperman, founder of hedge fund firm Omega Advisors, last month gave a presentation entitled, "Observations regarding: life, hedge funds, the investment outlook" at Roger Williams University.  Here are some of the highlights:


On Hedge Funds

- If you produce the returns, you'll grow.  What separates the men from the boys is how you do during periods of adversity

- He again detailed his characteristics of an outstanding analyst or portfolio manager 

- He tries to make money in 5 ways: market direction,  asset allocation (stocks versus bonds), undervalued stocks on the long side, sell stocks short. and macro investing (and he candidly mentioned the egregiously high fee structure that hedge funds use as well)

- "Eat your own cooking" i.e. your capital is aligned with that of your investors


On Investment Outlook

- Moderately constructive US equity market view: no recession in forecast horizon, monetary policy accomodative, valuation reasonable, investors have derisked

- "Stocks are the best house in the financial asset neighborhood - it is still not clear whether it's a good or bad neighborhood."  He touched on this at the Delivering Alpha panel as well

-  China is slowing more than expected and needs to be monitored carefully

- Factors needed for self-sustaining economic expansion: improving employment, pent up consumer demand, improving consumer balance sheet, pent up demand for houses, home prices stabilizing, positively sloped interest rate yield curve, growth in bank lending, excess liquidity, strong corporate balance sheets, absence of metrics foreshadowing recession

- Government bonds unattractive

- "The stock market does whatever it has to do to confound the largest number of investors."  Large de-risking over past few years as institutions move to bonds from equities, so the max pain trade is equities moving significantly higher


On Life

- Four observations: 1. there's nothing more important than family, 2. it's great to have friends but you have to be one, 3. never do anything that you'd be embarassed about if it appeared in the paper, and 4. when you've achieved success then share with others less fortunate

- Find something you like and pursue it

- He says getting an advanced degree (MBA) is what helped him get in the door on Wall Street

- 'Obsession': the word he uses to describe his approach to investing

- The harder he works, the luckier he got.  To be successful, you have to make sacrifices.  "It doesn't matter whether you are a lion or a gazelle; when the sun comes up you'd better be running."

- Surround yourself with the most able people and don't be threatened by them

- Respect people even if they can't do anything for you


Embedded below is the video of Cooperman's hour-long presentation:



For more on this manager, be sure to check out Cooperman's 14 attributes that make a good portfolio manager.

Jeff Saut, Scott Brown & Art Huprich on Current Economic and Technical Takeaways

Market Strategist Jeff Saut, along with technician Art Huprich and economist Scott Brown have put out an interesting compilation of data/charts entitled 'Gleanings.'  In it, they incorporate economics, fundamentals, technical analysis, and quantitative analysis. 

Overall, they see equity optimism due to the "open-ended central bank's 'put option,' QE3."  Here are some of the macro and technical highlights from what they're seeing:


Key Economic Takeaways

- Fed is targeting mortgage rates and 30-year rates recently hit a generational low (3.38%)

- "Good time to buy a house" helps housing as prices are improving

- Financials have traded higher & they think that continues due to low valuation, balance sheet clean-up, and housing's stabilization

- Inflation-adjusted consumer spending continues to trend at moderate pace

- Aging fleet of autos have supported improving trend in auto sales

- Home sales & construction activity are up double digit percentages since last year

- PCE Price Index is trending below Fed's 2% target (other core inflation measures have been drifting lower as well)

- Economic wildcards: gasoline and the election

- Economic risks: Europe, fiscal cliff, and debt ceiling.  (We recently highlighted Kyle Bass' thoughts on Europe and also presented Ray Dalio's interview on macro topics).


What The Technicals Say

- "Bernanke put" backed by Quantitative Easing

- Favorable 'seasonal' market & election cycle historical trends should backstop any declines into year-end

- Charts suggest having exposure to financials via selective exposure.  (We've noted how many hedge funds have bet on AIG this year).

- Charts are bullish for Homebuilders ETF (XHB) and Home Construction ETF (ITB) over the long-term, though a mid-term pullback would be healthy

- Bullishly configured price trend in S&P Consumer Discretionary sector


Embedded below is their presentation 'Gleanings' full of charts:




For more from Jeff Saut,this week we posted up his commentary examining how many investors are underperforming this year.

