My answer to the question "Should you follow the trail of the 'Big boy' funds" is a resounding - No. Absolutely not!
You need to begin by understanding the nature of these funds.
With being so big, they have to stay with the large capitalization stocks, just because if they buy anything smaller, their purchase transaction will significantly affect their purchase price. Therefore, the portfolio manager can not buy promising companies on the rise.
Many of the same securities are in these funds. If everyone else owns BAC and it doesn't perform well, you will not be critized for owning it since everyone else owned it. Should you own a smaller company that is not "popular" and it doesn't perform well, the view of your judgement is at risk. The portfolio manager's career is at risk.
Next, look at the turnover of these mutual funds, at 50% turnover their securities are completely changed every two years. At 100% turnover, everything was changed in a single year. Do you really think there is much chance that any company they own can change their business in less than a year?! Suppose it takes 2 years (which is optimistic) to turn the operations of a company around. How can you own it for less than a year AND EXPECT results?! (Give me a call, I'll show you the fountain of youth!) Unfortunately, the average unrealistic mutual fund holder, thinks the portfolio manager can do this. Poppy cock! Therefore, the portfolio manager jumps from stock to stock like a 16 year old boy who falls in love with each passing girl.
With open ended funds, the holders are free to buy and sell at the end of day price. If they are not happy and don't get immediate gratification, they vote with their feet. Bye! "See you, wouldn't want to be you!" The result is things are liquidated to meet redemptions. Or funds are lavished on the fund and they have to scramble to find effective investment ideas. Great ideas don't happen every second.
The list goes on and on. As a mutual fund investor, you should understand these constraints. But, as a buyer of individual securities you can take advantage of their behavior. You don't want to play on their terms, because they will crush you. Just thank them for moving the market to create "sales on securities"!
How do you do this? You buy quality companies that have great fundamentals at favoriable prices. Stocks often move in fads. One day everyone wants certain companies and the next day, those companies are treated like last year's clothing styles. You then hold them for the long term.
Take Advanced Materials (AMAT). There was no interest in the stock in 2012 when I bought it at a 9 PE. It was on the low side of its 10 year historical PE ratio. At that time, they had two slight earnings losses over the prior 10 years (shows good management skills). They had increased their LT debt load, but not to unreasonible levels. From 2013 to 2017, their sales increased at a 18% compounded rate ( (14,537/7,509)^.25). In the same time period, their net income exploded at a 91% compounded rate ( ( 3,434/256)^.25)!
By identifying quality stocks that are out of favor and holding them long term, you can beat the "Big Boy" funds. But, you must control your emotions and wait for those securities to come back in "style" with the "Big Boy" funds. The "Big Boy" funds will then buoy your stock with the vigor of a "teenage boy looking for the prettiest girl on the planet"!
