What the Smart Investors Are Up To

According to the World Federation of Exchanges, there were 45,358 publically traded companies worldwide at the end of 2009.                                                                  

Asked years ago how he finds gems when so many companies exist, Warren Buffett said he "starts with the A's."

Impressive, but impractical for most of us. We need a faster, more efficient way to find good investment ideas.

One smart approach: Copy the masters. Watch what they do. Get your ideas from them, then dig a little deeper.

That's what we do several times a year, when the world's greatest investors are required to disclose what they bought and sold in the previous quarter. Here's what six of them have been up to recently.

John Paulson 
Virtually unknown a few years ago, Paulson is now one of the world's most successful investors. He made a fortune riding the housing bubble down, and then the economic recovery back up. His personal payday came out to about $100 per second over the past four years.                                            

Paulson's hedge fund opened a new 25-million-share stake in Hewlett-Packard (NYSE: HPQ  ) last quarter, worth about $900 million at today's prices. Shares suffered a bit of crash yesterday, but now trade at about 6.5 times next year's earnings, and less than five times cash flow. Paulson also added to his already massive bet on gold, more than doubling his stake in Barrick Gold. Earlier this month, he made goldbugs' hearts go pitter-pat by predicting that the yellow metal is on its way to $4,000 an ounce.

Warren Buffett 
One has to be careful evaluating the fluctuations in Berkshire Hathaway's (NYSE: BRK-B  ) portfolio, since transactions often come from Buffett's lieutenants.

In the past, trades made by GEICO investment manager Lou Simpson were often misperceived as Buffett's work. Simpson is recently retired, but possible Buffett successor Todd Combs is now managing several billion dollars of Berkshire's money.                                                                                             

Combs is almost certainly behind Berkshire's new position in MasterCard. He specialized in financial stocks at his previous hedge fund, and the new position is fairly small, worth about $60 million. Buffett hinted in the past that any new Berkshire positions worth less than $1 billion were probably initiated by someone other than him.

David Tepper 
Tepper made a fortune betting on bank stocks during the 2009 meltdown. He's now backing off those bets. Last quarter, Tepper's hedge fund pared down stakes in Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) .

His latest buys: airlines. Tepper held small stakes in Delta Airlines (NYSE: DAL  ) and US Airways before, but cranked up the heat last quarter, more than doubling his bet on Delta and purchasing more than 10 million shares of US Airways.

You know the quip: What's the easiest way to become a millionaire? Start with a billion dollars and buy an airline. What's Tepper see in airlines? Who knows. They have regained pricing power after slashing capacity during the recession. Another possibility: betting on airlines is really a bet on falling oil prices.

George Soros 
It's been more than a year since George Soros called gold the "ultimate bubble," following up by noting that, "As a participant, when I see a bubble, I rush out and buy." And buy he did.

But his party's over. Soros's hedge fund sold almost all of its stake in the SPDR Gold Trust, and drastically cut its position in Novagold Resources. This is why Soros can buy bubbles. He sells before everyone else.

On the buy side: Soros's fund purchased over 1 million shares of Comcast during the quarter.

Bill Ackman 
An activist investor with a penchant for being either brilliantly right or catastrophically wrong, Ackman appears to have spent most of last quarter selling. Stakes in General Motors, ADP and Target were all liquidated.

David Einhorn 
Einhorn was busy adding new positions during the quarter, with new stakes in Best Buy, CVS Caremark, General Motors, and Yahoo! (Nasdaq: YHOO  ) .

Einhorn laid out the bullish case for a couple of these new buys in a recent letter to his investors. On Best Buy:

Over the years we have seen many retailers given up for dead after a weak holiday result, only to recover with a change in fashion or product cycle. Bears believe that the Internet puts BBY on a path to Blockbuster-video obsolescence. We think that view overstates the risk as there is value in store help, merchandising, service and being able to walk out of the store with your purchase.

And Yahoo!:

Under new management, YHOO has taken some increasingly shareholder-friendly steps. It has given up competing with Google in the web search business, a move which is improving free cash flow by reducing capex and operating expenses. It is using the improved cash flow to step up share repurchases (the company bought back more than 7% of its outstanding shares in 2010).YHOO is also taking steps to unlock value from some of its Asian assets in a tax efficient manner, including its 35% stake in publicly traded Yahoo Japan.

Thoughts? Comments? Share 'em below! 

Fool contributor Morgan Housel owns shares of Berkshire Hathaway and Bank of America preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Wells Fargo. The Fool owns shares of Bank of America and also holds a short position in the stock in a different portfolio. Motley Fool newsletter services have recommended General Motors, Yahoo!, Berkshire Hathaway, and Automatic Data Processing.

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Read/Post Comments (5) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2011, at 4:07 PM, ronbeasley wrote:

    Paulson has substantial position in Wells Fargo, which he added to in the fourth quarter. Soros bought 3 million shares of Wells in the first quarter, making it one of his largest holdings. Wells is Prem Watsa's largest equity holding by far. And Wells Fargo is Buffett's second largest holding, representing 20% of his portfolio, and the only one he has been consistently adding to for the past three years. Over the past 7 years, Buffett has gone from owning 3.3% of Wells to 6.5%.

    Wells Fargo is the largest equity holding in my personal and client portfolios.

    Ron Beasley

    www.rwbi.net

  • Report this Comment On May 18, 2011, at 5:14 PM, xetn wrote:

    And those boys don't have to worry about their investment in Wells because the Fed will bail them out if need be, with our money of course.

  • Report this Comment On May 19, 2011, at 12:07 PM, ldkoehler wrote:

    >> Asked years ago how he finds gems when so many companies exist, Warren Buffett said he "starts with the A's."

    Buffett is of course right. When making an equity investment, the opportunity cost of that investment is the vast array of other stocks you could have purchased. You need to understand what the equity market looks like to make an informed investment decision. And you need to start in a way that takes emotion of of the process.

    Traditional equity research that focuses on a small group of companies can be rigorous, but without scale, the ultimate investment decision lacks context. Analysts select companies to research before they know anything meaningful about them, bringing emotion and sentiment to the forefront of the investment process.

    Technology is now making it possible to perform large-scale rigorous economic earnings analysis on companies and it changes the way investors can think about their stock picks.

    http://www.newconstructs.com/nc/about/researchPlatform.htm

  • Report this Comment On May 19, 2011, at 12:10 PM, ChristopherHedge wrote:

    Didn't Soros take a huge hit in the dot com bubble?

  • Report this Comment On May 24, 2011, at 9:56 PM, hachmujt wrote:

    If everyone is always starting at the "A's" should we start with the "Z's"?

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