What We're Reading ~ 10/10/12

Barry Ritholtz's rules of investing [Washington Post]

Investor trauma and the recency effect [Abnormal Returns]

The five best financial bloggers [Reformed Broker]

On how experience improves individual investing performance [CXO Advisory]

World's most oblivious hedge fund [NYMag]

What affluent investors fear [WSJ]

Winning by losing: power of expectations [Aswath Damodaran]

Impact of size and age on hedge fund performance [PerTrac]

Foreign short sellers telling China it has a credibility problem [HedgeWorld]

On gaming the system [Portfolioist]

Profile of Robert Rubin [BusinessWeek]

How to get a hedge fund job [Business Insider]

How much will lower mortgage rates help the US economy? [SoberLook]

4 keys to successful long term investing [Street Talk Live]

50 best websites of 2012 [Time]

The future of television [Time]

Joel Greenblatt Interview in Latest Graham & Doddsville Newsletter

The latest Graham & Doddsville investment newsletter is out from Columbia Business School.  It features interviews with Gotham Capital's Joel Greenblatt, Loews Corporation, and Royce & Associates.

Greenblatt gave an insightful interview regarding his investment process and below are some of the key takeaways.


Highlights From Joel Greenblatt's Interview


On what kind of stocks he buys nowadays:

"Part of the future is unknowable but there are some instances where you can take a calculated risk/reward bet. One thing I would say is that a common characteristic of many of the stocks that we buy is that everyone hates them.  We do that a lot."


On going long/short:

"When we buy things, we like companies that invest their capital well; they generate large amounts of cash flow relative to the price we're paying.  On the short side, we would like to be short, in general, high-priced, cash-eating companies.  So it is essentially the opposite of our long approach.  You do have to balance your risk, though."


On emphasizing downside risk:

"One of the things I said in You Can Be a Stock Market Genius is if you don't lose money, most of the alternatives are good.  Even if you don't know what the upside is - if you just know there's upside - you can create scenarios where you have an excellent risk/reward.  Positions with limited downside are the types of positions that I have loaded up on in the past.  Not the positions with the biggest payoff.  I could buy a lot knowing that I wouldn't lose much and that there were good possibilities that it was worth a lot more over time.  At the very least, I knew that my downside was well protected and so I could create an asymmetric risk/reward by saying if I don't lose much, there are not many alternatives other than to make money."

This is an important facet of investing and we've previously highlighted previous thoughts from Greenblatt on risk and investment timeframe that are worthwhile.


On how to become a better investor:

"If you want to get good at investing, read a lot and practice a lot."  


For the rest of the interview with Greenblatt, as well as Q&A with Loews and Royce, please see the latest issue of Columbia Business School's Graham & Doddsville embedded below:





If you haven't already, be sure to read Greenblatt's book, You Can Be a Stock Market Genius.  While the title may be a bit cheesy, the book is recommended by most top hedge fund managers.

Hennessee Group on How Hedge Funds Are Handling This Market

Hennessee Group LLC has released September performance data for its Hedge Fund Index as it was up 1.26% in September (up 5.03% year to date).  Below is some select commentary of what they're seeing from various hedge funds:

Charles Gradante, Managing Principal of Hennessee notes that,

"Despite generally disappointing economic data in the US, the Fed's announcement of additional monetary stimulus encouraged investors to increase risk tolerance and led to a market rally.  Over the long term, managers are concerned that the global economy seems incapable of growing without constant liquidity from central banks.  Current monetary policy is extreme and untested, and it is likely to have negative long-term ramifications.  However, until then, 'don't fight the Fed' is still the rule."

Other Hedge Fund Index Performance Numbers

Global/Macro Index up 1.10% in September (up 3.32% year to date)

Arbitrage/Event Drive Index up 0.80% in September (up 6.06% year to date)

Long/Short Equity Index up 1.51% in September (up 5.13% year to date)


L/S Managers Pressured on Short Side of Portfolio

And given the focus on L/S managers on this site, we found this excerpt from Hennessee's release intriguing:

"While managers have generated significant gains on the long side of the portfolio, they continue to have difficulty shorting.  Managers report that 'the tide has been raising all ships in this low volume, climb-the-wall-of-worry rally, despite the deepening uncertainty of the global economy and the slowing pace of earnings growth.'  Managers report that many companies with deteriorating fundamentals have rallied more than the market over the past several quarters, resulting in short squeezes.  Most managers feel that the markets will continue to rally due to stimulus, but are concerned that fundamentals are not improving."

