Invest Like A Billionaire (Even if you only have $1,000!)

I considered starting today’s article (written on September 7) with this: “As I stand here outside New York City’s Fifth Avenue Apple Store, waiting to get my inevitably cool iPhone 6 and my long coveted iWatch…”.  However, anyone who has read more than two or three of my earlier articles would know that there is no way I’d be spending 12 days waiting in line for anything… much less doing so in New York City!!

So let’s just say that as I look ahead to Tuesday’s big unveiling (on September 9^th, with sales beginning on 9/19) of the iPhone 6, my thoughts turned to Steven Jobs, the internationally renowned co-founder of Apple, Inc. (AAPL) …  as well as the inspiration for almost all “i-products”!

Didn’t you sometimes wonder: “What did Steve Jobs do with his money? How did he invest?”  And if, somehow, you could have known what Jobs invested in, would you have put some money in the very same thing? 

Of course, we know Jobs best as a visionary who was able to inspire the creation of technology products that were high quality and user-oriented, with a touch of design “elegance”. But he was no slouch when it came to investments!

When George Lucas spunout the computer graphics arm of Lucasfilm in 1986 to form what we know today as Pixar, it was Steven Jobs who capitalized the spinout with $10 million of his own funds. Of that $10 million, $5 million was paid to Lucasfilm for the rights to the computer generated imaging technology it developed[1], and $5 million was designated for the operations of the Pixar. However, in succeeding years, Pixar ran out of operational funds at several points. As you remember, between 1985 and 1996, Jobs was exiled from AAPL, and (like most people) he did not want Pixar to fail because it would be embarrassing.  Therefore, Jobs added (in $10 million increments) additional capital to keep Pixar going – until by 1994 he had invested a total of $50 million, making him practically the only shareholder…. as well as (by then) its CEO! 

It was during Jobs’ long run operating as CEO of Pixar that the fortunes of the company “took off”.  As you can see below, the release date of the mega-hit “Toy Story” was November of 1995 … a film for which the credits listed Steven Jobs as “Producer” and “Miscellaneous Crew”! 

Needless to say, Jobs no longer needed to add capital to keep Pixar running! 

Fast forward to 2006, when the Walt Disney Company (DIS) purchased Pixar (net of Pixar’s cash) for $6.3 billion!

Based on Jobs’ total investment in Pixar as of 1994 ($50,000,000), Jobs’ average annual investment return was an amazing 49.65%!!  I think I could live with that magnitude of annual return!

With Jobs’ penchant for “thinking outside the box”, it is not impossible to conceive of Jobs being struck one day by an inspiration to create an ETF dedicated to investing like he and his peers invest!!  What a cool idea!

And of course, what would Jobs’ have called such an investment: the iBillionaire Index ETF!!

As we know, Jobs never got around to creating that ETF before he died in late 2011! However, we can pretend that the Ecuadorian entrepreneur, Raul Moreno, chose August 1^st (just 6 weeks before the big AAPL rollout) to transform his already very successful (and innovative) effort (the iBillionaire smartphone app… which morphed into the iBillionaire Index website (http://www.ibillionaire.me/)) … into a publically tradable ETF called the iBillionaire Index ETF (IBLN)… as a homage to Jobs!![2]

Let me hasten to add that Moreno is not the first to market an investment vehicle intended to mimic the investment choices of successful, wealthy, “big” investors. Two similar ETFs have already been on the market for a while:

Global X Guru Index ETF (GURU) was launched on June 6^th of 2012.

The underlying index is comprised of the top U.S. listed equity positions reported on Form 13F by a select group of entities that Solactive AG (the “Index Provider”) characterizes as “hedge funds”. 

Alpha Clone Alternative Alpha ETF (ALFA) was launched September 9^th of 2013.

The index is composed of U.S. equity securities selected based on a proprietary hedge fund position replication methodology developed by AlphaClone, LLC (the “Index Provider”).

During its full life, GURU and ALFA have thus far each outperformed the S&P 500 Index:

However, I should hasten to add two important disclaimers: 

1) Past performance is no guarantee of future results; and

2) This chart should not be construed to imply that the iBillionaire Index ETF will similarly outperform the S&P 500 Index at any given point in the future!

There are significant differences among GURU, ALFA, and IBLN that make each one unique; and a future article may describe those differences in some detail. However, the reason I wanted to focus on just IBLN at this point is because it is (in my experience) rather unique within its space! 

