Personal Finance & Money Asked on April 20, 2021
I was wondering if following the financial moves of a guru like Warren Buffett, a good investment strategy?
The reason for asking:
Warren Buffett just bought a significant stake in IBM recently. I was thinking of following in his footsteps, even though I have no clue what kind of business is conducted by IBM.
The best answer here is "maybe, but probably not". A few quick reasons:
Its not a bad idea to watch other investors especially those who can move markets but do your own research on an investment first. Your sole reason for investing should not be "Warren did it".
Answered by Freiheit on April 20, 2021
I think following the professional money managers is a strategy worth considering. The buys from your favorite investors can be taken as strong signals. But you should never buy any stock blindly just because someone else bought it. Be sure do your due diligence before the purchase. The most important question is not what they bought, but why they bought it and how much.
To add/comment on Freiheit's points:
Answered by Weiwei on April 20, 2021
Update in 2020
Excerpt from Warren Buffett has sold IBM shares, and 'revalued' tech icon downward, cites 'big strong competitors' (May 2017):
"I don't value IBM the same way that I did 6 years ago when I started buying... I've revalued it somewhat downward," Buffett told CNBC. "When it got above $180 we actually sold a reasonable amount of stock."
[...]
"I think if you look back at what they were projecting and how they thought the business would develop I would say what they've run into is some pretty tough competitors," Buffett said. "IBM is a big strong company, but they've got big strong competitors too."
Berkshire Hathaway completely eliminated its stake in IBM in 2018. The investment gained less than 5% (including dividends) over about 7 years (source). In hindsight, the purchase of IBM stock was a mistake. Nowadays, the IBM purchase is used as a case study of Buffett's mistakes.
This is why you need to think for yourself, and not blindly copy others. You may be punished for not doing your own thinking. Gurus make mistakes too.
User Weiwei made an important point that Berkshire's risk/reward considerations and opportunity costs are likely to be different from yours. Keep in mind that Berkshire is a conglomerate, and the companies that it owns outright make up an increasingly large share of Berkshire's value relative to its stock portfolio. When you blindly copy Berkshire's stock purchases, you are also blindly using Berkshire's risk/reward considerations and opportunity costs that may be applicable to a conglomerate but not to you.
Answered by Flux on April 20, 2021
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