Does imitating the stock picks of billionaires make you rich? The short answer is no. You don’t get rich by investing in a diversified portfolio of stocks. Let’s take an extreme example. Steve Cohen managed to return about 30% per year for a very long time. If you started with $1 million and return 30% per year every year, you still wouldn’t become a billionaire after 25 years. And that’s assuming that you don’t have to pay any taxes and you keep reinvesting everything you make. Greenlight Capital managed to return 18.9% since its inception in 1996. One million invested with Greenlight Capital at the beginning of 1996 would become only $32 million today assuming you don’t have to pay any taxes. If your tax rate is a modest 25%, your $1 million invested in Greenlight Capital would only become $14.2 million today. That’s assuming that you were lucky to invest with one of the most successful hedge funds in the World.
The truth is billionaire hedge fund managers start investing differently as their assets grow and they become billionaires. When they are managing a $100 million portfolio, they can easily invest in small, promising ideas. When they start investing a multi billion dollar portfolio they put most of their money on large-cap stocks because they have too much money to invest it all into small-caps. Unfortunately, almost all hedge fund managers, including billionaire hedge fund managers, can’t beat the market by a large enough margin by investing in large-cap stocks. That’s one of the reasons why hedge fund investors have been under-performing the market in recent years.
Our research has shown that the 30 most popular stocks among hedge funds outperformed the market by nearly 2 percentage points between 1999 and 2009. This isn’t bad at all but it isn’t enough to justify the high hedge fund fees. On the other hand, investors would have outperformed Vanguard’s index funds by an average of 2 percentage points a year if they had imitated these picks in their personal portfolios. Our research also has shown that hedge funds’ small-cap picks outperformed the market by double digit rates annually between 1999 and 2009 (read the details here). So, overall it is a good idea to pay attention to what hedge funds and billionaires are buying and selling, especially in the small-cap portion of your portfolio.
We recently published the list of the 10 most popular stocks among hedge funds. Most of those stocks are also very popular among billionaires. This list covers the equity positions of 59 billionaires. We excluded positions that are smaller than $10 million. We also limited our rankings to technology stocks. We ranked each stock by the number of billionaires with bullish positions. As you’ll notice in the forthcoming list, it appears billionaires love mostly mega-cap tech stocks but there are a couple of surprises at the top of the list.
7. Yahoo! Inc. (NASDAQ:YHOO) was in the portfolios of 12 billionaires at the end of 2014. Billionaires James Dinan, Daniel Och, and David Einhorn initiated brand new positions in Yahoo probably thinking that it is a much better way of investing in Alibaba. Yahoo has been targeted by one activist after another in the past three years. Actually David Einhorn was the first star hedge fund manager who thought Yahoo’s sum of the parts valuation was much higher than its market price. That was more than 3 years ago. Einhorn actually lost a little bit of money before Dan Loeb started buying Yahoo at $12 per share. Loeb ousted Yahoo’s management and pushed the board to hire Marissa Mayer as CEO. Third Point made about a billion dollars until he stepped down in the middle of 2013. More recently Jeff Smith’s Starboard Value has been targeting Yahoo. The thesis is still the same.