Guru focus: Should you pay attention to the Value Gurus?

Short answer: Yes, with a caveat or two. Don't fly blindly-- try to buy companies at lower price than your guru did and make sure you understand why he/she recognized what the market was missing such that it mispriced the stock. Unfortunately, this requires a lot of homework... I spend quite a bit of time focusing on the gurus that I admire and seem to think like me (I guess I think like them, lol). I can't get my head around the machinations of Ken Heebner, George Soros and Bill Ackman, for example. OTOH, Seth Klarman, Bruce Berkowitz, WEB, Dodge and Cox, Marty Whitman, Ron Baron, Mason Hawkins, Jean-Marie Eveillard, Ian Cumming, John Rogers, Chris Davis and Monish Pabrai all capture my interest immediately.

I think that Guru stock picks are an excellent starting point for your research. If the gurus you respect are almost all buying a company and the insiders are buying it too then it sure is compelling to scour the financial reports to find what they have seen that Wall St. has overlooked.

Model Portfolios Performance Review: How should you follow the Gurus?

September-11-2008

It has been a very tough year in the market. The S&P500 is down about 15% as of Sept. 10. Here we like to review the performances of our model portfolios. Each model portfolio consists of the top 25 stocks top ranked with its criteria. How did the model portfolios do in such a market?

All four model portfolios were rebalanced on Jan. 2, based on the close prices of Dec. 31, 2007 . Although all four model portfolios are down for this year, but they all outperformanced the S&P500.


The Most Weighted Portfolio consists of the 25 stocks with the highest combined weightings from the portfolios of the 25 selected Gurus. This portfolio gained 22% in 2006, without counting dividend. It lost 2% in 2007, compared with S&P500’s gain of about 3%. So far this year it is down 11.55%, compared with S&P500’s 16.09%. Since inception in Jan. 2006, the portfolio gained about 6%, while the S&P500 lost 3% during the same period. All numbers do not include dividends.

This portfolio had 40% of turnover at the 2007 rebalance.


It has been widely reported that Gurus are underperforming. However, buying the stocks with the highest combined weightings outperformed the market by about 9% so far in less than 3 years. The portfolio of 25 stocks shows similar volatility as the S&P500.


The Broadest Owned Portfolio consists of stocks that are most popular among Gurus. The rank is based on the number of the gurus that hold the stock. If this number is the same, the stocks that the gurus hold in higher positions (percentage to portfolio) are ranked higher. The portfolio is updated every 12 months.

This portfolio gained 15.8% in price in 2006, outperforming S&P500 by more than 4%. However, like the Most Weighted Portfolio, it lagged the market in 2007 by losing 6%. So far in 2008, it made up the bigger loss, and outperformed the market by 7%. Overall since inception in Jan. 2006, it did better than the market by about 1%.

The Consensus Picks Portfolio consists of the consensus picks by the 25 selected Gurus. The rank is based on the number of the gurus that have bought the stock over the past 6 months. If this number is the same, the stocks that the gurus bought in higher positions (percentage to portfolio) are ranked higher.

The Consensus Picks portfolio gained about 10% during 2007, outperforming the SP500 by more than 6%. Again so far it did better than the market by 7% this year. Since inception in May 2006, it gained 4.37%, relative to the loss of 1.95% by the S&P500. Maybe the Gurus are not doing very well, but their consensus picks are doing ok.

Guru Bargains 25 is the best performing portfolio in 2007, it gained 15.4%, beating SP500 by wide margins. This portfolio consists of stocks that have declined since Gurus bought. Is it telling us that buying stocks at lower prices that Gurus have paid has great rewards? If we believe in value, it should.

The Guru Bargain portfolio did poorly in 2006. We did things differently for 2007. First of all, we did not use the portfolios of all the Gurus in our database to make the portfolios. We selected a subgroup of 25 Gurus who have very conservative approach and the lowest turnovers. Then we limit the market cap of the stocks to be above $4 billion. These requirements made the portfolio much less volatile, and changed the results dramatically.

The rebalance of this year replaced almost all of the stocks but AMD. So far in 2008, it is about even with the market. This portfolio is more volatile than the market. If you see the current Guru Bargains here: http://www.gurufocus.com/Guru_bargins.php