{"id":25543,"date":"2011-11-24T07:43:05","date_gmt":"2011-11-24T12:43:05","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/11\/24\/when-in-doubt-follow-the-greats\/"},"modified":"2011-11-24T07:43:05","modified_gmt":"2011-11-24T12:43:05","slug":"when-in-doubt-follow-the-greats","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/11\/24\/when-in-doubt-follow-the-greats\/","title":{"rendered":"When in Doubt, Follow the Greats"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

Stocks fell sharply as we started trading this week on fears that Europe\u2019s sovereign debt crisis was again spiraling out of control.\u00a0 Of course, I could have used that same opening sentence at almost any point in the last 10 months and it would have been equally true.\u00a0 The remarkable thing about 2011 is that it has been largely devoid of any real news.\u00a0 The macro concerns driving the market haven\u2019t changed much in two years\u2014and yet we continue to see some of the most volatile daily price swings since the Great Depression.<\/p>\n

The art of investing is an exercise in making decisions under conditions of uncertainty.\u00a0 But today, it seems that the cloud of uncertainty is a little thicker than usual.\u00a0 Despite having two years to discount the likelihood and consequences of default by one or multiple \u201cPIIGS,\u201d the market\u2019s persistent volatility shows that investors are as uncertain as ever.<\/p>\n

I\u2019ve been consistently bullish for most of the past year, arguing that the low prices on offer more than compensated investors for the risk of meltdown.\u00a0 But I\u2019m also the first to admit that the volatility of recent months has thoroughly frayed my nerves.<\/p>\n

During times like these, I like to do what your college professor might have called \u201ccheating.\u201d\u00a0 I like to look over the shoulders of other investors and see what they are doing.<\/strong><\/p>\n

As I wrote last week in an article on Warren Buffett\u2019s recent acquisitions<\/a>, you should never mindlessly ape the trading moves of another investor.\u00a0 But studying the moves of successful investors can be an effective way to step back and get a little perspective on your own trades.<\/p>\n

With all of this said, today I\u2019m going to take a look at the portfolios of three of my favorite institutional investors: Mohnish Pabrai, Joel Greenblatt, and Prem Watsa.<\/strong><\/p>\n

\"\"<\/a><\/p>\n

Mohnish Pabrai<\/p>\n<\/div>\n

We\u2019ll start with Pabrai, the author of the must-read The Dhandho Investor<\/em><\/a><\/strong> and a well-respected value investing guru.\u00a0 Based on his SEC filing for the 3rd<\/sup> quarter, Pabrai went on a buying spree in the financial sector.\u00a0 After initiating a massive position in Bank of America ($<\/span>BAC<\/a>)<\/strong> and adding to his already-large positions in Wells Fargo ($<\/span>WFC<\/a>)<\/strong> and Goldman Sachs ($<\/span>GS<\/a>),<\/strong> Pabrai\u2019s weighting to the financial sector jumped from 39 percent of his portfolio to a whopping 58 percent with a fair bit of the reduction coming from basic materials. Materials dropped from 46 percent to 33 percent of the portfolio (see Pabrai\u2019s portfolio here<\/a><\/strong>).<\/p>\n

Though his returns are not reported, we can assume that Pabrai\u2019s high allocation to financials has hurt his returns this year.\u00a0 He wouldn\u2019t be the first.\u00a0 John Paulson\u2019s flagship fund was at one point down by nearly half this year due to his high allocation to financials and his use of leverage (see \u201cDon\u2019t Mess Up Like Paulson<\/a>\u201d<\/strong>).\u00a0 Still, Pabrai has proven to have a sharp eye for value over the years, even if he\u2014like many other high-profile value investors\u2014tends to be a little early.<\/p>\n

\"\"<\/a><\/p>\n

Joel Greenblatt<\/p>\n<\/div>\n

Moving on, let\u2019s now take a look at what Joel Greenblatt is buying these days.\u00a0 Greenblatt runs Gotham Capital and is the author of the eminently readable The Little Book that Beats the Market<\/em>.<\/a><\/strong>\u00a0 Unlike Pabrai, Greenblatt tends to have a relatively high portfolio turnover.\u00a0 He made few major moves in the third quarter, though he was a net buyer and added to his already large holdings in technology and industrials (see Greenblatt\u2019s portfolio here<\/a><\/strong>).<\/p>\n

Greenblatt is conspicuously under-allocated to the financial sector because much of the money he runs today follows his \u201cmagic formula,\u201d which stresses high returns on capital.\u00a0 Suffice it to say, the big banks are a little light on profits these days, so financials are not showing up on Greenblatt\u2019s screen.\u00a0 But with more than 40 percent of his portfolio invested in the cyclical technology and industrials sectors, Greenblatt is every bit as aggressively invested as Pabrai.<\/p>\n

\"\"<\/a><\/p>\n

Prem Watsa<\/p>\n<\/div>\n

Finally, let\u2019s take a look at Prem Watsa.\u00a0 Watsa is the CEO of Fairfax Financial Holdings and is considered by many to be the \u201cWarren Buffett of Canada.\u201d\u00a0 He has certainly earned the nickname.\u00a0 He and his team have grown Fairfax\u2019s book value per share by 25 percent per year for the past 25 years.\u00a0 He was also one of the few managers that made money during the crisis year of 2008.\u00a0 Not a bad run indeed.<\/p>\n

Watsa\u2019s portfolio moves will certainly raise a few eyebrows. In the 3rd<\/sup> quarter his added to his already large position in battered BlackBerry maker Research in Motion ($<\/span>RIMM<\/a>).<\/strong> He also increased his position in Citigroup ($<\/span>C<\/a>)<\/strong> by 50 percent.\u00a0 Overall, his exposure to the financial sector rose from 9 percent to 24 percent in the third quarter (see Watsa\u2019s holdings here<\/a><\/strong>).<\/p>\n

Watsa was a slight net seller in the 3rd<\/sup> quarter, though the composition of his portfolio hardly suggests excessive bearishness at the moment.\u00a0 More than 80 percent of his equity holdings are in technology, financials, and telecom.<\/p>\n

As a caveat, there is a limit to what you can glean from reading SEC 13-F filings.\u00a0 For example, only long positions are reported; short position and derivatives hedges are not.\u00a0 And Prem Watsa, for example, does indeed hedge his equity positions.\u00a0 Still, his willingness to be so heavily invested in some of the most volatile sectors would imply that he\u2019s not quite as bearish as some of his public comments would suggest.<\/p>\n

So there you have it.\u00a0 Given the recent volatility, it\u2019s entirely possible that the Dow has moved 100 points in the time it has taken you to read this article.\u00a0 That\u2019s nerve-racking, of course, even for an experienced investor.\u00a0 Still, I see compelling bargains at current prices, and I consider the pervasive fear and bearishness among rank-and-file investors to be a contrarian bullish sign.\u00a0 And when I start to get that feeling in the pit of my stomach, I take comfort in knowing that I\u2019m on the same side of the trade as some of the brightest value investors in the business.<\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a><\/strong> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter Stocks fell sharply as we started trading this week on fears that Europe\u2019s sovereign debt crisis was again spiraling out of control.\u00a0 Of course, I could have used that same opening sentence at almost any point in the last 10 months and it would have been equally true.\u00a0 The remarkable thing … <\/p>\n

Continue reading “When in Doubt, Follow the Greats”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-25543","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25543","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=25543"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/25543\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=25543"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=25543"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=25543"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}