My recent “discussions” with fellow InvestorGeek, Steve, about “baseball cards” as a metaphor for stocks have prompted more thinking on my part. Isn’t that what you wanted, Steve? Actually, I’ve already known that trading stocks is very much like trading baseball cards. I’ve already blogged about the same metaphor many times.

Though Steve and I disagree on whether dividend paying stocks are more than just baseball cards, another point of mutual agreement is that fact that most investors cannot affect any changes with their meager number of voting shares. Whether you own 1,000 or 10,000, or 100,000 shares of a company (even penny stocks), your ownership is no more than a drop in the ocean. But there are investors who do affect positive change through shareholder activism. Notable names include Warren Buffett (Coca-Cola), Carl Icahn (Time Warner), Kirk Kerkorian (General Motors), Ed Lampert (Sears/K-Mart). What if you followed them instead?

Why shouldn’t you leverage their insight and know-how to turning meager companies around? Very often, the news of an activist investor entering the picture can cause a falling position to revive. Case in point with General Motors – if you had bought GM when Kirk Kerkorian announced his interest, you’d have done very well for yourself. How about when Warren Buffett first took a position in unloved Coca-Cola? Or as Ed Lampert is currently trying to turn Sears around? The jury’s still out on the Sears venture, but K-Mart investors caught a break from their falling stock prices.

On the Forbes list of 400 richest Americans, a good subset of these folks made their fortunes by investing. That subset includes Warren Buffett ($46 billion), Carl Icahn ($9.7 billion), and Jim Simons (worth $4 billion). What are some other investors that can be considered “smart money”? Similarly, short investors may be following ShareSleuth to find out which companies Mark Cuban is currently shorting. But how do you take advantage of these legendary investors’ track records?

Following The Legends
Sites like GuruFocus.com make it their mission to follow the trades of many of the notable gurus, investors and fund managers out there. The information on GuruFocus can become a very good starting point for an investor to setup their initial stocks watch-list. If you’re willing to be a swing trader, you might not catch the bottom of the stock, but you might be able to ride the upward momentum!

I also use PubSub.com to keep track of trade movement by some famous investors. Through PubSub, you can get alerts on keywords in SEC/EDGAR filings. When these investors move, they often have to disclose their actions, and if you know what to look for, you stand a chance of staying ahead of the majority of the market.

Are there any other tools out there that I have missed?

Warning!
Blindly following anybody’s stock picks can potentially turn into a recipe for disaster. Smart money stock picks can offer a good starting point, but your own research and due dilligence cannot be replaced. How do you separate the true activist investors from the hedge funds looking to profit from arbitrage?

In the end, these investors are only looking to make profit for themselves. Please be sure you understand the rationale for these activist investors to buy a position in the first place. Check your own risk tolerance to see if you can stand the potential fluctuations like these investors can!

Comments (4)

Very well written! This is the kind of thing I was looking for. I think following Buffett is a pretty good strategy on the whole, but when you do, you have to know that he’s thinking long-term, so you might be on a long journey with his stocks, which is fine if that’s your goal and strategy.

Thanks for adding the links. A great mixture of opinion and substance.

And, dividend stocks are just like baseball cards. 😉

– Steve

So when do you know when to sell?

If you follow the guru’s picks, you’re always buying and selling late. Lagging.

How do you know its still a good time to buy? Or sell?

You don’t.

I’d rather do my own research.

Kimber,

Good question, “when to sell” baffles many people, some go by measurements, some adopt a system. But there’s no denying the track recordes of the “smart money”. Anybody who got into GM around Kirk Kerkorian is looking at upwards of 50% return for the year.

Was there anything different about GM when Kirk got in? No. But Kirk became a catalyist by forcing a lot of tough union negotiations to take place, mostly ending in GM’s favour. My point about this is that the gurus that are active shareholders often can stimulate positive change, and markets often take note of this. Many gurus are there are still passive invetors, and it might not make as much sense to follow “passive gurus” if they are not able to take the stance of a sharholder, get a seat on the board etc…

BTW, should anybody sell GM right now? or keep watching the Kerkorian show go on? I also wish I have answers for that.

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