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How to Profit From Portfolio Managers' Miscues

Investors get a chance every three months to pick up strong stocks at a discount, Real Money's Paul Price writes.
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A tradition among fund managers is the quarterly 'window dressing' employed at the end of March, June, September and December. 

Real Money Columnist Paul Price recently commented on what the process entails and how investors can profit from it. 

When a company or portfolio manager is holding a lot of stocks that are down at the end of the quarter, they’ll often dump those assets regardless of the fundamental or underlying value

“Portfolio managers are loath to show big losers on their end of quarter reports,” Price wrote recently on Real Money, “as it makes them look bad.”

So even though a manager might be confident in an asset’s long-term value, they’ll be concerned over how that stock’s chart will look at the time they release their financials. That report will drive investor activity over the next three months. So if they’re holding an asset with good fundamentals but a currently depressed value, they’ll offload it.

“Those same money managers come right back in tomorrow morning and repurchase the same stocks,” Price wrote, “while obtaining a full three months before they have to show they owned them.”

And “by then, many of those beaten up names will have recovered brilliantly, making the managers appear fabulous.”

For the stock market, this often leads to a flurry of short term trades. In the meantime, agile investors can get ahead of the game by picking up stocks that the managers put on sale. It can be a great chance, he writes, to “buy some major bargains.” 

Get more trading strategies and investing insights from the contributors on Real Money.