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The Best Way to Trade the Smart Money

October 30, 2017

One of the best ways to following the “smart money” is to keep track of what’s known as 13F filings. Filed within 45 days of the end of a quarter, they required full disclosure of the name of the institutional investment manager that files the report, as well as the name of the investment, the number of shares bought and total market value of the transaction.

For example, in the first quarter of 2017, I could see that Warren Buffett increased his stake in Apple from 57.4 million shares to 129.3 million, as of March 31, 2017.

Or, let’s say I wanted to see what David Tepper bought in the first quarter. A 13F filing would provide me with information that he took a new position in Bank of America, General Motors, CBS, UnitedHealth, Symantec and Nucor, as he exited American Airlines.

We’re not talking about following retail money here. This is big money changing hands.

And if we can track it, we have a better idea of where we can invest, too.

There can be a downfall to this strategy, though. Sometimes, by the time such information is revealed, funds may have bought and sold their positions already. However, such filings still offer great insight into the mindset of institutional money.

For example, as of August 15, 2017, a good number of funds were Intel (INTC).

That told us funds were beginning to over-crowd the trade. Contrarians took it as a buy signal, and watched Intel jumped from $34.50 to $40.83. Of course, this doesn’t happen all the time. But it’s one of the many reasons to track smart money.

Another way to track what the “smart money” is buying is by keeping an eye on what’s known as the 13d-101, which requires funds to disclose new stock purchases that represent at least 5% of any stocks’ outstanding shares. Unlike a 13F, a 13D must be filed 10 days after purchase, which gives us opportunity to get into a trade not long after the smart money.

For example, in mid-2016, we learned that Elliott Associates – a hedge fund management company with a string of successes at the time – just bought shares of Imperva (IMPV), a provider of cyber and data security products. At the close of business June 27, 2016, the company owned 743,227 shares of the stock.

Their intention for buying was to simply help raise shareholder value.

By the time we learned of the news days after the initial transaction, shares traded at $41.88. Any one that followed the fund into the trade would watch their investment move from $41.88 to $57 a share not longer after.

Does that mean we should buy every 13D filing tip?

Not at all… Such reports don’t provide the “Holy Grail.” But what they can help expose is the potential for long or contrarian opportunity.

When you find a 13D filing, explore the stock both fundamentally and technically.

It may just lead to your next big opportunity.

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