By Marc LichtenfeldEvery year, a tiny group of investors quietly outperform the stock market by more than 20 percentage points. They're tough, direct, no-nonsense guys -- and are arguably the best people to have fighting for everyday investors like you and me. They're called activist investors. So who are these guys? What do they do? And more importantly, what can they do for you? "Activists" by Name ... And by Nature An activist investor is someone who owns a stake of 5% or more in a certain company and wants to make changes. They're required to file a 13D document with the SEC, outlining the demands they're making from management. Those demands often include...
- The sale of the company or certain assets.
- Instituting a share buyback or special dividend.
- Firing the CEO or replacing members on the board of directors.
- Reining in executive compensation.
So as an everyday investor, the takeaway from this is simple: You should follow what activist investors are doing because it works. The numbers back it up, too. When Activist Investors Get Tough, You Bag an Extra 21% According to a study published in The Journal of Finance, the stocks that activist investors target end up outperforming the market by an impressive 21.6 percentage points annually. What does this mean in dollar terms? Using historical averages, you'll see that $100,000 invested in the S&P 500 would be worth $131,000 in three years and $247,000 in 10 years. But if your portfolio outperforms the S&P by 21.6 percentage points annually, that $100,000 grows to $225,000 in three years and $1.5 million in 10 years. Following activist investors is similar to following insiders in that you're placing your bets with the "smart money." Why It Pays to Follow Activist Investors Remember that activist investors need to own 5% of a particular stock before they can start demanding changes. So you can be certain that they've thrown a lot of resources into research and due diligence. These guys simply aren't going to risk millions, tens of millions, or even hundreds of millions unless they're sure that the shares are heading higher (often with their help). Now here's the thing: Activists target less than 1% of all stocks out there, which makes activists-fueled shares somewhat rare. So the key to making money is to know which activists to follow. Do that and this strategy can be extremely lucrative. I mentioned some of my favorite activists a moment ago, but take a look at the 13D filings to see which ones make sense to you. You can access them for free on the SEC's Web site. But if you don't have time for that and want me to do the work for you in digging out the best activist ideas, feel free to check out my new service, The Activist Trader. Hoping your longs go up and your shorts go down. By Marc Lichtenfeld