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Legendary Investors Are Betting on These Companies… Beware

Thanks to the nature of modern media… it’s nearly impossible to clone the trades of the old guard profitably.

In a world of instant reporting, as soon as someone — especially someone like Warren Buffett — makes a move in the markets, the world is made aware.

Investors flood a stock, and before we know it, it’s trading at unreasonable levels.

And this has never been more true than in the unpredictable market of 2020… 

Many of the stocks that these large-scale investors bought in Q2 have since made enormous runs up—to well above levels where it makes any sense to buy them. (To give you an idea, the S&P 500 is 40% higher today than it was at the start of Q2… and the Nasdaq is up over 50% since the quarter began.)

Take, for instance, David Tepper of Appaloosa, inarguably one of the best investors and traders of the last 20 years. 

In the last quarter, Tepper was a big buyer of PayPal (PYPL). I love this business… So should we jump on the bandwagon and follow Tepper into the stock?

Probably not: PayPal is almost 100% higher today than it was when Q2 started.

Plus, Tepper is pretty active — he has a 40% turnover rate in his holding — so the odds are pretty good he’s looking to sell some or all of his PYPL position already.

(That said, Tepper was also a massive buyer of AT&T (T) in the quarter, which is still trading near its April levels. So investors who like the idea of owning a 7%-yielding blue chip as much as Tepper does could follow his trade in this stock.)

Let’s take a look at another great investor for the last several decades: Stanley Druckenmiller. 

Druckenmiller got very aggressive in Q2 — buying 50 stocks, 41 of which were new positions. 

His biggest purchase was Freeport McMoRan (FCX), which has doubled since the first of April.

Is now the time to follow Druckenmiller into this trade? 

You get the point.

These stocks are moving so far, so fast, that a lot of these purchases have run too high to follow.

This year more than ever, blindly following 13F filings of even the very best investors and traders could become very dangerous, very quickly.

An Important Lesson…

When it comes to following the moves of big investors, sometimes, we can take a wait-and-see if there is a pullback approach. Or, we could try selling puts just below the level that “Big Money” bought. This might work if the market is in a generous mood…

Still, even if we can’t perfectly replicate the trades of these big-time investors… we can learn a lot by watching what they’re doing…

And in the case of Q2 2020, we can learn an important lesson about the new world we’re living in…

Based on the recent filings, it’s clear that some of the world’s smartest investors are concerned about the disconnect between the market recovery and the hurting economy.

Let’s take a closer look.

By now, we’ve probably all heard about Buffett — famous for (among other things) his longtime support of banks and criticism of gold — and why he recently sold out of his bank positions and moved money to the yellow metal.

Not only that… according to the second quarter (Q2) 13F filings, Buffet just increased his cash position to $147 billion in Q2.

As far as buying… his largest purchase was in buybacks of Berkshire Hathaway (BRK-A), with over $8 billion in repurchased shares over the last quarter.

While this isn’t exactly a bearish position… it does signal that the oft-dubbed “world’s greatest investor” is exercising extreme caution… 

In particular, Buffett’s move out of banks and into gold signals that he’s not confident in the U.S. economy, and is instead erring on the side of yellow metal — widely considered to be a safe haven asset against economic downturn.

Buffett isn’t the only old-school investor to make this type of move, either…

Seth Karman, of the hedge fund Baupost Group, sent a letter to his investors at the end of July, informing them that he had been a massive seller in the quarter as prices rose off the bottoms. 

In Q2, Klarman sold some or all of 17 holdings… while buying shares of just eight. The sales were much larger than the buys. In particular, he sold millions of shares of energy and technology companies as they rebounded, adding the cash to his stockpile.

Also like Buffett, Klarman is holding onto some cash—about 31% of his $30 billion fund, to be exact.

The fund’s most compelling buy of the quarter was a direct investment in Viasat (VSAT), adding about 2.5 million shares.

Klarman has owned shares of the satellite company since 2008, and saw reasonably large profits up until COVID-19 burst onto the scene — which, at one point, had knocked the stock down by more than 50%.

Viasat is well-positioned to profit from the growing demand for affordable, high-quality internet connectivity. The stock is trading a little bit above Klarman’s latest purchase price. If we see any kind of a pullback that takes us back to that $39 level, it may be worth a nibble. 

Carl Icahn is another old pro who did more selling than buying last quarter.

The corporate-raider-turned-activist-investor had an interesting quarter, to say the least…

Icahn took a massive loss on his position in Hertz (HTZ), as COVID-19 pushed the rental car company into bankruptcy. However, he mostly offset that loss by making an enormous bet against commercial real estate mortgages (retail properties). So far, Icahn’s made more than $1.3 billion on these credit default swaps.

He also sold out big positions in companies like Hewlett Packard (HPQ) and Freeport McMoRan (FCX). Then he reduced his Herbalife (HLF) position by $176 million—although he remains the company’s largest shareholder. 

Icahn did add to some of his current activist positions, including Occidental Petroleum (OXY) and Xerox (XRX).

But the most interesting part of his filings: Icahn made a major move — both financially and geographically — out of New York and to South Florida… relocating his business out of N.Y.C. to become the first tenant of the new Milton Tower, located in Sunny Isles Beach (just north of Miami).

Icahn wasn’t the first to leave the former business hub of the U.S… and he won’t be the last.

The technology world has evolved to the point that anyone — including investors, and even traders — can work from any location in the world… So why stay in a high-tax state?

In Today’s World, Nothing is Entirely Predictable

My point is:  You can make a lot of money by following 13F filings (and I am going to help you do just that)…

But we can’t forget the fact that we’re living in unprecedented times. With free money floating around, not every move by a top investor is black and white. 

Be smart and understand the research before you hit the buy button.