Large investors — the 3,600-plus people managing more than $ 100 million — are required to report their holdings to the Securities and Exchange Commission (SEC) every quarter. These investors have to submit a Form 13F within 45 days of the end of the quarter.
In a market where information is literally swapped at the speed of light and news becomes stale after an hour, a 45-day-old snapshot of what an investor was holding may seem downright ancient. But the information can still provide plenty of value, if you know what to look for.
As with any data related to the stock market, it is important to isolate the information that is valuable and ignore the rest.
In the 13F reports, the most important information will be found in the filings of long-term investors. Filings from short-term traders should be ignored.
This is because some high-frequency trading (HFT) firms could be required to report their holdings if they manage money for others, but their filings would simply be a snapshot of what the firm held at the close on the day the quarter ended. Odds are high that the firm had completely different holdings an hour after the open the next day.
Another group of 13Fs to ignore are those filed by index funds or firms that manage money using an index methodology.
But just because I believe these particular reports should be ignored doesn’t mean that they are. Instead, all 13F forms are reported together, making the aggregate data from the 13F database essentially meaningless.
Here’s a great, timely example of just how useless this information can be. In the most recent quarter, more than 1,900 filers (over 50%) reported a position in Apple (NASDAQ: AAPL).
HFT firms will own it simply because it is actively traded. Indexers own it because it is in the index. We can’t tell from 13F reports how many of those investors believe AAPL is a buy right now.
A high-level analysis of 13F filings simply tells us that AAPL is listed in more than 1,900 13F forms. Some of those investors hold short positions or put options on AAPL. Some will be using complex trading strategies like pairs trading and, again, we don’t know whether they are bullish or bearish on this stock.
AAPL demonstrates that there is absolutely a wrong way to analyze 13Fs. A mere overview of the filings simply does not offer useful information.
However, there is also a way to use 13Fs to our advantage. That’s why I spend days every quarter going through the individual 13F forms submitted by the 20 investing gurus that I follow. Only the holdings of the world’s greatest investors, like Warren Buffett, George Soros and Carl Icahn, offer a useful starting point for additional research.
After I update the list of stocks owned by my select group of gurus, I use my trading system to look for the stocks with the best fundamentals and highest relative strength (RS).
My preferred fundamental metric is growth in cash flow. Companies with strong cash flow growth have the ability to increase dividends, buy back their own shares, acquire other companies to increase their earnings per share, or reinvest in the company’s operations to increase growth.
To decide whether or not the company is using its cash flow wisely right now, I turn to the wisdom of the markets. The current price of a stock reflects the assessment of thousands of investors and analysts in the company.
Additionally, we can track the collective opinions of the market with RS. Stocks with a high RS value are in greater demand than stocks with low RS. High RS indicates that a large number of analysts and investors have concluded the company’s management is using cash flow wisely.
By combining these two indicators, I am finding stocks that possess great fundamentals coupled with endorsements from the world’s most famous investing icons. This system has provided readers of my premium newsletter, Guru Trader, with gains of 13.6%, 25.8%… even 49.7% in a few months. To check out my free report on how you can beat the returns of the world’s greatest investors, simply follow this link.