I’ve received a lot of email feedback lately from those asking me about the simple strategy of following where the smart money is invested.
The reason for this is because a very highly held stock of many smart hedge funds, Valeant (VRX) has been in the headlines of late for all the wrong reasons.
Besides destroying the recent performance of these famous hedge funds, it has also hurt many small time investors who blindly followed the lead of their ‘guru’s without doing their own homework, as the stock is down almost 70% from its recent peak of $262.52.
The concentration of stock held by some very prominent names of the money management industry is quite remarkable at first glance. They include;
Greenberg of Brave Warriors who holds 36.57% of their portfolio in Valeant
Robert Goldfarb of Sequoia holds 34.16% of their portfolio
Bill Ackman of Pershing Square holds 29.95% of their portfolio
Jeff Uben of ValueAct holds 17.54% of their portfolio
Lou Simpson of SQ Advisors holds 12.46% of their portfolio
And many more…
Don’t get me wrong, I’m always watching what and where the smart money is invested in for extra ideas.
However, there is one big difference.
I need to be independently comfortable with my own research and valuation first before checking who also agrees with my analysis. Valeant actually hasn’t even come up on my radar in the past year.
Doing it in reverse order is a bad idea. Why?
There are two reasons to this.
One, is that you are likely to have bought at a much more expensive price and hence now have suffered a permanent loss of capital, whereas the smart money may have got in at a much lower price earlier and are still sitting on large profits even after the recent fall.
And two, when the stock drops by such magnitude like Valeant, you have no idea when you need to exit your investment. All you now have is the ‘hope’ that the smart money don’t bail out further leaving you holding the potato alone in the end. You are in effect hostage to what the smart money does because you followed them in.
Currently, most of the smart money seem to be still holding onto their positions, although many have begun lightening their portfolio weighting on the stock.
Valeant is currently in my too hard to analyse basket as I am unsure if whether permanent reputational damage has already occurred and what further government investigation will Valeant be involved in.
Only time will tell if Valeant becomes the permanent basket case for those who are still holding the stock.
