A Deep Look at Smart Money

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Brendan Byrnes: Sure. Another one of the four elements in your book, Quantitative Value, is look at what smart money does. I know a lot of people look to Warren Buffett and they say, well ... Berkshire (NYSE: BRK-B  ) , and in their portfolio Coca-Cola (NYSE: KO  ) , is a big one. Wells Fargo (NYSE: WFC  ) recently a big bet on IBM (NYSE: IBM  ) . Is that what you mean by that, looking at the 13 Fs or do you mean take an even deeper look into certain fund managers and things like that?

Wesley Gray: Yeah, I mean, there's a lot of different ways you can cut the smart money and clearly one of them is following people that you already know are smart. So if Warren Buffett is buying your stock that you've identified as being cheap it's probably a good signal on average that you're on the right track.

That one is kind of obvious and that's just the general idea of following the 13 Fs. Now, another one that would be 13 Ds, like activist. Because the thing that I like about activists is not only do they buy cheap stocks but they're actually working for you to unlock some sort of hidden value, right? So activists are another good way to, or another good people, follow because they're going to actually unlock true value.

Some other ones that are less intuitive people is, for example, short interest. But a lot of people think that short interest is how you identify cans for the short side. But there's some great academic research where there's actually good news in short interest in a sense that if you can identify firms that you really like and they're really, really liquid, and they also simultaneously have very, very low short interest this is actually a counter-intuitive signal to be a buy, why? Well, if a firm is very, very liquid and theoretically very easy to short but nobody's willing to short it ,this is at least an indication that at a minimum it's not overvalued.

And there's an academic paper that shows that if you just buy these firms that are really, really liquid and also have really, really low short interest they do really well.

Some other signals are insider buy. You know, if the CEO is buying that's probably a good sign. If the CEO and the CFO are all selling and the stock is really, really cheap well it might be cheap for a reason. Or if it's really cheap then the repurchase in stock with company funds and they're doing it with their own money, you know, these are good signals.

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