Steal This Column

In the investing world, talk is cheap. We're bombarded by a never-ending stream of chatter in the form of newspaper articles, marketing material, television interviews and, yes, even magazine columns. Buy oil, sell gold, get out of the house builders, get into biotech stocks — how can an investor (especially one who is just starting out) make sense of this babble of often contradictory advice?

It's easy. Stop listening to what the investment experts are saying. Look instead at what they're doing.

While legendary investors like Warren Buffett won't take your phone calls, they are obligated by law to regularly report their major portfolio holdings. These days, thanks to the Web, you can click a few links and see exactly what these geniuses are up to. It's like being at a giant poker game, where you can peer over the shoulders of many of the smartest money managers on earth and see precisely what cards they're holding.

You can use this information to shape your own buys and sells. For instance, if you're just starting out and you want to assemble a low-risk balanced portfolio, you can zero in on the balanced mutual funds that earn the highest marks from MoneySense or Morningstar. You can then go to the Web sites of these funds and see what stocks they're holding. After a bit of poking around, you'll discover that banks, insurance companies and energy producers make up a big portion of these funds' holdings. You might decide that several of those stocks could provide the perfect bedrock for your own portfolio.

If you're a more experienced investor, you may want to take a tip or two from great money managers with stock-picking philosophies that resemble your own. For instance, if you're a deep value investor, you can click over to the Longleaf Partners Web site to see what Mason Hawkins, the legendary fund manager from Memphis, Tenn., has been up to. You might not want to jump into GM or Dell stock with the same enthusiasm that he has, but reading his reasons for investing in those downtrodden companies will make you think twice. After all, you know that Hawkins is being sincere: unlike an analyst or a newspaper pundit who can tout a stock for no good reason, he has billions of his firm's money riding on his decisions and his quarterly reports show exactly how big a bet he's made on each of his favorite stocks.

You don't have to restrict yourself to following just a couple of investing masterminds. Click over to GuruFocus and you can instantly pull up the current holdings of any one of 31 investing gurus in the U.S. For a Canadian perspective, visit the Web sites of top fund firms such as Phillips, Hager & North, Saxon Funds or Chou Associates and read their commentary and quarterly reports. You can also enjoy a roundup of the most insightful reports, as well as much other investing news, on StingyInvestor.com, the Web site of MoneySense columnist Norm Rothery.

The only drawback to following these gurus is that their reports tend to appear only once every three months, so there's going to be a lag between the time that these money managers buy or sell a stock and the point at which they disclose their moves. For that reason, copying a particular investing genius works best with buy-and-hold value managers, who tend to keep the same stocks for years.

Still, updating your portfolio even just twice a year based upon the gurus' moves may be enough to give you an edge. A 2004 study called Copycat Funds, done by four researchers from Stanford, MIT, the University of Virginia and the University of North Carolina, found that if you had set up copycat funds based on the 100 largest stock-focused mutual funds in the U.S. and you only updated your copycats twice a year based on publicly available information, your returns would be "statistically indistinguishable, and possibly higher" than the returns of the original funds. The higher returns come about mainly because you're not paying mutual fund fees.

Think of your chosen gurus as the ideal stockbrokers. Through their buys and sells, they effectively recommend stocks and give you a second opinion — but their advice is free, and they're much better investors than your average broker. Best of all, by looking at what they're doing, and ignoring what everyone else is saying, you can cut through the chatter and get at the truth.
October 2006 issue of MoneySense