The Form 13F Trap: 5 Things to Know

What is a Form 13F?

A 13F disclosure is a quarterly report that institutional investors with $100 million or more in assets under management (AUM) must file with the US Securities and Exchange Commission each quarter. 13F filings are meant to provide Wall Street, retail investors, and smaller institutional investors with transparency into what stocks and assets some of the world’s most successful and influential investors are trading. Included in the report is the name of the security, the type of security (for example, “call option” or equity”), the number of shares or contracts held, the fair market value of the position, and the percentage of portfolio the position comprises.

These reports are required to be filed within 45 days of the end of each calendar quarter. Since the third quarter ended on September 30^th, investors should expect 13F filings to trickle in over the next few weeks. While 13F filings can provide investors with transparency, entertainment, potential study material, and valuable insights, they are often misunderstood and can mislead the average investor.

As a result, I will cover five of the most common pitfalls that investors often fall into when analyzing 13F filings.

1.      13F Filings Represent Stale Data: The biggest trap amateur investors fall into is assuming that because a position is listed in the 13F, the filing firm still holds it. In reality, although institutional investors often have lower turnover than other investor types, a lot can change in 45 days. In fact, many prominent and successful investors credit their flexibility with their success. For instance, legendary billionaire investor Stanley Druckenmiller once said, “If the reason you invested changes, get the hell out and move on.” Remember, so long as the 13F has been filed, these investors are not required to inform the public, and they are not incentivized to (so investors don’t ride their coattails).

2.      13F Reports Only Require Long Positions to be Disclosed: An investor may gain confidence in their position if they see that an institutional investor is long the stock.  However, in theory, the fund can hold an equally large, or even larger, undisclosed short position. In other words, the portfolio manager may have a complex position betting on the stock to go down, but the 13F disclosure shows that the manager is instead bullish on the stock.

3.      Timeframe is Unknown: Even if the position is as it appears on the 13F, it is impossible to know if the position is intended to be a trade or an investment.

4.      Notional Values can be Misleading: Michael Burry became famous among investors after the Hollywood smash hit “The Big Short” documented his prediction of the 2008 Global Financial Crisis. This quarter, Burry was one of the first to release his 13F. The 13F disclosure shows that he is short (via long put options) ~$186 million worth of Nvidia (NVDA) (~66% of the portfolio) and ~$912 million worth of fellow AI juggernaut Palantir (PLTR) (~13% of the portfolio). However, 13F disclosures represent notional value NOT actual value. In other words, in all likelihood, Burry is paying a tiny premium to control a massive exposure and is not actually short that much of each company.

5.      Confirmation Bias: Most investors want to be fed fish instead of learning to fish. As a result, investors often rely on 13Fs instead of conducting their own research and developing their own strategy. Unfortunately, like any investor, institutional investors are wrong constantly, and blindly following them can lead to bad habits and unprofitable trading.

Buffett & Tepper: Two 13Fs Worth Watching

Warren Buffett’s Berkshire Hathaway and David Tepper’s Appaloosa Management are two of my favorite 13Fs to track. Buffett and Tepper are not only correct often, but they also often make high-conviction, long-term bets that are easier to track. For instance, Buffett began buying Apple (AAPL) in Q1 of 2016. Since then, the stock has been up tenfold. Meanwhile, Tepper began buying beaten-down Chinese stocks like Alibaba (BABA) and Baidu (BIDU) late last year, right before their explosive upside moves. Additionally, in his most profitable trade ever, Tepper purchased beaten-down banks, such as Bank of America (BAC), following the 2008 Global Financial Crisis.

Bottom Line

While Form 13F filings offer investors transparency into the holdings of deep-pocketed investors, they are fraught with limitations, including stale data, incomplete disclosures, and misleading notional values.

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