The idea of stealing ideas from the best money managers is not a new one.
I first learned the practice back in the 1980s when I would check dozens of fund filings by hand every quarter.
On the face of it, it sounds easy. Read the filing, note the new buys or increased positions, and buy those stocks.
Today, software has replaced the need to spend hundreds of hours reading those same filings. Now I can pull up a website and see exactly who is buying and selling stock and how much they are.
This has ultimately led to the proliferation of headlines you see every day of “X Investor Buys Y stock.”
Main Street eats these kinds of headlines up…
And I get it. Everyone wants to know what Warren Buffett or Carl Icahn is buying or selling.
But just following the headlines will lead to mediocre or even worse, negative, returns.
That’s because most of the people I talk to that claim to engage in some idea pirating are not doing anywhere near the level of research that’s needed to be successful.
If they were real pirates, they would have quickly ended up on Execution Dock along the River Thames dangling from a rope.
Idea Pirate Mistake #1: Following the Wrong Investors
One of the major mistakes I see investors making is following the wrong people.
You see, following the celebrity investors does not work as well as you might think it would.
For example, Carl Icahn is one of the best investors that ever walked the planet. He has returned an average of more than 30% annually since he started back in 1968.
If you had bought the top ten holdings of his portfolio since 2001, you would have outperformed the market by 60% annually on average.
However, if you bought his top ten holdings starting only ten years ago, you have lagged the market by about 30% annually.
Five years ago and the Bogleheads with their index funds would have doubled your rate of return.
Did Carl Lose his touch?
Not at all. He just got older and his goals changed.
His fund also got bigger so he could no longer target the smaller companies that led to his outsized returns.
How about Warren Buffett? He is obviously one of the greatest investors of all time. However, if you cloned his top ten holdings for the last decade you would have barely beaten an index fund.
Over the last five years you would have earned only half of what the index has returned.
Has Warren lost his touch?
Of course not. He has the same size issue as Carl Icahn. They simply cannot target smaller companies.
On the other hand, there is a small investment manager out of New York whose portfolio has beaten the market by 5x over the past five years. There is also a Boston based growth stock investor that has been beating the pants of the market since 2007 and was up more than 35% annually over the past three years.
I want to know what these folks are doing and so do you.
Idea Pirate Mistake #2: Buying When Insiders Are Selling
Another mistake I constantly see investors make is buying when a top performer is reducing their position.
Trust me, the fund is not selling their position because they think the stock is a bargain. The stock has probably greatly appreciated since they bought it and they are reducing their position.
The fund may still own shares, but the fact they are selling tells you that they think the stock may go down soon.
Idea Pirate Mistake #3: Not Doing Research
Ok, now let’s say you have found the right investors to follow and you aren’t buying when they are selling. Now it’s time to do the real research.
One of the biggest mistakes I see investors make when trying to pirate ideas is blindly following headlines.
This is your hard earned money. You either need to do the research yourself or find someone you really trust to inform you.
Let me give you a recent example of where following the headlines would have been a terrible idea…
Horizon Kinetics is an investment firm run by the New York based investor Murray Stahl.
Stahl lives by the idea that the best investments are the ones that everybody hates.
He has proven this continuously since 1979 when he bought General Public utilities right after their Three Mile Island nuclear plant had a meltdown. After the initial sell off, the stock recovered and delivered huge profits to Mr. Stahl.
In 2018 he bought into Bitcoin as prices collapsed and still holds it today. His firm even owns a business that repairs cryptocurrency servers.
Since 2002, Horizon Kinetics has been buying shares of Texas Pacific Land Trust (TPL) to the point that the fund now owns a little over 20% of the company. As their largest shareholder, Mr. Stahl also sits on the board. Since his first purchase, the stock has gone from about $7 to almost $900. You might say he’s a fan of the company.
That’s why recent headlines on some reputable news sources that Horizon was selling Texas Pacific Land Trust were baffling investors.
You see, on January 11th, Texas Pacific Land Trust converted from a trust to a C-Corporation. With the transition, all of the shares of the Trust were turned in and exchanged for Texas Pacific Land Corporation certificates.
This change required Horizon Kinetics to file SEC documents showing the disposition of Texas Pacific Land Trust and the acquisition of Texas Pacific Land Corporation.
This was a fairly mundane situation. But that didn’t stop a birth eyed market observer who noted the 13D showing the disposition of Texas Pacific Land Trust and immediately wrote an article stating that long time shareholder Murray Stahl had sold his entire position in the company.
Of course, he had not. He had merely exchanged his trust shares for the corporation’s shares.
But if you had reacted to the headline and sold your shares, you would have been making a mistake and potentially triggered a massive capital gains tax based on their error.
Not only did Horizon not sell their shares, they were a buyer of Texas Pacific stock almost every day in December.
Not too long-ago Mr. Stahl wrote about Texas Pacific Land in his shareholder letter saying:
“TPL’s free cash flow margins exceed those of the most profitable S&P 500 company. It is the single highest quality, highest profitability asset that it is possible to identify in energy –we, at least, have located no other –and therefore a singularly important inflation hedge that can pay off mightily at a contingent moment that might be greatly damaging to most other equity valuations.”
It took me less than ten minutes to uncover all of this information…
That’s because I knew where to look.
You can make a lot of money as an Idea Pirate. However, just like the original pirates, there are things you need to know in order to succeed.
Blackbeard and his friend had to know how to identify a fat merchant target. They had to know how to sail, shoot a cannon and wield a sword better than their opponents to be successful. Those that couldn’t, ended up on a gibbet.
Idea Pirates of today need to know who to steal ideas from. You also need to understand things like arbitrage, hedging, and reorganization. You have to be familiar with SEC regulations regarding filings and timing. You need to know the manager’s style of investing and what they were recently doing with the shares of their portfolio.
You have to read through filings every day.
Every day.