Jonathan Ruffer: Seeking Refuge in Inflation-Linked Bonds, Gold & Japanese Equities (Q3 Commentary)

It's been a while since we checked in on what Jonathan Ruffer is up to, so today we present the latest Q3 market commentary from his Ruffer Investment Company.  The UK-based fund provides perspective on the other side of the world and outlines what's worrying them currently.

On Dangers They See

"We therefore hold investments on the basis of how they will perform in an environment quite different from today, and we have identified two dangers which need to be guarded against.  The first and, arguably the most worrisome, is that the price of cash (no income on bank deposits) is distorted: you are robbed if you hold cash.  That drives savers into investments which have cash-like qualities.  The result is that the safer and surer an investment is, the more it will reflect (by overvaluation) the distortion of cash on deposit.  When that distortion reverses, the capital value of these safe investments will decline as they re-price for the new normal."

Ruffer goes on to lay out the second great risk that investors face at the moment:

"... to assess what will happen when the stimulus of monetary liquidity grinds to a halt."


Ruffer Sees Future Inflation

Of all the printing of money worldwide by central banks, Ruffer notes that:

"The markets, the inflation rate, the experts and the populace remain quiescent - but sooner or later that will change - and suddenly.  High inflation will follow - but not the hyper-inflation that the doomsters (who, as a group, are the guys who are looking in the right direction) hope for."

It's worth noting that Ruffer has been concerned about inflation for some time now. 


How They Are Playing It

"It is not  enough to see it coming: we need also to have the wisdom to know what is likely to represent a safe haven – bearing in  mind that safe havens are all entering this new and frightening overvalued phase, because the attack on savers has already started. That is probably the right way to look at the lack of yield on deposit. We are taking refuge in inflation-linked bonds and gold, of course: but we remain attracted by Japanese equities, which have, up until now, stood out like a bad deed on  Armistice Day. Japan is one of the few countries which will be the outright beneficiary of inflation, since the perils of  deflation have been an intermittent reality in that country. Although heavily indebted, the owners of the debt are exclusively  Japanese, and the government bonds they own are conventional, and not inflation-linked. Remember the argument above:  the way to clear the debt is to transfer the asset wealth from the saver to the borrower."


Embedded below is the latest market commentary from Jonathan Ruffer:





For additional recent investment manager commentary, head to: Dan Loeb's Q3 letter

The Pros and Cons of Tracking Hedge Funds Via 13F Filings

In Jim Chanos' recent interview with CNBC, he made comments about the 13F filings that hedge funds are required to file with the SEC each quarter and said investors should be wary of using them.  This post will present his comments and then present a counter-argument in a post we're calling: The Pros and Cons of Tracking Hedge Funds Via 13F Filings.


The Pitfalls of 13F Filings 

13F filings disclose hedge fund long positions in US equity markets, American Depositary Receipts (ADRs), both put and call options, as well as convertible notes.  They do not disclose short sales, cash positions, or any other asset class.  Of these quarterly filings, Chanos said:

"If you don't know the other side of the book, it can be very misleading."

This is obviously true and is why 13F's have to be taken with a grain of salt.  Shorting is an essential part of a hedge fund.  After all, that's what puts the 'hedge' in hedge fund.

His statement is even more pertinent to funds that put on pairs trades or are trying to hedge out certain exposures.

Chanos gave a perfect example where he is short Hewlett Packard (HPQ) as his core position.  But he has hedged out enterprise exposure to the name by being long Microsoft (MSFT) and Oracle (ORCL).  By hedging as such, Chanos is effectively shorting a segment of HPQ's business: laptops, printers, and anything "ink" related.

And that's the problem: the SEC filings will only disclose his longs in MSFT and ORCL.  Without him revealing that he is short HPQ, you would assume he is simply long those two stocks, which couldn't be further from the truth.  It's an incomplete picture.

Chanos' rationale could also apply to risk arbitrage focused funds.  One might look at the 13F's of these managers merely to see which merger deals they are playing.  That said, you have no clue how they've hedged out the position (unless they disclosed puts).


Why 13F's Are Worth Looking At

In his interview, Chanos went on to say:

"And I caution anyone looking at our 13F's, or any hedge fund's 13F's by the way... you don't see the other side of the book, and it's very scary to invest, just saying."

