The Tycoon Report

How to Beat Top Performing Hedge Funds!

Finally! Individual investors have an advantage that institutions don’t have!!! Do you want to make more than the institutions are able to? Today I’ll talk about how you can.

First, If you think that buying stocks that trade in the triple digits is only for the institutions, YOU ARE DEAD WRONG. Don’t be afraid to buy “Expensive” stocks. Not to be confused with “high-priced” stocks.

I have managed money for all types of investors from individuals with small accounts to large institutional accounts. And not to offend anyone, but the unsophisticated investors are usually – scratch that – are ALWAYS the ones who would say that they wouldn’t want to buy a stock like NVR Inc. (NYSE:NVR because it traded at $230 at the time. (Check the charts. Today it trades above $900), or Chicago Mercantile Exchange (NYSE:CME) that I started recommending to my investors at $131 (today, it trades over $300.)

And don’t make me bring up Berkshire Hathaway (BRK.A) this week. It is okay to buy a stock trading in triple digits. Just ask Eddie Lampert. He runs one of the most successful hedge funds, ESL partners. He’s up an average of 25% over the last 10 years. Last year alone ESL was up 52%, but don’t even bother calling them unless you have a minimum of $10 million to invest. (Don’t worry. I will show you how the individual investor can make more than the 800 pound gorilla.)

Eddie Lampert is also the Chairman and largest shareholder of Sears Holdings (NASDAQ:SHLD). His knack for finding value is well known throughout Wall St. Some say he’s the “next Warren Buffett.” As a matter of fact, if you are a subscriber of Fallen Angel Stocks, you have access to a great report about Lampert, which was written by Dylan Jovine, the Chief Investment Officer, last October.

I personally wrote a short report one month later in mid-November 2004 on the fact that Eddie Lampert stole what was then K-Mart stock from shareholders and brought the company out of bankruptcy at $15 per share. At one time, I thought to myself, “Boy, did I miss that one!”

As a matter of fact, I recommended buying the stock as high as $95 and bought it in my mother’s account in the low $100s. That’s right folks, my customers got in first. Rules are rules. Okay, I’ll admit, luck was on my side. The company announced the $11 Billion merger with Sears Roebuck less than two weeks later, 25 points higher. Today, the company trades under the ticker symbols SHLD on the NASDAQ National.

I was in the same boat as many of you. I watched the thing trade higher and higher, hoping and praying for a pullback. All of a sudden the hottest story on the street was the new focus on the value of the real estate holdings that retailers like Sears (NYSE:S, at the time) or Saks Inc (NYSE:SKS) owned at the time. Everywhere you looked these stocks were flying.

It was just past the beginning of the real estate craze that I realized that I may not have a second chance for a pullback. A report surfaced that K-mart’s real estate holdings were possibly valued at $150 per share. With K-mart at $105 the glass was half full. The bright side was that if the report was wrong, you owned a holding company that was selling assets and raising cash, which would be invested by, you guessed it, Eddie Lampert.

Here’s how individual investors can make higher percentage returns than ESL is able to make.

First, investors must accept that it is okay to buy an “expensive” stock and that triple digit stocks can show the percentage returns that any other stock can.

Then, you can then use an advantage that a $10 Billion hedge fund can’t use: Sell the Covered Calls! FINALLY! The advantages of being the little guy!

 I had about 9 or 10 reasons for buying the stock. One was that when you follow momentum, you make money. And like a bull in a china shop, you can see more and more volume pouring into the stock as they forced the stock price higher. Obviously, institutions were planning on having a field day with this thing.

Today, the stock is held mainly by hedge funds (most of which only wish they could match Lampert’s performance). If ya can’t beat ’em, join ’em. Today other hedge funds ride Lamper's coat tails through ownership in Sears Holdings (SHLD).

Today, you, the individual investor, have the advantage!

If you are a multi-billion dollar hedge fund with a major stake in a stock like this, you aren’t selling calls on your entire position. The problem is that since the options don’t trade enough volume, many institutions don’t bother with them because they would move the price of the option contract. It’s too hard to get in or out.

Don’t get me wrong, hedge funds definitely use this strategy. But you won’t see ESL selling calls on $2.7 billion worth of stock.

If you have less than $1.5 million invested in it, you should be able to do this without affecting the price of the option contract. Depending on what option contract you want to sell, you can have anywhere between 7-16 % of the value of your position in Sears (SHLD) every other month!!!

Which ones will I sell? I can’t tell you that. The effect of telling all of the investors who read this would be similar to an institution’s trying to do the same thing as me. What I CAN tell you is:

1) I will get a much better premium if I execute my plan when the stock is a bit higher. So can you. 2) You don’t really need me to tell you EXACTLY what I’m doing because the strategy is simple enough and very conservative.

So if I’m a believer in a high-priced stock like K-Mart or CME or NVR, for example, I would be sure to generate that extra income by selling the speculators the right to buy my stock at higher prices when the stock trades higher. It’s my favorite strategy for a market like the one we see today. If you aren’t doing it, you’re missing out!

And don’t ever be afraid to buy a stock trading at what some say is an “expensive price”.

I think Warren Buffett said it best: “Price Tells Nothing About Value.” If you don’t agree with that, then you should never buy individual stocks.

I agree with #2 on the Forbes 400.