Why Investors Shouldn’t Steal Stock Picks from Great Investors

Once every three months, institutional investors have to file a form 13F to disclose the investments in their portfolio. These filings give Average Joes an opportunity to "steal" investment ideas from legendary investors like Warren Buffett's Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) or Renaissance Technologies' Medallion Fund.

But before you rush out to buy what the legends are buying for their portfolios, it's important to understand the investor you want to copy, and the limitations of regulatory filings. Join The Motley Fool's Gaby Lapera and Jordan Wathen as they discuss the ups and downs to form 13F filings in this segment of Industry Focus: Financials.

A full transcript follows the video.

This podcast was recorded on March 20, 2017.

Gaby Lapera: I had anonymous write in and ask, they have a name but, you know, "Should I base my investments on 13Fs?" This question needs to be broken down a little bit, starting with, what is a 13F. Jordan Wathen, a softball question for you.

Jordan Wathen: All right, one of my favorite regulatory filings. A 13F is a filing that large investors or funds have to file, and they have to disclose their holdings at a point in time at the end of the quarter four times a year. That's as simple as I can say it. But they only disclose their long positions, so, they only disclose what they own, not necessarily what they're short selling. So, with hedge funds, you have to be a little bit careful.

Lapera: Yeah, and the type of people who have 13Fs are, like, George Soros or Warren Buffett or, like you said, hedge funds. So, I think that's why the person asked this question, because it is, in theory, these people who have some sort of deep insight into the market. You know what I mean?

Wathen: Right, that's why anybody looks at them. I would be lying if I said I didn't, because I really want to reverse engineer a great investor's process. I look at it and try to figure out how they're shaping their portfolio, and if I can learn something, why not, it takes 10 minutes to look at a 13F, so I, of course, do.

Lapera: But, the short story on this question -- which is, to remind you, "should I base my investments on 13Fs" -- is no, you shouldn't.

Wathen: No. I actually want everyone who's listening to this to google this. It's called The Medallion Fund, and it's managed by Renaissance Technologies. It's the greatest hedge fund of all time, period, end of discussion, ungodly returns. I'm talking like 30% a year. They only have one losing year since 1988, and it wasn't 2008, it was 1999. But, they've blown it out of the water. But if you look at their 13F, you will learn nothing, because The Medallion Fund trades in and out of stocks more often than you change your socks on your feet. They trade constantly. So the point in time snapshot which you get from a 13F has actually no value whatsoever.

Lapera: Yeah, and that's exactly why you shouldn't be making these long-term investing decisions on what's going on with the 13F. I think one of the most popular people to look at is Warren Buffett. Recently -- you told me this when we were talking about it before the show -- he bought ExxonMobil (NYSE: XOM), and he said he bought it because it was better than having that money in cash.

Wathen: Yeah, at the Daily Journal annual meeting, Charlie Munger basically said, "Do you know why we bought ExxonMobil? We thought it was better than cash." And they literally held it for less than two years. If you think about what Buffett does and what Berkshire Hathaway does, they're trying to beat the market over long periods of time. But if you don't understand that nuance, you might look at it and say, "Oh, ExxonMobil, they bought it, it must be great, they're trying to beat the market," when in actuality, all they wanted to do was beat a savings account. There are so many investments to do that. So, I think you really just have to understand who's filing the 13F, first of all, and second of all, what is the goal with the stocks that they buy? With Berkshire, it's changed so much. They used to want to smash the market, and now, apparently, they're really just trying to be the savings account, which is a really low threshold.

Lapera: Yeah. It's also hard because Berkshire Hathaway, like we talked about earlier with those really big companies that have trouble out-performing how they did historically, Berkshire Hathaway has the exact same problem.

Wathen: Right. I'm not trying to give Berkshire a hard time. I can see, they're probably thinking, dividend incomes, tax at a lower rate, those kinds of things. I'm not trying to rag on Buffett. He's the most successful investor of all time. I don't know if anyone will ever top him. But if you follow him now, he's investing much differently than he did in the 1980s and 1990s, what he's really known for.

Lapera: Yeah. Again, short story to, "should I base my investments on 13Fs" is no. And if you want, I'm more than happy to send you an article on this. We write approximately a million every year. That might be a mild exaggeration. But it feels like that, because I edit it all of them.

Wathen: You just have to look at them as shopping lists. You still need to do your own analysis, but I don't think it's ever bad to look at what a great investor is buying and try to understand why. I actually think that's a really productive use of your time.

Lapera: Yeah, definitely. And it's definitely also really interesting to get a stack of 13Fs together, historical 13Fs, and see what's going on over time. But yeah, you should not base your entire portfolio around what one person, or even a set of really good investors, is doing, because you have no idea what's going on in their mind. They're just saying what they own, not why they own it.

Wathen: And that's the thing, too. Because they don't report short sales, it's really important that you are really careful about how much weight you put on to it, because someone could be long Wal-Mart and short Target, to have neutral to retail, but they don't really love Wal-Mart that much. They just love it more than Target. It's a pair straight, but you would never know the opposite side of it with a 13F.

Lapera: The other thing to keep in mind is that it's kind of a snapshot of an investor's portfolio. They could exit the position the day after 13Fs are out, and you wouldn't know until the next 13F comes out. And, those come out about once a quarter, in case you're curious. But you don't really 100% know exactly what's in there based on the 13Fs.