The Limitations of 13F’s

It has become increasingly easy to track the equity holdings of today’s leading investors. Numerous sites track their holdings based on disclosures made in 13F filings.

These 13F’s are an excellent place to search for new ideas. However, there are limitations to this approach if it is not part of a broader, well-concieved investment process.

In order to make big money in the stock market, you need to make meaningfully sized bets when opportunity presents itself. You also need to have the conviction to hold your positions if they decline in price, which all stocks are apt to do from time to time, sometimes by as much as 50%.

If your purchase was based entirely on the fact that a “guru” purchased it, you are less likely to 1) make a meaningful bet and 2) remain calm and not be rattled if the stock goes down 20%, 30% or even 50%.

There is no substitute for having your own thesis – based on your own reasoning – on why a stock is cheap and a good company. The market frequently overeacts to short-term news or problems and the guru won’t be there whispering in your ear to reassure you.

If you know what you are doing and have done your homework, these can be viewed as opportunities to add to your position.

In order to exploit time arbitrage – the discrepancy between the clearing price for the market’s short-term oriented price setters and the company’s long-term intrinsic value – you need to do your own work. 13F’s are a good place to look for ideas, but only the first step in a sound investing process.

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2 thoughts on “The Limitations of 13F’s

  1. Jim Allen

    Nothing beats knowing what you are doing.

    Warren Buffett claims that “risk comes from not knowing what you are doing.”

    When you follow only the 13Fs, you have no idea why the “guru” was buying, what factors prompted him or her to buy, and you will not have any warning if they decide they have made a mistake and bail out.

    You have to make your own mistakes, just like dating!

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