Portfolio Strategies Archives - Exploit Investing

If your a private person you may be wondering who is watching when you trade stocks? When you hear and see famous investors reporting their every investment move, it gets a little scary. Can everyone see your investments too? The Gramm-Leach-Bliley act protects your investment privacy. It requires consumers of financial institutions to have their information protected and safeguarded. This does not apply to insiders or fund managers. While your investments may be safe and kept a secret is there a time where that may not be the case? If you become a finance professional you may be nearing that threshold of reporting. Who is Required to Disclose Their Stock Holdings While you may not need to report your investments to anyone other than the tax man. Others are required to report it in order to avoid insider trading or a material ownership interest in the company. Below are the major reasons your stock holdings may not be private: Insiders need to disclose their ownership and trades. Mutual fund managers need to report ownership in their quarterly filings. Material ownership that exceeds 10% of outstanding shares need to report. If the court orders you to disclose ownership for any reason. Insiders Insiders include anyone in upper management or directors on a board. This includes CEO's, CFO or CAO. This information is made public to help avoid any insider trading that may result from knowledge that has not been made public. Mutual Funds Mutual funds are required to disclose their ownership but they do have an option to delay. This allows the fund some time to purchase securities without portfolio cloners buying up all the cheap shares. 10% Ownership Warren Buffet often cites why he keeps his ownership below 10 percent. This is because it reveals your ownership as you have to cite your intent. If you intend to be an active or passive owner. If you cite being an active owner it could rapidly increase the share price as others may believe you are an activist trying to squeeze more profit from the company. Court Ordered This is not likely unless it is a high profile case, but you may be required to disclose in cases of insider trading or possibly during a divorce. Portfolio Cloning as a Legitimate Strategy One of the reasons many wonder if their trades are public is because of the perfectly legitimate strategy of portfolio cloning. This method of trading effectively mimics the trades of exceptional traders like Warren Buffet or Mohnish Pabrai. Cons of Cloning This type of trading is effective although it has a lot of lag time. For long term traders this isn't really much of a problem, but it would effectively make your investment less profitable than the original investor as the price may have already risen. Cloning can also get you into trouble if you don't do you own research and understand the idea behind the trade. You may not know the time horizon of when the stock may be profitable which could lead you to lose confidence. Pros of Cloning Mohnish Pabrai's 10th commandment of investing is to be a shameless cloner. He backs this up by explaining that you are statistically more likely not have a winner by choosing stocks that have already been vetted by other great investors. This does not mean that you don't do your own research, instead treat it as a secondary screen where you throw out investments that don't meet your own standards. Social Investing and Public There is a new investing app that allows anyone to reveal their trades in real time. This allows you to take portfolio cloning to the next level. It's an interesting way to gain ideas, and sort of works how Seeking Alpha does without the added level of analysis. If you don't want to share your own trades, you can turn this functionality off. Even better you can keep your stock trades public but hide the dollar values. While this new app seems great it by no means is a shortcut to your own analysis. Other investors are often wrong especially those without a long track record. This is dangerous since Public itself has not been around a long time, so other traders don't have a long term track record on the app itself. Congress and Public Servants A relatively new law, within the past decade forces lawmakers and those in government to reveal their trades. This is to avoid insider trading as many lawmakers could have special inside information. Nanci Pelosi is an example of when lawmakers can benefit from information before the general public. This has become such a problem that investors are just tracking what congress trades on specialized websites. Her insights and privileged information are impossible to prove but have been cited as a reason why congress should not trade individual stocks. Instead they should only be allowed to trade in mutual funds or index funds keeping them from personal bias. Final Thoughts on Public Stock Visibility Stock visibility is a double edged sword. Because of herd mentality it can increase the value of a stock if a famous investor begins buying shares. It can also hurt that very investor because he is no longer able to quietly buy shares below their intrinsic value. This is why there is usually a window of opportunity for large investors to purchase shares without public knowledge. Investors need to remember that while portfolio cloning is an effective way to screen investments and even find new investment ideas, it is by no means a shortcut. One example is the price paid, a good investment can quickly become a bad one if the price paid is too high.