MORENO’S VISION

Raul Moreno is one of those individuals with whom I would love to have the privilege of sharing lunch once a month!  Moreno became well known through his entrepreneurial efforts from several years ago – including the creation of Kinetik (aptly described as “a Latin-American-born app finder”) and HIP (related to Kinetik… but focused strictly on the very hippest, coolest apps).

His vision for iBillionaire is actually much bigger, and of a different order, than other ETF creators!  Moreno developed a vision (and passion) to “democratize” investing. 

Now we have all heard of countless business folk who have voiced similar goals/hopes… marketing her or his product as a way to bring profitability and a higher standard of living to the “little guy”. I regret to say that (in my experience) most of that rhetoric is a bunch of hogwash. All too often those highfalutin[3] words are just a marketing ploy to con one more sucker into a web of promises that initially bring hope to a human heart, but eventually only serve to dash that hope!! 

With the upfront disclosure that I am not omniscient and I cannot look into Moreno’s heart, my intuition tells me that he is sincere. This is a summary of what prompted Moreno to create iBillionaire… and a brief outline of how he has rolled out the “product”:

Moreno recognized that billionaires (such as Warren Buffett and Seth Klarman) have demonstrated for many years the use of strategies that (over time) outperform the market. In addition, the stories tied to such personalities are appealing enough to capture the human imagination and help motivate individuals to want to emulate such figures.[4]

Moreno also recognized that, although investment details/data related to such individuals have been publically available[5] for over a decade, it has not been realistic to expect the average person to access and plow through those reports in any way that results in optimum actionable insights!  Therefore, he decided to develop a system through which to gather, process, interpret, and present such data across multiple platforms in a consumable format!!

In that effort, Moreno needed some personal and financial backing – which he found largely within his existing (and expanding) Latin American Network. Among his funders and “angel investors” are such persons/entities as Martin Varsavsky, Alec Oxenford, Fabrice Grinda, and NXTP Labs.

With that support, Moreno developed a systemic way to access and interpret the 13F information from a large coterie of billionaires. He describes his objective in this way:

“The billionaire’s data is finally available for everyone, in an easy to understand, and actionable format. The stock market is increasingly volatile, which often forces investors to decide when to buy, sell or hold a stock. Investors need a tool to help them make more strategically sound and profitable decisions within this volatility.”

That is a worthy effort… but Moreno’s passion burns even stronger with regard to a particularly underserved (and often forgotten) group of people – his fellow Latinos and Latinas! Quite unlike many U.S. investment entrepreneurs, the vision that drives Moreno is “global” from beginning to end.  Moreno describes the roots of his passion in this way:

“Unlike in the U.S., in Latin America, we don’t have a culture of saving and investing in stocks… [and] there is very little trust in financial institutions. Therefore, people often ‘save’ by buying multiple houses, cars, or putting cash below their mattress. In Ecuador, there is even a name for that – a Colchón Bank.” 

“So, when someone in Latin American goes to our website and sees that Warren Buffett has 20% of all his money invested in Coca Cola and not in houses, or under his mattress, they can learn from that. They can see that investing in stocks, the right way, is also a good way to save!” 

Isn’t that cool?!  An investment product legitimately inspired by, funded by, and created by folks who are drawn toward the goal of helping improve the financial wellbeing of their fellow people!

With this important background, let’s move on to the progression of Moreno’s “vision” coming to life!  Following extensive analysis and the development of a system that would access, process, interpret, and present accurate investment information/data from “billionaire” portfolios, Moreno launched the first public iteration of “iBillionaire”… in the form of an IOS application for smartphones (available since the April of 2013).  Then some six months later, the iBillionaire Index website went live… presenting a wealth of information about the Index, as well as billionaire investment choices in general. (See: http://www.ibillionaire.me/).

Before I show you some interesting screen shots from the iBillionaire website, here are a few key points of information that will help you get the most out of that website

1) The performance data for the Index presented in this website is based strictly on the conceptual Index… not any actively, publically traded ETF. As I reported earlier, that public ETF was not available until August of 2014!

2) In this same vein, other performance metrics that you see or hear related to the iBillionaire Index that stretches back further into the past than October of 2013 actually reflect the back tested performance of the Index. An investor should never place as much credibility upon back tested performance data as one would place upon the publically attested price performance of a market traded instrument (such as an ETF).

