“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

~ Warren Buffett

Investing money in the stock markets is something that we all have done at one or another in our lives. The likes of Warren Buffett makes it sound easier with quotes like these but honestly, outperforming simple index funds is something that very few of us can master. Academic studies have shown that mom and pop retail investors are actually extremely bad at investing. They underperformed the market by an average of 3.7 percentage points per year after adjusting for risks.

My track record was a little better than the track record of the average mom and pop investor but I decided to subscribe to Insider Monkey’s quarterly newsletter shortly after its launch at the end of August 2012. Their quarterly newsletter claimed to identify the “best stock picks of the best hedge fund managers”. The strategy also looked good on paper. In their back tests it outperformed the S&P 500 Index by an average of 18 percentage points per year. I am not a huge believer in back tests because anyone with a good knowledge of modeling can mine the data and come up with “excellent” investment strategies that beat the crap out of the market.

What interested me about the strategy in the first place is the underlying simple approach of the Insider Monkey team. Dr. Ian Dogan and the research team of Insider Monkey formulated this strategy. They started with a thorough analysis of the 13F hedge fund filings of major hedge funds and picked out the most consensus small-cap stock picks among these hedge funds that have excellent track records. If their consensus stock picks can’t beat the market, then my stock picks surely can’t beat the market.

I also like the fact that Insider Monkey focuses on the small-cap stock picks of hedge funds. I don’t think hedge funds or anyone else can generate huge returns by investing in large-cap stocks. On the other hand, identifying an undervalued stock is much easier in the small-cap arena. Hedge funds hire the best analysts from the top business schools. When their analysts hit a wall, they hire industry experts to gain an edge over other investors. They do their best because they make a ton of money if their analysis and stock picks are solid.

Insider Monkey’s newsletter is a quarterly newsletter and they rarely send emails or publish reports in between quarters. Once a quarter, within hours of the 13F filing deadline, they email the list of their 15 stock picks. I like that they give us at least 3 hours to buy and sell their new recommendations before they track the performance of their stock picks. Some of their stock picks go up less than a percent after their recommendation. Since the end of August 2012, Insider Monkey’s stock picks returned 125% through the end of December vs. 53% gain for SPY and IWM during the same period. I also like the fact that they don’t share their top ideas publicly anywhere. So, I don’t feel like an idiot paying for the subscription.

I feel very lucky for subscribing to Insider Monkey’s quarterly newsletter. My returns are a little bit less than their advertised returns because I didn’t invest in all 15 stocks. They recommended US Airways when it was trading at $10 but I didn’t buy it until it acquired American Airlines and changed its ticker to AAL. I thought if Warren Buffett can’t make money from the airlines, David Tepper is probably wrong about airlines. I was wrong. US Airways (now American Airlines) went up 400% in the last 2.5 years and I managed to buy it at $24.

There are no sure things in investing but Insider Monkey’s investment approach is probably the best strategy I have come across. You are basically investing side to side with the smartest hedge fund managers. Better yet, you are investing only in their best ideas. That’s why this strategy managed to return 53% in 2013 and 28% in 2014 and outperformed the market by double digits.

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