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Gurus You Should Listen to And Those You Need to Ignore!

October 19, 2007 – by Richard Band

Many financial advisors like to pretend they
never listen to anybody else—as if they were mad
scientists working alone in a laboratory buried
thousands of feet below the Ural Mountains.

However, the truth is quite the opposite.
Every analyst or money manager is exposed to the
ideas and arguments of others, whether through the
mass media or somewhat more refined and intimate
channels. This cross-pollination serves a vital
purpose, allowing investors to test their own insights
and explore new money-making possibilities.

Of course, professionals don’t act on every investment
tip they hear. Neither should you. But there’s
no shame in seeking out the best minds in the business,
listening to them and learning from them. In
fact, I encourage you to do it. I’ve done it myself, for
many years, as part of my own research process.

Seek Out Money Managers Who Add Value

The key is to figure out which players are worth paying attention to, and which ones can be safely ignored. In my experience, the most helpful leads usually come from successful, value-oriented money managers.

Sometimes, these folks will share their opinions in a public interview. More often, though, investors have to dig a bit deeper to find out what they’re really thinking. Each quarter, the Securities and Exchange Commission requires institutions with more than $100 million under management to file Form 13-F, detailing their exact holdings. By comparing one quarter’s 13-F against the last, you can see which stocks the manager has been accumulating or which ones they have been shedding. These silent numbers on this obscure SEC form speaks volumes—particularly when the manager is someone with a great long-term track record.

Keep in mind, that in today’s wired world, it’s not very difficult to find out what the top money managers are buying or selling. For mutual funds, the MSN Money Web site gives a handy summary of the fund’s 25 largest holdings, together with any increase or decrease in the position over the past quarter. You can also access the money manager’s complete list of holdings at the SEC’s EDGAR site (www.sec.gov/edgar). Type in the name of the management company—not necessarily the same as the fund name—and click on the two or three most recent Form 13-F filings to uncover any emerging trends.

It’s easy for money managers to publicly say they like a stock (after all, wagging their tongues won’t cost them a dime!) but a money manager who channels hundreds of millions, perhaps billions, of client dollars into a single security is putting his or her reputation, and quite frankly, their livelihood, on the line. And top-ranked professionals won’t take that step without a lot of prior research and reflection.

Voices to Tune Out

 Let’s face it, this industry has its share of hucksters and charlatans, as well as advisors who simply lack good, sound judgment. For your own financial well-being, it’s crucial to train yourself to ignore these voices. Better yet, smile and laugh at them for comic relief!

Several years ago, for example, Investors Business Daily recommended that someone with a $100,000 portfolio should own no more than five stocks. I wonder how many portfolios have been incinerated as a result, when one or two of those five magic names collapsed at the same time!

You can also safely pass over the numerous trading-oriented services touted by discount brokers. They’re totally inappropriate for the 95% of investors who seek tax-favored long-term gains. For example, ScottTrade (a worthy firm in most other respects) is pushing a stock-rating system that uses a 13-day moving average of the share price to decide whether you should buy or sell. Is this a joke without a punch line? 13 days? Are they kidding? Follow this frantic system, and brokerage commissions will empty your pockets—if your psychotherapist doesn’t first!

So, just who, exactly, are these outstanding pros? Here are a few I trust and admire.

Money Managers Worth Their Weight in Gold

Warren Buffett of Berkshire Hathaway certainly belongs on the list, but I also follow a number of lesser-known money managers, and their funds who deserve bragging rights, including:

  • Dodge & Cox Stock Fund
  • Fairholme Fund
  • Longleaf Partners Fund
  • Polaris Global Value Fund
  • Selected American Shares
  • Third Avenue Value Fund
  • And last but not least the Weitz Value Fund.

By the way, it’s no accident that I’ve recommended each of these funds in my Profitable Investing newsletter. I believe in their investment approach and the quality of their research. It stands to reason, then, that I’m also a fan of many of the stocks they own!

 In short, follow the advisers who put their money where their mouth is! Like Warren Buffett, one of the geniuses in the investment community, says:

“I’ve mainly learned by reading, myself…If you learn basically from other people, you don’t get too many new ideas of your own.” 

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