He's 100% right on one point:  They aren't required to publicly disclose their short positions so half of the portfolio equation is indeed missing.

HOWEVER, you also have to keep in mind that Chanos' hedge fund Kynikos Associates is a short-biased fund and they're net short.  Therefore, Chanos' 13F is different from that of other hedge funds because Kynikos' core positions (shorts) are hidden from disclosure, while their hedges (longs) are publicly disclosed.

Typical long/short equity funds are often the exact opposite, i.e. they are net long, so they reveal their core positions (longs) while their hedges (shorts) are hidden from public view.

So in Kynikos' case, it absolutely makes sense to disregard their 13F filing.  But for other hedge funds, it's worthwhile to look at 13F filings and here's why:

While some managers are more skilled on the short side and see solid performance attribution from that portion of their book, a big chunk of a fund's performance can often be attributed to their long positions.

In 2010, Alphaclone posted an article that compared actual hedge fund performance numbers to those of a portfolio cloning only the publicly disclosed long holdings via 13F filings.  The results were very interesting in that the 13F clone portfolio performance numbers were largely in line with those of the actual hedge fund performance numbers.  Their article comparing 2012 performance thus far shows the same results.

This is because net long funds have most of their capital invested in their long ideas and for the bulk of these managers, this is where their performance comes from.  This is why looking at 13F's for their longs makes sense.  That said, you can't just track any manager's 13F.  Tracking 13F's is only useful if you know which funds to track.

And even though Jim Chanos told viewers to be cautious when viewing 13F's, he admitted that his firm looks at them too: "If (a 13F) overlaps with one of our longs or shorts, sure my trade desk will flag it to me or head of research."


Keys To Tracking Hedge Funds Via 13F's

After tracking SEC filings for almost a decade, here are 7 keys we've learned to safely tracking hedge funds via 13F filings:

1.  Only track long-only or long/short equity fund managers: And add an asterisk to this point as well: only track managers that normally run net long.

Tracking global macro funds (Bridgewater, Tudor) or credit funds (Fortress, Cerberus) is misguided because the vast majority of their positions are in asset classes that they don't have to disclose (futures, commodities, bonds, currencies, etc).  And while quant funds (RenTec, AQR) often disclose stocks, following them is a folly because you have absolutely no idea why their algorithms bought in the first place. 


2.  Track funds that primarily invest in domestic markets:  13F's only disclose activity on domestic stock exchanges and do not reveal international holdings (except for ADR's).  Therefore, you want to keep an eye on funds that will have the vast majority of their equity exposure in the US.

If you follow international managers, just know that only a small slice of their portfolio would be disclosed (if they hold any US longs at all).  You'll have to track international managers via foreign regulatory disclosures as well (something Market Folly strives to do via this link for UK activity and this link for Hong Kong activity).

A manager that invests primarily abroad could disclose a position in a US-traded stock and if you're only looking at their 13F you'd think they've made a big wager when in reality that holding could be one of their smallest because you can't see their international plays.  You have to place domestic positions within the context of their entire (global) portfolio.


3. Focus on long-term investors with lower turnover: 13F's are filed on a delayed basis and it is basically a snapshot of a fund's portfolio from 45 days ago.  A manager can easily sell out of a position by the time a filing becomes public.

This is exactly why following long-term oriented funds is key: to reduce the effect of the delayed disclosures.  Long-term investors are more likely to hold on to positions for an extended period of time.

Many long/short equity hedge funds actively trade around positions and so manager selection for 13F tracking is crucial.

Readers constantly ask us to cover activity from well known funds Steve Cohen's SAC Capital due to popularity, so we oblige.  But in reality, SAC is a horrible fund to track via SEC filings due to the fact that they actively trade in and out of stocks (not to mention there's a ton of portfolio managers each doing their own thing).

This is why value investors are often good bets to track: they buy and hold (or at least typically hold longer than one quarter!)  Even so, through backtesting 13F's, Alphaclone found that for most L/S funds, the "average holding periods are much longer than most people perceive them to be."  So the effect of the delay in disclosures is smaller than you think.  They've found the average holding period to be around 1 year.

Managers that run concentrated portfolios are also usually good bets because they have lower turnover and every position adjustment they make is that much more important to their portfolio.  The same can be said for activist investors (for example ValueAct Capital) that take a stake in a company and try to help implement positive change over longer periods of time.


