There you are, at a cafe or restaurant in central Tel Aviv, when you happen to recognize the two guys at the next table. They're big shots in one of the larger institutional investment companies, lapping up lunch. You hear one remark to his colleague, "We have a ton of Teva stock. Our portfolios are bursting with it."
You are a dabbler, an amateur investor, and you are absolutely thrilled. It's your first-ever tip, first-hand, from a player! You have information other people don't! You bolt the rest of your own meal and scurry off, whipping out your cell phone as you stride down the street.
But wait a minute. Should you phone your broker and tell him to go deep on that share?
What is the true significance of what you overheard? Is it actually worth anything?
Note that the big shot didn't say he was about to buy a truckload of Teva shares, he said he'd already done it. His investments vehicles are awash in the stuff. You don't know when the shares were bought. You don't know if he means to buy more. You don't know if in fact that giant chunk of Teva he holds is worrying him, and he's thinking about unloading some of it.
All you know is that until recently, at least, one institutional investor thought Teva was an especially toothsome investment prospect. You also know that this institutional investor has an army of experienced analysts who studied the issue.
This is not a theoretical exercise, and you don't have to loiter on Rothschild Boulevard to glean tips. The listed companies and brokerages are publishing their financial statements for 2010. By law the big institutional investors must disclose the state of their holdings at year-end. With a little work delving into Israel Securities Authority databases or the companies' own websites, you can determine the most popular stocks. That information will be two to four months behind, but when it comes to investor favorites the information is likely to still be relevant.
Goldman Sachs recently pulled off this very trick regarding hedge funds - theoretically, the smartest, fastest investment vehicles around - and hired the brightest traders. If lots of hedge fund managers choose a given stock, you'd think it would make sense to get into it too.
So what were the hedge funds' faves? First and foremost, Apple, in which 195 hedge funds were invested at year-end 2010. It paid off for them: Apple is near its all-time high.
Next were three banks (Citigroup. JP Morgan and Bank of America ), followed by four more technology companies (Microsoft, Google, Cisco Systems and HP ), drugs (Pfizer ) and General Motors, fresh from bankruptcy proceedings. These were the 10 biggest tips from the brightest minds on Wall Street.
They are among the world's larger companies. The shares are liquid. Anyone can buy them.
Israel doesn't have much of a hedge fund scene, and the funds it does have don't have to announce their holdings at year-end. The closest thing we have is mutual funds. The favorite among mutual fund managers at year-end 2010 was Teva, which also placed 34th on the American hedge funds' managers list: 306 of them had shares in the Israeli company.
After Teva in the Israeli top 10 were the four big banks, followed by Bezeq, Israel Chemicals, Makhteshim-Agan Industries and Delek Group. (Note that both the Americans and the Israelis were betting on drugs, banking, oil and chemicals. )
But does aping the big boys promise you success? Not really. In Israel, at least, the top 10 list is very much like the TA-25 index, meaning it's a "market portfolio". The mutual funds aren't picking stocks, they're picking indexes, with a tweak here or there. It isn't that they're crazy about this or that company, it's that there's nothing else. The one thing the Israeli mutual fund managers want is not to underperform the index and their colleagues.
In the United States, too, being on the favorites list doesn't assure you'll beat the market in the future. Clever people at hedge funds have a sense about when to get out of a stock. The moment they decide its risk is greater than its reward, it'll be bye-bye Charlie with no parting kiss. Nobody can assure they won't be dumping that stock on the very day you decide to get in.
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