Toby Carlisle
You can’t see all
of the portfolio either because you can’t see
international holdings and you can’t see shorts that they have on which
you might be looking at half of arbitrage or something like that. And you can’t
see any option positions that they have on site. You’re
getting one picture of the portfolio. The other, that’s a weird one. And
I think I learned this from Meb when I read his book was that you shouldn’t buy the biggest holding, because that’s the
one that’s run up the most, I think.
Wes Gray
As you say, we’ve
done our own research on this, because we’ve always had big family offices
asked about doing this strategy. And to your point,
Toby, the irony is you don’t want to actually conviction(信仰) weight in accordance with how
the actual managers weighed them. You generally want to own their smaller, tiny positions.
That’s actually where they get the most mojo. It’s not usually their
biggest position, typically, because I like tracking error concerns, or capital
allocation concerns, or other things that are actually unrelated to how much
actual conviction, and more related, arguably, with the incentives of asset
management business.
Wes Gray
Well, there’s
always out performance because, generally, to Toby’s point, when people pick
their baseball players, they focus on people that are performed well after the
fact. So obviously, if you clone holdings of people that you choose as your
baseball players, they usually choose baseball players that have hit homeruns,
not necessarily those that strike out all the time. So obviously, the back
tests are incredible. [inaudible 00:11:57] is a danger in the first place. So
then the empirical question is, okay, great, we know they all work, but how do
we extract the most, quote unquote, alpha, or kind of ride the cocktail value
looking at these 13F positions?
Wes Gray
The other thing we
did was, we talked about it in our book, Toby and I’s book, back in the day,
then we formally looked at it. You can also look at these names in 13Fs and
then map them back to their fundamental factor characteristics. And the
question is like, okay, well, if they have 13F conviction, and they happen to
look good on whatever you like, value, quality, whatever the heck it is, that’s
certainly an additive measure at the margin. You want to do a 13F name, but
then also identify that it has low momentum, and it’s a total piece of junk,
and it’s the most expensive stock in the world. That’s probably not a great
idea, but using 13F is like potential marginal contributor to a factor
portfolio. I want to tell someone that’s a bad idea. That seems reasonable to
me.
Jake Taylor
One other point
that I think is important is I will often kind of bias towards managers who I
know have an activist bent, because then there are other levers to be going on
at the corporate level that can make a difference, and it’s not necessarily
just a sort of passive holding.
Toby Carlisle
Yeah, I like that.
Stig Brodersen
Yeah. Going into
this I was so excited about asking that question. I’m really happy you guys are
setting me straight. So I do want to say for the record, though, to I think it
was Toby’s point about how much the trader, if not it was Jake. I would say
that if you do that, someone who is really interesting
to follow would be someone like Mohnish Pabrai. He doesn’t trade a lot.
Sometimes it can even go years in between and he has a huge international
portfolio and not a lot of US stocks. And like he used to say, “There’s 1,000 reasons why people sell a stock, but there’s
typically just one reason why they buy a stock.” And I think that’s
definitely a pivot for him, but I can easily see why it might not be applicable
for everyone else. And we shouldn’t fall into that trap.