4. Look at a fund's larger positions (top 30 holdings or so):  The rationale here is to focus on their core positions that represent a larger percentage of their portfolio because most money managers allocate the most capital to their best ideas.  It's also worthwhile to place an emphasis on stocks that show up as 'new positions' in their disclosures as these are their most recent ideas.

Some investment managers hold hundreds of positions (Soros Fund) and as you go down the list of their holdings, each stake becomes a much smaller percentage of their portfolio.  It's much easier for funds to exit small positions and more often than not, these are lower conviction bets. 

Additionally, sometimes these smaller positions aren't what they seem.  In the past, we posted up a quote from T2 Partners' Whitney Tilson on why he had a small long position disclosed in his 13F in a stock he'd said publicly he was actually short:

"A lot of people make this mistake when reading 13-Fs: managers often own puts (which are also disclosed in the 13-F) or are short a stock (which isn’t disclosed) and then own a small offsetting long position to make it easy to trade around it."

Sometimes on 13F's, very small stock holdings are actually trading positions that hedge funds use to manage net exposure to a name they're actually net short.  So, focus on the upper echelon of their long portfolio. 


5. Take it with a grain of salt: The delayed nature of SEC filings means that you're looking at hedge fund activity in the rear view mirror, or in a tracking sense: following their footsteps.  While the effect of this delay isn't as bad as you think as illustrated earlier, there are many variables at play here.  Managers can move in and out of positions for any number of reasons.  So when viewing 13F's, remember that a) it's not their whole portfolio and b) it's a past snapshot.


6. Use it as a starting point to do more research:  Do your own due diligence.  It's one thing to know that ABC manager bought XYZ stock.  It's quite another to know the investment thesis behind *why* they bought the stock.

At the Value Investing Congress recently, Greenlight Capital's David Einhorn mocked investors that don't do the work and just try to blindly follow him.

However, 13F's are a great place to find ideas.  Fairholme Capital's Bruce Berkowitz has said in the past, "We use a lot of grapevine ideas... Why not look at what other great investors have found?"  The key here is to use it as a starting place and then to do your due diligence.  

This is exactly what MarketFolly does with our premium newsletter: Hedge Fund Wisdom. 


7. Monitor all SEC filings, not just 13F's:  MarketFolly keeps you afloat of the latest hedge fund portfolio activity via 13G filings, 13D filings, as well as various Form 3 and Form 4's filed with the SEC.  These disclosures are filed on a more timely basis and provide a more current look at what managers are buying or selling.  They help bridge the time gap between quarterly 13F filings and hedge funds are required to disclose when they've purchased 5% or more of a company. 

Additionally, if you can track managers via their quarterly letters, annual meetings, and investment conference appearances, this gives you the most up-to-date information regarding their portfolio (at least what they choose to reveal).  MarketFolly tracks all of these via the links above.


Conclusion

Jim Chanos is 100% correct that you have to use caution when examining 13F's because they do not show the short side of a hedge fund's portfolio.  However, tracking the 13F's of equity focused hedge funds that run net long can be beneficial for idea generation provided you know which funds to track and that you take everything with a grain of salt.

Check out how we analyze hedge fund 13F filings in our premium newsletter: click here for a free past issue.

Excellence in Investing San Francisco Conference: John Burbank, Jeff Ubben & More

Today we wanted to let readers know about the 3rd annual Excellence in Investing: San Francisco conference taking place October 24th.  In partnership with The Sohn Conference Foundation, the event benefits local and national children's causes.  You can sign up for the event here

Speakers List

Great collection of speakers, many of whom have been featured on this site numerous times:

John Burbank (Passport Capital)
Jeff Ubben (ValueAct Capital)
William Duhamel (Route One Investment Company)
David Batchelder (Relational Investors)
Mackenzie Davis (RS Investments)
Steve Romick (FPA Funds)
Keith Meister (Corvex Management)
Mick McGuire (Marcato Capital Management)
Christopher Lord (Criterion Capital Management)
Mary Meeker (Kleiner Perkins Caufield & Byers)
Mike Wilkins (Kingsford Capital Management)
Brian Zied (Charter Bridge Capital Management)

Event Info

Date: Wednesday, October 24, 2012
Time: 2:00-6:00 pm (with reception to follow)
Location: San Francisco, CA in the Julia Morgan Ballroom at the Merchants Exchange

Website: www.excellencesf.org
Phone: 646-336-6800 ext.105

Embedded below is the event flyer:



It should be a great event so if you're on the west coast or decide to travel, definitely check it out.  You can register by clicking here.

