Most of the stocks I have invested in can be found among the holdings of a select group of mutual funds. I am not trying to be a hero in the investment game desperately scouring the markets to find stocks, I simply piggyback off of the trends and ideas of people I consider to be smarter and more resourceful than myself. You can pick and choose which fund manager’s style and performance you might want to emulate and then all you have to do is either go to the fund’s official website or some central database like SEDAR to which companies have to submit their public filings, to find out the top holdings in their funds.
Here is my process; one of the fund families I follow is Sprott Asset Management. On their official website, Sprott has a quarterly summary of each fund’s holdings and it also has recorded conference calls, which not only highlight the trends the funds are following but many a time you might also get to hear the fund managers respond to questions about particular stocks. I also regularly scan news releases for the words ‘Sprott Asset Management’ to find out which companies Sprott has taken a private placement or major stake in. Lastly, I look up the fund’s public filings on SEDAR for anything that I might have missed otherwise. In fact, the latest stock I researched Alturas Minerals is a holding in one of the Sprott Funds.
I do not recommend people blindly pick any stock they see in a fund portfolio and invest in it without further researching it on their own. The process I highlighted above merely lessens the field of stocks one has to look at before investing but it is still up to the individual to pick and choose from the narrowed list which stock they want to invest in. Once I find a fund’s top holdings, I then look through them to check up on the following: management, quality of properties/assets, stock structure (market cap, cash, major shareholders etc.), price action and lastly, upcoming catalysts that might propel the share price of the stock. After going through my list, I pick whichever stock I feel ranks the best according to the checklist. If anyone wants to know which aspect of the checklist i regard most highly, it is management. Competency and track records of managment teams are very important for all stocks but it is doubly important when it comes to investing in junior exploration companies, like i do. Since something like 80% of exploration stocks turn out to be lemons, one might as well bet on management teams that have had previous successes and displayed an affinity to create value for shareholders. Hence, i try and pick stocks with management teams that have previously discovered mines but sometimes i find that a company's properties or assets happen to so prospective/interesting that my evaluation regards this aspect more highly however, even in these cases i would prefer to see a few people on either the technical or management team who have the experience to see the project through to production, should the case be.
This process can be duplicated to model any and every investor’s style. If an investor was more value oriented, he/she could head on over to GuruFocus to find the holdings of managers such as Warren Buffett, Mohnish Pabrai, Joel Greenblatt, Bill Nygren and many others. One can also go to StockPickr to find out what hedge fund mavens such as Boone Pickens, Stevie Cohen, Carl Icahn and Jim Simons are holding in their portfolios.
If you want statistical proof of this process, (I found this in MoneySense magazine) look up a study called ‘Copycat Funds’ done in 2004 by researchers from Stanford, MIT, the University of Virginia and North Carolina. The study found that if an individual sets up funds to mirror the holdings of the 100 largest stock focused mutual funds in the United States and only updated the mirror funds twice a year based on publicly available information his/her returns would be statistically indistinguishable, and possibly higher than the returns of the original funds. The higher returns are mainly the result of not having to pay mutual fund fees.
I am not advocating this process to everyone and neither am I guaranteeing the viability of the process, all I am saying is that i have found this to be one of the most profitable methods to find stocks to invest in.
Here's a look at Sprott's top holdings as of March 31st, 2007 (Sprott Website)
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