3 Things I learned this week from Investing Masters
On Index Funds ,13Fs and Small-cap Healthcare
Welcome back!
Today I’m sharing 3 interesting investing insights I recently came across.
If you’re new here, I study the world’s best long-term investors and share what I learn.
My latest deep-dive was on Rich Pzena, a friend of Joel Greenblatt who calls him “one of the highest quality, smartest, nicest people I know”.
I am also building two real-money portfolios based on the Gurus’ wisdom:
Guru Gems portfolio - Quality companies held for years
Magic Formula portfolio - ‘Good’ companies at ‘bargain’ prices held for one year
1️⃣ Index Funds Have Become Tech Funds
Both Terry Smith and Bill Nygren have highlighted something many passive investors overlook: when you’re investing in an S&P 500 index fund today, you’re making a big bet on technology stocks—whether you realize it or not.
The ‘Magnificent 7’ stocks (Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla) + Broadcom now account for nearly 38% of the S&P 500’s market cap.
Terry Smith’s warning
In his 2024 annual shareholder letter, Smith writes that “index funds are not truly a passive strategy” but are actually “a momentum strategy”. Because index funds are market-cap weighted, “when there are inflows to index funds, the largest portion goes to the largest companies”.
Smith points out that in late 2023 passive investments via index funds exceeded the amount of assets held in active funds for the first time ever. As inflows to index funds continue to increase, it drives the performance of the largest companies which are companies whose shares have already performed well.
This is a self-reinforcing feedback loop which will operate until it doesn’t.
[…] If the largest companies were to produce disappointing results, their share prices are likely to react badly which will drag down the index performance more than that of those active managers who are underweight in these stocks.
Bill Nygren’s take
In a recent interview on CNBC, Nygren echoed this concern: “The S&P isn’t the broad-based index it used to be, it’s really a technology growth fund. With Oracle’s recent move, 9 of the 10 largest names in the S&P are technology names”
He explained that “Oakmarks’ portfolio looks nothing like the S&P, acts nothing like it”:
Why this matters
Many investors think they’re diversified because they own an index fund. But if one-third of your portfolio is in six or seven stocks, you’re not diversified—you’re actually concentrated in big tech.
The irony is that most of these investors would never consciously put 35-40% of their portfolio in eight or nine technology stocks. But that’s exactly what they’re doing through ‘passive’ investing.
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2️⃣ Matthew Peterson’s 13F Strategy: Very aligned with Guru Gems
I watched an excellent interview with Matthew Peterson on the Talking Billions podcast with , and around minute 53, they discuss Peterson’s approach to generating investment ideas, which resonated a lot with what I’m doing with Guru Gems.
Peterson leverages 13F filings from other value investors to generate investment ideas. As he puts it: “This is a very simple and profound way to give yourself an advantage”.
Here’s his process:
Track ~100 favorite value investors
Peterson and his team monitor a curated list of investors whose philosophy and track record they respect. Every quarter they run analyses based on the 13Fs of these investors.Look for specific characteristics
Very low portfolio turnover (patient, long-term holders)
Concentrated portfolios (high conviction in their best ideas)
Pay attention to new purchases
When these investors make a new buy, Peterson knows “their entire team of analysts have spent probably months analyzing it”.Focus on circle of competence moves
“It’s helpful if you know something about these investors, especially when they make a big conviction buy in their circle of competence.”
Hearing this was a powerful validation for me because it confirms the core thesis behind Guru Gems.
When I started this newsletter six months ago, the idea was simple: if long-term investors with very strong track records are buying something, that’s a signal worth investigating.
“If you’ve got a great investor out there spending probably millions on their research and then billions on an investment, they have some conviction. And if you know why, if you know what they’re good at, you can start identifying and weeding out the good opportunities from the bad.” — Matthew Peterson
3️⃣ Small-Cap Healthcare’s 1999 Moment (And why Magic Formula loves it)
I came across a fascinating chart this week from @JeffWeniger on X showing that small-cap healthcare’s current underperformance versus the S&P 500 shows a lot of resemblance with 1999:
What happened after 1999? Small-cap health care beat the market for nearly 20 years.
Of course, as we know, past performance doesn’t guarantee future results.
Small-cap health care in the Magic Formula screener
What’s really interesting is when I run Joel Greenblatt’s Magic Formula screener, healthcare names—pharma, biotech, medical devices— seem to dominate the list.
These companies are scoring high on:
Return on Capital (quality)
Earnings Yield (cheapness/value)
My current Magic Portfolio already includes SIGA Technologies (pharma/infectious diseases), Catalyst Pharmaceuticals (rare disease therapies) and Harmony Biosciences (rare neurological disorders).
But there are many other small-cap healthcare names on the screener: Atara Biotherapeutics, CytomX Therapeutics, Innoviva, Pediatrix Medical Group, Puma Biotechnology, Rigel Pharmaceuticals and SBC Medical Group Holdings.
Why this matters
These companies aren’t exactly household names. They’re small, overlooked, and often unloved by Wall Street.
But they’re generating strong returns on capital and trading at depressed valuations—exactly what Greenblatt’s formula is designed to find.
When capital will return or sentiment normalizes, the healthcare group may have strong catch-up potential.
🅱️ Bonus videos
Here are two videos which I really enjoyed (re)watching this week:
Terry Smith on the Richer Wiser Happier podcast, one of my favorite podcasts:
And finally, a recent interview with the legendary Peter Lynch on The Compound and Friends podcast:
That’s it for this week! I hope you find these insights valuable and please like or share these posts - I put quite a bit of time in them, so it’s always nice to get a bit of recognition or to see them being shared :)
You can also follow me on X @guru_gems.
Until next week!