Jeff Saut: Many Investors Underperforming This Year

It's been a while since we've checked in on market strategist Jeff Saut so we wanted to highlight his commentary this week.  Entitled "A Kid's Market," Saut's latest piece examines how many investors are underperforming the S&P 500 this year.

Saut has noticed that many market observers have pointed to market leaders such as Apple (AAPL) selling off.  He does not believe that this is the predecessor of a major stock market decline.

He goes on to make the observation that, "trading volume is abysmal, suggesting portfolio managers are still too defensively positioned.  That gleaning is reinforced by an insufficient net-long position in the hedge fund community of only 46.5%, as well as a five-year high 'short sale' position."

Most hedge fund exposure reports we've seen have L/S funds ranging from 20-45% net long.  While this is only a small sampling, many we've seen are actually below the number Saut reports (around 20-30% net long).  One that's in line with Saut's findings is Dan Loeb's Third Point, whose exposure report we recently posted.

Saut believes the upcoming earnings season will not disappoint and thinks any pullbacks will be contained.  We've highlighted his previous thoughts on performance anxiety where maybe the most painful move in the markets is heading even higher.

Embedded below is Jeff Saut's market commentary for this week:




You can download a .pdf copy here.

If you disagree and think the market is headed lower, check out Saut on the philosophy of market tops.

Kyle Bass on Europe & How He's Investing Now: Interview

Continuing coverage of hedge fund appearances from the Barefoot Economic Summit, we also wanted to highlight Kyle Bass' interview on CNBC.  The Hayman Capital founder touched on Europe and how he's positioning his portfolio.

Bass noted that global money printing has made it a difficult investing environment.And regarding Europe, he says that:  "You will still see the European dominoes fall, I don't think there's any way around it."

Bass then elaborated that:

"The world sits in a place where it hasn't ever been before.  It's the largest peace-time accumulation of debt in world history ... The reason it's so difficult for us to understand what the playbook looks like going forward: we've never been here before."


Bass Long RMBS

As to how you invest given this worldwide mess, Bass says: "in our portfolio we have more than half our portfolio invested in subprime and Alt-A bonds." 

He thinks housing is going to flatten out (not going up anytime in the near future, but not going down either).  He feels you still have to flush out the shadow inventory (which he argues is still high).

As to how else he's positioned his portfolio:

"In our portfolio, we actually own what we call event-driven situations in either credit or equity and the way that we hedge our kind of the corpus of our portfolio is - the Black Scholes model of options pricing dramatically misprices optionality at secular turning points.  So there is enormous convexity in various areas of the world and we can spend just a small amount of capital and have enormous convex positions.  And I believe all the convexity in the world is in Japan."


On Investing "Not To Lose Money"

If you're approaching investing with the mentality of simply not losing money, Bass argues you need to own producing assets, something that's "nailed down."  He cited apartments, oil wells, and gas wells as examples.

When prodded about gold, Bass said he simply views it as a surrogate currency and doesn't think the gold standard will return anytime soon.  He still thinks you should own it among all the other currencies, but he doesn't know what percentage allocation is appropriate.



Embedded below is the video of Bass' interview:



Earlier today we posted John Burbank's interview from the same summit where the Passport Capital founder said he was negative on the US economy.

John Burbank Says Go Long High Quality Stocks, Short Speculative Ones: Interview

Passport Capital founder John Burbank appeared on CNBC and gave his thoughts in an interview with David Faber from the Barefoot Economic Summit.  Burbank basically said that while he has a negative view on the economy, his trade is essentially to go long high quality stocks and short speculative companies.

Burbank believes there's essentially a 'lack of growth' not yet reflected in equity prices.  He doesn't think all parts of the US are in a recession yet, but we're "very close."  We've covered how Passport had been net short with their negative viewpoint.

He thinks that everyone buying dividend stocks and yield chasing has created a new dynamic.  Burbank said:

"My view is that after '08, all that government spending and central bank liquidity tried to push things back together and push everything up higher and for '09, 2010, and 2011, everything traded together.  Last year things started separating. 

