What are the best stocks to buy? The Wisdom of Crowds: Why the Many Are Smarter Than The Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations is James Surowiecki’s 2004 book that centers on the idea that the collective estimates of large groups of people are smarter, more accurate than the estimates of any single individual. Surowiecki’s book starts with telling Francis Galton’s story about a competition at a county fair. Eight hundred people tried to guess the weight of an ox that was on display. To Galton’s surprise the average guess (1197 pounds) was mind blowingly close to the actual number (1198 pounds). Surowiecki gives several other examples of this concept throughout his book.
I read this book because, as a PhD student studying the predictive power of insider trading, I observed the same concept in action a few years before the book was published. My research showed that a stock bought by several insiders outperformed the market by a meaningful margin. This result was actually a confirmation of several other studies on insider trading. I don’t want to mislead anyone. Consensus estimates or stock picks work surprisingly well on average but this doesn’t mean that they work all the time.
A few years ago I applied the same theory to the stock picks of hedge funds and found that the consensus stock picks of hedge funds outperformed the market by double digits annually. In fact, the results were even better than the consensus stock picks of corporate insiders. So, we launched an investment newsletter and started sharing the stock picks of this investment strategy in real-time to prove that this is not just a statistical fluke. During the three years since the launch of our investment newsletter this strategy’s stock picks returned 102%. S&P 500 Index managed a gain of only 49% during the same three years. So far this approach of investing seems to be working (see the backtested results).
In this article I will share the consensus stock picks of the 4 most successful quant hedge fund managers. Quant hedge funds fundamentally utilize the same principle that was described in Surowiecki’s book. They try to identify several (in some cases dozens of) independent investment strategies by employing dozens of PhDs in several disciplines. None of these strategies work 100% of the time (there is no such thing in investing unless you are robbing people blind) but collectively they generate relatively consistent results. Jim Simons of Renaissance Technologies, David Shaw of D.E. Shaw, Cliff Asness of AQR, and John Overdeck and David Siegel of Two Sigma became billionaires by exploiting this concept commercially on a massive scale. Now, we are going to exploit the collective wisdom of these 4 billionaire hedge fund wizards by identifying the 5 stocks they all had in their portfolios in the latest round of 13F filings. By the way, once a quarter large hedge funds are required to disclose their positions in stocks that trade on major US exchanges. That’s how we get to see and track what they are doing. Based on these filings, here are the 5 stocks stocks that are identified by these billionaire hedge fund managers’ secretive algorithms.