03 How to Read Form 13F

In the previous sections, we've learned that 13F filings allow investors to track the holdings of star Wall Street funds.

However, not all filings offer valuable information, so you'd better first analyze their investment strategies before referring to their reports.

Assume you have a 13F report. What to look for then?

Before we dive into details, let's first take a look at the report's contents.

The report contains a lot of information, but the most important ones include:

● Name of the security issuers;

● Class of security (e.g., common stock, put/call options, class A shares, convertible debenture);

● Number of shares owned (as of the last day of a calendar quarter);

● Market value of the holdings (as of the last day of a calendar quarter).

The above picture is a snapshot of the 13F report in Q1 2022 of Pershing Square Capital Management led by Bill Ackman. Column 1 shows the name of the securities the fund held, while Column 2 is the class of security. The market value of each security and the number of shares are listed in Column 4 and Column 5, respectively.

The report reveals that Pershing Square held eight stocks in its portfolio as of the end of the first quarter of 2022. The top 5 holdings by market value are Lowe's Companies Inc., Chipotle, Hilton, The Howard Hughes, and Restaurant Brands International.

However, the data itself only tells part of the story as it is yet to be sorted. To get a deeper understanding of the report, you also need to look at changes in institutional holdings.

How the holdings changes of a fund matter even more than its portfolio in 13F analysis.

Changes in holdings refer to whether a fund manager increases or decreases holdings of a given stock, buys shares of a new company, or sells out a stock in a particular quarter. This information might help you see through the actions of a fund manager.

Take Baupost Group's 13F report in Q1 2021 as an example. This fund is managed by Seth Klarman, a renowned value investor.

If looking at the top 10 holdings in his portfolio only, you'll find eBay was the third-largest holding by market value for the quarter. So you may think Baupost Group was bullish on eBay.

However, if you take another look at how the positions changed, you'll see Baupost Group reduced its stake in eBay by about 41.1%, from 32.12 million shares in Q4 2020 to 18.32 million in Q1 2021. Now it's clear that the fund manager might be less optimistic about the company.

However bear in mind that fund managers may change their positions for various reasons, such as shifts in the macroeconomic environment and the company's fundamentals. So study the change case by case.

Another critical element of analyzing a 13F report is to keep track of the company's filings over time. In this way, you can observe how your favorite investors apply their investment strategies.

If a fund manager you track bought a new stock and continued to increase its position over the past quarters, you may choose to dig deeper into the underlying company as you're curious to know why.

Conversely, if you notice that the institution you watch kept reducing its exposure to a particular stock, you'd better examine the company's fundamentals to see whether they've worsened.

Let's go back to the previous example. If you've closely tracked Seth's 13Fs, you'll see the fund had been trimming its eBay position since Q1 2021 and completely exited the position in Q4 2021.

Again, tracking the guru's portfolio doesn't mean you should always follow suit. Even the best fund managers may make mistakes. So it's not a good idea to make a buy or sell decision solely based on the information discovered in 13F filings.

In addition, books, annual letters, and interviews of famous fund managers can be a good reference for your analysis of holding changes.

For example, Warren Buffett writes an open letter to Berkshire Hathaway shareholders every year to share his view of the market. By reading these letters, you may get a sense of his investment strategy.

We hope you now have a general picture of Form 13F after learning these three lessons. Let's recap the key points:

13Fs allow investors to track the holdings of star Wall Street funds. But remember that the reports are only part of the picture and have a lag.

Study a fund's investment strategy before reading its 13F filings. Reports of long-only institutions with a long-term horizon and outstanding performance records are generally more valuable sources of information for you.

The key to reading a 13F is to analyze how the positions changed and track the changes over time.