You see the separation now and a recognition that we're not going to have the growth that we thought.  I call it the 'great separation.'  I think what's happening is that the really high quality, well managed, well governed dividend paying companies are going to be treated as an asset class that's priced off of these other available yield instruments.  While speculative companies, things that really need the economy to do well, things that aren't that well managed, that don't pay dividends etc, are going to stay poor.

I basically would be long high quality, leading companies which generally in the United States and then short speculative companies that rise into Fed announcements but then fall away."


Embedded below is the video from John Burbank's interview:



For more on this investor, we've also highlighted Passport's thesis on Saudi equities.

Bill Ackman on GGP, Procter & Gamble, and His Mystery Short: Interview

Pershing Square Capital Management founder Bill Ackman recently appeared on CNBC Squawk Box to talk about his positions in General Growth Properties (GGP), Procter & Gamble (PG) and dropped a hint about his newest short position.

General Growth Properties (GGP)

Ackman again talked about how Brookfield Asset Management (BAM) is trying to slowly takeover GGP without paying a premium.  Ackman is pushing for Simon Property Group (SPG) to buy GGP.  A background on the situation is provided in Ackman's letter to GGP.  And then an in-depth look at his proposal was posted in Bill Ackman's presentation from the Value Investing Congress if you missed it.

Procter & Gamble (PG)

Of his newest investment, Ackman says there's not a culture of efficiency.  He argues the company's fat and bloated.  The company has a solid board of directors and he's already met with them and will look to see what they can do about helping improve things.

Ackman's Newest Short

We highlighted at the Value Investing Congress how Ackman teased the crowd that he had a new short position but did not reveal it.  He gave a hint in this interview, saying: "it's a good for America short ... as soon as the company goes out of business, the country will be better off."


Embedded below is Bill Ackman's interview video:



For more from this investor, check out Bill Ackman's recommended reading list.

What We're Reading ~ 10/4/12

The Value Investors: Lessons from the World's Top Fund Managers [Ronald Chan]

The world's biggest hedge fund you have never heard of [Zero Hedge]

Investors are safer when they think for themselves [Value Perspective]

Ex-Maverick Cap partner Steve Galbraith preps major launch [AR+Alpha]

Wanting to hedge and wondering how [All About Alpha]

The coming dividend tax hike [World Beta]

Why John Paulson's hedge fund is still in business [ValueWalk]

Contango Oil & Gas: opportunity for natural gas bulls [RationalWalk]

Activist investors: do they really help? [InvestorPlace]

What if Google had a hedge fund? [Harvard Business Review]

What QE3 means for your portfolio [MicroFundy]

An inside look at JCP's new retail strategy part 1 & part 2 [Peridot Capitalist]

Amid soft returns, hedge funds return to roots [WSJ]

Chase Coleman's Tiger Global up 22% this year [Reuters]

Insurers and the interest rate challenge [SwissRe]

Investors are still yield hunting [Reuters]

Walter Schloss' 16 Factors Needed to Make Money in the Stock Market

Today we present rules of investing from Walter Schloss, founder of Walter & Edwin Schloss Associates LP.  He was one of the best investors of our time with over 15% CAGR between 1956 and 2000 and unfortunately passed away early this year.

In an old document dated March 10, 1994, Schloss outlined the following principles for becoming better investors


16 Factors Needed to Make Money in the Stock Market


1.  "Price is the most important factor to use in relation to value."  

Warren Buffett's famous quote is the perfect complement: "price is what you pay, value is what you get."


2. "Try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper." 

Indeed, Warren Buffett has long preached this principle as it's important to set your frame of mind and how you look at things.


3. "Use book value as a starting point to try and establish the value of the enterprise.  Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock)."


4. "Have patience.  Stocks don't go up immediately." 

Value investors everywhere live by this adage but many prominent long/short hedge funds also focus on the concept of 'time arbitrage': waiting for the market to come to the same realization you have regarding the valuation/opportunity of a specific security.


5. "Don't buy on tips or for a quick move.  Let the professionals do that, if they can.  Don't sell on bad news."

Modern hedgies might argue against that last sentence because sometimes bad news is a warning sign of more impending problems at a company.  At the very least, bad news usually merits further due diligence. 

Leon Cooperman of Omega Advisors takes this concept one step further by outlining his rules for portfolio managers: if you have conviction in a name and it's down, buy more.


