I usually don’t give away my best stock idea but from time to time I’d also like to give something valuable back to the subscribers who are powering this website. We launched our quarterly newsletter more than 2 years ago and not one subscriber has said “I lost money by EXACTLY following your stock picks”. The reason is simple. The stock picks of our quarterly newsletter returned 97.2% during the 26 months since the end of August 2012 (see the details here). Both the S&P 500 ETF (SPY) and the Russell 2000 (ETF) returned less than 50% during the same period. Because of these results, our quarterly newsletter is extremely popular among investors.
We use two different approaches to pick stocks. I don’t have a team of analysts who can spend weeks analyzing the suitability of an investment idea. I bet that you don’t have the time nor resources to do your own analysis. The cost of thorough stock analysis is extremely high and it doesn’t guarantee superior returns anyway.
There are hedge funds with more money than God who spend millions on obtaining information (both legally or illegally) before making their investment decisions. They aren’t stupid either. They have degrees from the World’s most elite colleges and they know that they will be filthy rich if they are able to beat the market with their stock picks. There are thousands of hedge funds with tens of thousands of analysts. I can’t outspend them and I can’t outwork them.
Fortunately I don’t have to outspend them to beat them. The trick I use is to identify the best ideas of the best hedge fund managers. How do I do that?
As I said earlier, I have two different approaches. The first one is presented in our quarterly newsletter. I have a PhD in financial economics and developed a quantitative investment strategy that tries to identify the best stock picks of more than 700 hedge funds and narrow down the list to only 15 stocks every quarter.
I backtested this strategy and found that it outperformed the market by an average of 18 percentage points per year during a 10-year period. I am an expert in backtesting and took extraordinary precautions to avoid several pitfalls (like survivorship bias or selection bias) that most researchers knowingly or unknowingly fall into.
However, you should never invest in a strategy solely based on the backtested results. You should understand why the strategy was working and verify that it is still working today.
Our strategy outperformed the market by more than 47 percentage points in 26 months and this is in line with its backtested results.
Our strategy works because it identifies the best stock picks of the best hedge fund managers at an extremely high accuracy. Our strategy works because it invests in smaller cap stocks that are followed by only a few analysts, that are inefficiently priced, and that are misunderstood by the mainstream institutional investors.
Our number one stock pick was United Rentals (URI) 26 months ago and it remained our number one stock pick for a year. We first picked it at $32 when it was trading at 7 times earnings. Most investors didn’t really understood this stock and didn’t care as it had a market cap of only $3 billion.
Today United Rentals trade at $113 and has a market cap of $11 billion. We were able to identify several stocks like United Rentals that crushed the market and managed to nearly double our subscribers’ portfolios in the past 26 months. We will share the new stock picks of this strategy this week. You can download a sample issue of this newsletter here.
The second approach we use to pick stocks is way better than our market crushing small-cap strategy that we share in our quarterly newsletter. It is way better because it directly gets the best stock ideas from the best hedge fund managers themselves. We started publishing our monthly newsletter after identifying one of those best hedge fund managers in the World.
We revealed the identity of this hedge fund manager in a March 2013 Marketwatch article titled 3 Stock Picks From The Next David Einhorn. I quantitatively analyzed the historical returns of this fund manager, interviewed him, and tracked the performance of his best ideas before dubbing him “The Next David Einhorn”.
You probably never heard his name: Michael Castor of Sio Capital.
Michael Castor is a medical doctor (he used to be a surgeon) by training, but switched to finance in mid 2000. He worked as a health-care analyst at JPMorgan and Bernstein Investment Research and Management until he launched Sio Capital in 2006. At that time Sio Capital returned 10.4% a year since its inception vs. 3.8% average annual gain for the S&P 500 Total Return Index during the same period.
We liked Michael Castor because he achieved a 6.6 percentage-point outperformance with a nearly market neutral portfolio. Sio Capital’s beta was 0.15 since inception. Sio Capital was also 12% net short in 2012, yet it returned 14.9% after fees and expenses.