Whether you're just starting out or have years of experience, you can get some good investing ideas by paying attention to which stocks the experts are buying.

In this article, I'll describe three ways of doing that:

  • Spying on which stocks are favored by market-beating mutual fund managers.
  • Checking the portfolios of top money managers.
  • Searching for stocks turned up by top gurus' selection strategies.

Mimicking mutual funds

You can get plenty of ideas by paying attention to the stocks that mutual fund managers hold in their portfolios.

Fund managers have at least three advantages over individual investors. For starters, analyzing and picking stocks is their day job. Moreover -- and this may not be fair -- because their trading generates huge commissions, fund managers have access to market-moving information that you and I never see. Further, many fund managers employ squads of analysts to help them research and evaluate stocks.

Though some fund managers would undoubtedly prefer to keep their holdings secret, they can't. By law, funds must report their holdings on a quarterly basis. You can use MSN Money's Top Holdings report to see any mutual fund's biggest 25 holdings in terms of market value.

However, only a few funds are worth looking at. Despite their advantages, many mutual funds still underperform the market. So there's no point in looking for investing ideas in those portfolios.

Further, if a fund trades actively, it might have replaced many of its stocks since it last reported its holdings. If that happens, the stocks listed in the Top Holdings report don't represent the fund's current holdings.

Thus, it's important to stick with funds that produce market-beating returns and report portfolio holdings quickly enough to be useful. If those requirements are satisfied, it doesn't matter whether the funds are carry high or low fees, are open or closed to new investors, etc. You want to tap top funds for stock ideas, but you're not buying the funds.

Fund rater Morningstar evaluates funds by comparing historical returns with volatility. Morningstar rates funds from one to five stars, with five is best (highest return versus volatility). Historical results don't necessarily predict the future, but in my experience, market-beating funds tend to keep winning, and underperformers usually continue to disappoint shareholders. Thus, it makes sense to look to at five-star funds for stock ideas. MSN Money shows each fund's star rating in its quote report.

Besides listing each fund's major holdings, MSN Money's Top Holdings report also lists the date when the list was updated (the portfolio holdings date).

The timeliness of the portfolio data depends on two factors: the age of the data and the (annual) turnover ratio, which measures how fast the fund changes its holdings. A 50% ratio means that the fund, on average, replaces half of its holdings over the course of a year.

Obviously, the portfolio data for a low turnover fund will stay relevant longer than the data for faster-changing funds. And while all funds are required to report portfolio data quarterly, some report at least their top 10 or top 25 holdings monthly.

As a rule of thumb, consider data for funds with turnover ratios below 25% relevant for three months from the portfolio date. Stick with one month or newer data for turnover ratios exceeding 75%.

Here are five sample five-star funds that meet those requirements. Use MSN Money's Top-Rated Funds search (Fund Power Search category) to find more Morningstar five-star-fund ideas.

 
FundCategoryTurnoverUpdate rate
Amana Trust Growth (AMAGX)Large-cap growth5%Monthly
Amana Trust Income (AMANX)Large-cap growth5%Monthly
First Eagle Gold (FEGIX)Precious metals3%Monthly (top 10)*
Sextent International (SSIFX)Foreign large cap2%Monthly
Westcore Select (WTSLX)Mid-cap growth217%Monthly

Note: Check each fund company's Web site directly if the MSN Money portfolio data is not updated as indicated above. *Monthly top 10 holdings are shown on the fund's Web sites.

Following the gurus

Warren Buffett, considered one of today's most astute investors, has recently added to positions -- via Berkshire Hathaway (BRK.A, news) -- in Wells Fargo (WFC, news), Johnson & Johnson (JNJ, news), Iron Mountain (IRM, news) and Becton Dickenson (BDX, news). Conversely, Buffett dumped Home Depot (HD, news) and Republic Services (RSG, news), and reduced positions in Nike (NKE, news), Ingersoll Rand (IR, news), ConocoPhillips (COP, news) and Kraft Foods (KFT, news).

I didn't have to spend days digging out that information. I found it on GuruFocus, the place to go if you want to see what Buffett and many other famous money managers are doing.

All of the big names are there, including George Soros, Carl Icahn and Stanley Druckenmiller.

The GuruFocus Scoreboard shows you which of its gurus are hot, or not, over periods ranging from six months to 10 years.

GuruFocus doesn't say, but it probably gets its data from the reports that big holders are required to file quarterly with the Securities and Exchange Commission. So, for very active traders, the information won't be timely.

While GuruFocus charges for some content, everything that I've described is free.

Emulating the experts

Running stock screens designed to emulate the selection strategies used by stock-picking experts is another way of finding worthwhile stock candidates. If you're not familiar with the term, a stock screener is a program that searches the entire market for stocks meeting your specified selection criteria.

Validea has developed stock screens that can emulate a dozen stock selection strategies, many devised by well-respected experts. Using the Validea site requires a subscription, which costs around $30 per month.

However, you can access a subset consisting of eight of Validea's strategies via the Nasdaq stock exchange site. From the Nasdaq home page, access the Guru Screener from the Investing menu. Validea's Nasdaq screener emulates the stock-picking strategies of David Dreman, Benjamin Graham, Kenneth Fisher, Peter Lynch, James P. O'Shaughnessy and Martin Zweig.

If you're not familiar with these names, Graham co-authored the first book describing fundamental analysis. Lynch ran the Fidelity Magellan mutual fund during its market-beating heyday. Dreman, Fisher, O'Shaughnessy and Zweig are well-known money managers and authors. Dreman and Fisher are primarily value investors, and Zweig is solidly in the growth camp. O'Shaughnessy melds growth and value strategies.

Validea's Nasdaq screener also emulates a small-cap growth stock strategy from The Motley Fool and a momentum stock selection strategy devised by Validea.

You can use Validea's Guru Screener to generate lists of stocks meeting the selection requirements of one or more gurus. Of course, the stocks turned up are based on Validea's interpretation of each guru's strategy. The real gurus might not agree with Validea's selections.

Validea offers additional gurus, such as Buffett, and model portfolios, advanced screeners and other features on its own site.

Picking stocks favored by veteran stock pickers is an excellent way to start investing in individual stocks. Nevertheless, don't jump in with both feet. Everybody approaches stock investing differently.

Your investing style might not be compatible with the strategies followed by the guru you've selected. For instance, your guru might be a long-term buy-and-hold investor while you want to see immediate results. Or, you might pick a guru who is having an off year. So, start slowly with a few stock picks -- and closely monitor your results.

At the time of publication, Harry Domash did not own or control shares of any company or fund mentioned in this article.