3) By intentional design, the investment parameters that guide the management of Moreno’s portfolio index are described by the iBillionaire site as follows:

“It is composed of the top 30 large-cap equities listed on the S&P 500 in which financial billionaires have allocated the most funds, providing ample trading liquidity, a well-known benchmark, and better results to equity indexation than capitalization-weighted indices [see Petty’s note in Footnote [6]]. Devised from 13F filings, the iBillionaire Index provides investors an efficient and effective way to follow the smart money. In essence, the index works as though one gathered a group of billionaires and asked them to come to a consensus as to which S&P 500 stocks are the best bets.”[7]

For this reason, the IBLN portfolio will always fall into the “Large Cap” category!

4) Another very appealing aspect of iBillionaire (besides being available through multiple platforms) is that Moreno gives away the app for free.

Here are some screen shots from the iBillionaire website:

As stated above, IBLN focuses on the investment choices of billionaires… and here are some of the ones it follows:

Among this exalted list, here are the ones who very recently have outperformed:

And here are the top holdings from some of the billionaires I find most intriguing: 

First, there is the venerable John Paulson. You have to give him credit for the courage of his convictions about Gold (in the form the GLD ETF)!! Holding that “forever” is a burden he and I share! However, give Paulson 5 Stars for riding Shire PLC (SHPG) to a 120% profit! 

Seth Klarman (an investment manager trained by the legendary Michael Price!) may be the most successful “unknown” hedge fund manager of his time! His most recent quarterly performance has been “smoking” – at 60.50%!!

Since 2009, Klarman has garnered an investment return of nearly 200%, well more than doubling the S&P:

And of course, there is the always outspoken, and frequently controversial, Bill Ackman! What is astounding about Bill is that 80% of his portfolio is tied up in just three stocks:

Allergan (AGN), Air Products and Chemicals (APD), Canadian Pacific Railway, Inc (CP)!                  

As of September 3rd, here are the top 10 holdings in IBLN!

Here is “Index Data” from IBLN:

If I looked at the “Index Data” on its own… apart from the fact that it reflects a portfolio composed of stocks held by big-time players… I would be very unenthused.  As you can see, it is more expensive than the S&P on a couple of key valuation metrics…it pays a lower dividend…. and it is more volatile (carries a higher beta).  

As you see below, IBLN leans (relative to the S&P 500) toward the Technology, Consumer Discretionary, and Energy sectors … and shows slightly higher allocations to Financials and Health Care!! 

As we see here, the back tested performance data on the Index is quite impressive when compared with the S&P 500 Index (high valuation or not!). 

INVESTOR TAKEAWAY:

As an investment, I am an agnostic on IBLN until the actual public ETF establishes its own performance track record. However, as a concept, I find the iBillionaire smartphone app and its website both extremely informative and quite engaging!  

Take a moment to listen to Moreno explain the significance (and potential usefulness) of the iBillionaire Index, ETF, and platform tools. There are two videos to be found within this link (one about 1/3 of the way down… the other about 2/3’s down): 

http://www.cnbc.com/id/101195119

Note in particular that this website allows you to (in a theoretical portfolio) pick and choose among the billionaires’ portfolio choices and then (over time) check your performance vis-à-vis theirs!!

I am quite impressed by the (seeming) sincerity of Moreno’s passion to equip and encourage people in Ecuador and Central/South America to become better savers. 

And finally, I would be remiss if I did not point out the obvious (and unavoidable) shortcoming that the filing deadlines on the 13F reports (upon which IBLN depends for its portfolio decision-making) means that the Index (and ETF) are always a bit “late to the party” relative to “buy dates” for the stocks that become added to the portfolio! That doesn’t negate the value of knowing billionaire purchase and sale decisions during a reporting period; but it does mean that one should remember that the investment data is at least a bit dated by the time it becomes public knowledge!

DISCLOSURE:

The author is not a billionaire and will never become one!  Nor does the author own IBLN.  However, there are a number of the followed billionaires for whom I hold deep regard and respect (such as Buffett, Klarman, Pickens, Icahn, Einhorn, Ackman).  And I just signed up for email updates from iBillionaire!  Nothing in this article is intended as a recommendation to buy or sell anything. Always consult with your financial advisor regarding changes in your portfolio – either subtractions or additions.

FOOTNOTES

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