How To Trade Around a Billionaire

If you are a billionaire there are a lot of things you could do in your spare time. You could race 747 jets around the world, you could have 37 kids and not worry about affording their college educations, you could quit everything and try to start a career in standup comedy, or you could do what most billionaires do and try to make a little more money.

Money isn’t always the goal but it’s certainly a method of measuring success.

Normally when a private investor, billionaire or not, buys stock, it’s a private affair, not worthy of notice. But when someone with a billion dollars or more tries to make a decent return on their investment they are like a bull in a china shop. Using a small portion of their net worth to invest in a public company can often cause them to cross the line in the sand that requires them to file an SEC filing, revealing to the public their interest in the stock. That line in the sand is when their buys cause them to own more than 5 percent of a company. At that point, each new purchase or sale needs to be reported within 10 days, according to the SEC, which conveniently allows us to follow the investment strategies of our favorite high-net-worth individuals.

The most interesting and telling point of investors such as Warren Buffett, Bill Gates, or Peter Lynch is that they don’t seem to buy for their personal accounts large caps such as Cisco or GE, but instead regularly dabble in small cap and micro cap stocks since that is where the most potential for large gains exists. One doesn’t even need to look further than the indices for large caps versus the indices for small caps. In mid-2005 the Russell 2000 small cap index was at an all-time high while indices such as the NASDAQ or the S&P 500 were between 20 and 70 percent down from their all-time highs.

I like to follow billionaire investors Mark Cuban, Michael Dell, Bill Gates, Bruce Covner, Carl Icahn, George Soros, Peter Lynch, and Peter Kellog, among others. I look from a macro perspective (what types of investments, what size companies, and what sectors are they interested in) as well as micro (what are the specific investments). It is often worthwhile to piggyback alongside of these investors, particularly since you have the edge of knowing exactly when they are making their big purchases or sales (since they have to file within days of acquiring or selling), and this allows you to nimbly trade around their positions.

If there’s a billionaire you are interested in following, you can use various services to keep track of their filings, such as www.sec.gov and www.edgar-online.com. Specifically, you want to look for these types of filings:

• Form 4: This details if they are making a significant change to their holdings. If they own more than 5 percent of a company and they sell shares, they must file a Form 4 within 10 days.

• SC-13D: A 13D schedule needs to be filed whenever they hold more than 5 percent of a company or if they go from owning more than 5 percent to less than 5 percent. This form has to be filed within 10 days of the “acquisition event” that took the filer above the 5 percent ownership level in a company.

• 13F-HR: This is filed to list all of the holdings of an institution that needs to file within 45 days of the close of a quarter. For instance, Michael Dell is not an institution but he funnels all of his money through a family office called MSD Capital, which does have to file the 13F-HR filing.

Let’s take a look at some of the investors I like to follow.

MARK CUBAN

Even successful dot-com cowboys diversify. Perhaps they know better than anyone the need to explore unpopular investment options. Cuban, perhaps most famous for his impeccable timing in selling his company, Broadcast.com, to Yahoo! and then selling his Yahoo! shares at the very peak when they were worth upwards of $3 billion, recently posted his stock positions, both long and short, on his blog, www.blogmaverick.com.

His long positions include Lion’s Gate Entertainment (his comment: “The only indie film library available, willing to leverage new media for revenue”), Rentrak (“Only independent source advertisers can use for tracking Video on Demand and Online Video on Demand”), and domain name registrar Tucows (“Good management, low PE, sells to growing market segment”). His shorts include Imergent, which makes software to help people build e-commerce sites (“I don’t like companies that sell products that consumers shouldn’t buy. It catches up at some point”) and Interoil, an oil and gas company (“Appears to have cash issues”).

BILL GATES

Even billionaires occasionally need to diversify their portfolios, and Bill Gates’ massive $40 billion investment in Microsoft is a case in point. Through his investment vehicle, Cascade Investments, Bill Gates buys the stocks of traditional brick and mortar companies. For instance, he owns 2.4 million shares of manufacturing, plastics, electric, health-care company Otter Tail. While the stock hasn’t gone up much in recent years, it is currently paying a very steady 4.5 percent dividend and is trading at a low double-digit P/E, providing a decent cushion for Gates and his heirs.

Other stocks Gates owns include 5.1 million shares of Pan American Silver, one of the largest public silver mines; 441,000 shares of Four Seasons Hotels; and 18 million shares of trash collector Republic Services. The rest of Gates’ holdings can be found in the SEC filings for Cascade Investments.

MICHAEL DELL

When he’s not churning out computers, a look at his stock portfolio (as managed by his investment vehicle, MSD Capital) suggests he spends a lot of time eating pancakes and drinking milkshakes. He owns 2.1 million shares of International House of Pancakes and 2.3 million shares of Steak ’n Shake. He also owns over 9 million shares of Darling International. And what does Darling do? From their description found on Yahoo! Finance:

“The Company collects and recycles animal processing by-products, and used cooking oil from food service establishments.” Mmmm.

From the 13F-HR report for MSD Capital, Dell’s holdings as of December 31, 2004 include:

Good investing,

James Altucher

		Extract taken from SuperCash: The New Hedge Fund Capitalism, Copyright © 2006 By James Altucher. Reprinted by arrangement with John Wiley & Sons, Inc. Editor’s Note: James Altucher is a partner at the hedge fund firm Formula Capital. He writes for TheStreet.com and theFinancial Times and has been a periodic guest on CNBC's Kudlow & Cramer. Previously, he was a partner with the
technology venture capital firm 212 Ventures and was CEO and founder of Vaultus, a wireless and software company. He holds a BA in computer science from Cornell and attended graduate school for computer science at Carnegie Mellon University. Altucher is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett, both published by Wiley.