In their recent investing mastermind discussion on The Investors Podcast, Wes Gray, Tobias Carlisle, and Jake Taylor discussed a number of topics including Cathie Wood and ARK’s ETFs, the Schiller P/E as a measure of market valuation, and whether low interest rates are good for stocks. They also discussed the pros and cons of cloning superinvestor 13f’s. Here’s an excerpt from the discussion:

Stig Brodersen
All right guys. So another thing I wanted to talk about is whether or not you’ve used the 13F filings in your investment approach. And if you’re sitting out there not completely sure what a 13F filing is, it’s a quarter report filed to the SEC if you control more than $100 million in assets. It’s something that institutional investment managers have to do. Jake, let’s start with you.

Jake Taylor
For 13Fs, I use it as a screening tool. It’s a place to look for ideas, the vast majority of the time when I kick the tires on something that I look at, it doesn’t make any sense to me. And that’s okay. You don’t have to understand everything. But every once in a while, there’ll be an idea that I’ll find that is worth digging into more. And those make up for all the other times where it’s a fool’s errand. I think one of the biggest problems that I think I see in that, when people are kind of 13F cloners, if you will. It’s really easy to clone the portfolio, but it’s really hard to clone the conviction. And the conviction doesn’t come until you’ve actually done some of the work yourself.

Jake Taylor
If you wanted to sort of quantify or use a quantum approach to it in a 13F. I think Meb has written about this a fair amount Meb Faber. You can do that, and I think that probably works over a long period of time. But the periods of time where it doesn’t work, I bet are really hard to get through, because you just don’t have the conviction to hold in there. The other thing I would say is that you have to be really careful about who you choose to follow in the 13F space, because some people turn over their portfolios in such a way that that information by the time it comes out might be really stale, it might not look like their portfolio at all. So you can figure out who the ones are, who are the long term holders. And those tend to be better places to look. That’s been my experience.

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 [inaudible 00:08:26], 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 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.

Toby Carlisle
How do you find those? I think I heard somebody say that recently that they look for the weird holding in the portfolio that doesn’t make sense. And that their argument was that some analyst is pushed really hard to get this in and [inaudible 00:09:20] little bit of it in.

Wes Gray
Yeah, I think that’s one approach. I mean, the other challenge, obviously, to Jake’s point, and this is one that no one’s convinced me of is how do you pick your baseball players? Who’s on the team? Either it’s one thing to go pick their stocks, but it’s most important to figure out who hell is going to be your baseball players and can then they hit homeruns or not?

Toby Carlisle
This is going to be familiar enough with the philosophy that you like. So it’s easy to climb Buffett because we all kind of know his philosophy pretty well. And there’s a whole lot of Buffett type dudes out there, who I’d be reasonably comfortable. Probably there’s some tech guys so you can if you get comfortable with it. I can’t get comfortable with it, that process, but if you are that kind of investor, then you can probably figure it out.

Stig Brodersen
So now that you bring up Buffett, let’s just say that he would be our butter. So he bought a position for him. I don’t know if you want to define this a big position, he put in $8.6 billion in Verizon, I think he put around $3 billion in Chevron. Do you guys have any thoughts on those two picks?

Wes Gray
Berkshire’s 13F you have to be a little bit more careful with now that he has lieutenants who are managing bigger sums of money. So you don’t really necessarily know if it’s Buffett. Then you have to understand their process, they don’t really talk much, they’re pretty quiet. So it’s not quite as clear that that was Buffett anymore. That’s just something to keep an eye on.

Toby Carlisle
I’ve got a position in Amazon or they did at one stage, which is sort of it was optically expensive. I had a look at it at the time they put it on, and I couldn’t kind of figure it out. And then a year ago, maybe they put the position on in Barrick Gold. And I know from running a blog that if you put Buffett and Gold in the headline of a post, it’s going to go bananas. And I think every other news outlet in the states knows that it’s well, or in the world knows that. And so that was a headline for a long time. It was this tiny little position, and then it got sold out in the lightest 13F. And I didn’t hear anybody say anything about that at all. It was like, it just didn’t happen. It didn’t exist.

Jake Taylor
What about snowflake, too, very kind of out of character for what you would expect from Berkshire?

Stig Brodersen
Wes, you’re talking about it before that you dig into some of the data on those filings. Could you talk a bit more about that?

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
And I think the broad idea is, do not weigh them in accordance to how they weigh them. And if anything, if you’re going to do it, equal weight the things. Again, I’m like Toby at this point, I gave up stock picking. So I always think through quant lens, I would just go grab the baseball players, and just take the ones I liked the best and equal weigh all their positions, not in accordance with their conviction, where Jake might have little better qualitative insights, and he may do a different approach. But I just thought about that through the lens of if I were going to try to clone these people to extract the most benefit efficiently and without thinking too hard, that’s basically the conclusion of all the work we did.

Toby Carlisle
You can also use those services that show when somebody is buying or selling. And if it’s someone who tends to hold for a very long period of time, it probably doesn’t matter if you’re a quarter or so behind when they’re buying something. That’s when you get the guys who are trading all the time, in and out. It’s a snapshot of chaos every quarter and you don’t know what’s happened in the days or weeks since or before. It’s kind of useless trying to clone those guys. And you’re just taking a snapshot of the entire portfolio, not what they actually traded.

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.

Stig Brodersen
I remember I was speaking to Bill Miller about this, and well prepared as I was, I was going into Datorama and talking about different pics, and one of the first thing he said was just like, “Hey, dude, that’s how you’re supposed to look at it.” “We have different funds for different aims, and this is just all summation of all them together, and we have different strategies for that.” So [inaudible 00:15:33] me in the sense if you look at what I do. And I would say that’s correct for Bill Miller’s fun, I wouldn’t necessarily say it’s the same thing if you’re looking at Mohnish, or Guy for that matter. I think we have a very different approach where it makes a lot more sense to go and see not only what they bought, but you can also reverse engineer and see what price did they buy something at, which could also give you some help in terms of conviction.

You can listen to the entire discussion here:

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