Wall Street has rhythm. Like clockwork four times a year, earnings season starts shortly after each quarter ends, and halfway through the quarter, professional money managers reveal their latest purchases and sales through what's called a 13F filing.
For ordinary investors, the quarterly ritual of 13F filings gives some valuable insight into how Wall Street's best and brightest -- along with those who've fallen short -- think about the market in general and about specific sectors and companies in particular. But there's a big mistake that many investors make in trying to interpret the latest moves from money managers, and if you fall into it, you can end up in the wrong stock at exactly the wrong time.
Later in this article, I'll reveal the traps that quarterly money-manager filings set for unaware investors. But first, let's look at why money managers give us all this information and what it all means.
Turning over your cards
Without financial regulation, most money managers wouldn't want to reveal anything about their portfolios. After doing all the proprietary work to come up with what they think are the best investments available, giving that work away to anyone who wants to look at it doesn't exactly make sense as a business model.
But the SEC requires any fund management company that manages more than $100 million to disclose its current holdings in certain securities. Because the rule that established this requirement is Section 13(f) of the Securities Exchange Act, the SEC named the form for these disclosures Form 13F. Managers only have to disclose certain securities, but the list of stocks and other investments that companies have to reveal if they own them is 472 pages long and basically includes most publicly traded stocks, along with options on those stocks.
Managers have to report holdings every quarter and have 45 days to do so. That's why when you count forward a month and a half from the end of each quarter, you see a flurry of filings getting in under the wire.
What you know and what you don't
The information that 13F filings provide is unquestionably valuable. Not only can you tell what a manager owns, but by comparing against past filings, you can also figure out what a manager bought and sold. For instance, in its latest 13F, Fairholme Capital revealed that manager Bruce Berkowitz had done an about-face in his holdings of financials, cutting out Goldman Sachs
But 13F filings don't tell you everything. First and foremost, the 13F provides only a snapshot of a fund's holdings at a particular point in time. So although you can narrow down purchases and sales to a three-month period, you'll never know exactly when a manager made trades. One common trick that some managers use is to buy winning stocks near the end of the quarter -- window-dressing their portfolios to make it look as if they made smart decisions.
On a related point, the Form 13F only reflects holdings as of the quarter's end. That means that 13F filings are always out of date, as money managers don't have to make updates to reveal any purchases or sales between quarter-end and the filing date.
Should you follow the managers?
Many investors use 13F information to inform their own individual stock investments. But how reliable those decisions are depends on the manager you follow.
For instance, Berkshire Hathaway files Form 13F every quarter. Because Warren Buffett is notorious for his position that his ideal holding period is forever, you can be reasonably confident that he won't dip in and out of a particular stock for a quick gain. So when Buffett bought General Motors
For managers who rely on short-term trades, however, 13F filings aren't very valuable. By the time you see holdings information that's a month and a half old, a fund might have made a huge number of trades.
Knowledge is power
Getting to track Wall Street pros gives you a huge wealth of information. As long as you don't misinterpret it, you can get a lot of useful insight that can help make you a better investor.
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