6.  "Don't be afraid to be a loner but be sure that you are correct in your judgment.  You can't be 100% certain but try to look for weaknesses in your thinking.  Buy on a scale and sell on a scale up."

The key in this rule is to look for weaknesses in your thinking.  As Warren Buffett's partner Charlie Munger says, "invert, always invert."  Examine the variant perception and the bear case if you're long a company.  The best investors focus on the downside even more-so than the upside.


7. "Have the courage of your convictions once you have made a decision."

A very important and often under-mentioned aspect of investing.


8. "Have a philosophy of investment and try to follow it.  The above is a way that I've found successful."

Warren Buffett obviously says to "stick to your circle of competence" and Peter Lynch says to "invest in what you know" in his golden rules of investing.


9. "Don't be in too much of a hurry to sell.  If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit.  Before selling try to reevaluate the company again and see where the stock sells in relation to its book value.  Be aware of the level of the stock market.  Are yields low and P-E ratios high.  If the stock market historically high.  Are people very optimistic etc?"


10. "When buying a stock, I find it helpful to buy near the low of the past few years.  A stock may go as high as 125 and then decline to 60 and you think it attractive.  3 years before the stock sold at 20 which shows that there is some vulnerability in it."


11.  "Try to buy assets at a discount than to buy earnings.  Earnings can change dramatically in a short time.  Usually assets change slowly.  One has to know how much more about a company if one buys earnings."


12.  "Listens to suggestions from people you respect.  This doesn't mean you have to accept them.  Remember it's your money and generally it is harder to keep money than to make it.  Once you lose a lot of money it is hard to make it back."

This is what MarketFolly.com strives to provide on a daily basis.  There are many great investors out there, so why not at least see what they're up to and use it as a starting point to do further research?
 

13. "Try not to let your emotions affect your judgment.  Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks."

Surprised this rule isn't higher up on his list, but then again he was a patient value investor so this probably wasn't a problem for him.  This was our top answer for advice for new investors.


14.  "Remember the word compounding.  For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded.  Remember the rule of 72.  Your rate of return into 72 will tell you the number of years to double your money."


15. "Prefer stocks over bonds.  Bonds will limit your gains and inflation will reduce your purchasing power."


16.  Be careful of leverage.  It can go against you."

Example: see the financial crisis of 2008 as the perfect example: Look at where Lehman Brothers' 31:1 leverage landed them.


For those of you who want a copy of Schloss' original document from 1994, it's embedded below:




For more wisdom on becoming a better investor, see these great resources we've compiled:

- Top 25 Warren Buffett quotes

- Peter Lynch's golden rules of investing

- Leon Cooperman's 14 attributes that make a good portfolio manager

- George Soros' best investment advice

- Lessons Dan Loeb learned as an investor

- Bruce Berkowitz's checklist for investing

- Peter Lynch on using your edge

Dan Loeb's Third Point Q3 Letter on AIG, Greek Government Bonds, Murphy Oil

Dan Loeb's hedge fund firm Third Point released its Q3 letter to investors today and in it they talk about how they've increased positions in high conviction ideas.

Third Point writes,

"Following an analysis of our performance for the past several years, we have both reduced our overall number of positions and increased the concentration of capital invested in our 'best ideas.'"

Long Greek Government Bonds

Loeb's firm, showing its street cred, quotes rapper Tupac Shakur in regards to their new position in Greek Government bonds which we posted about earlier today: "I'm tryin' to make a dolla outta fifteen cents."

Long Murphy Oil

Third Point originally bought in the second quarter and recently filed for approval to increase their position ("should we so desire").  The hedge fund looks for Murphy to take four steps to improve things:

1. Spin-off its retail business
2. Sell its Canadian Natural Gas assets
3. Sell its 5% stake in the Syncrude Oil Sands project
4. Complete UK refining business exit

Long AIG

Loeb originally purchased shares in March of this year as the government sold down its stake in the company.  As detailed in Third Point's most recent exposure report, AIG is their 2nd largest holding.

While they originally bought it under a 'forced selling' thesis, they quickly realized that the investment was actually a post-reorg equity with upside.  Third Point continued to buy AIG in the Treasury's offerings as well as in the open market.


Embedded below is Third Point's Q3 letter detailing their investment thesis on the above positions:



To learn more about this investor, Dan Loeb is profiled in the book: The Alpha Masters.