Investment Management – Investors play game of follow the leader
Globe and Mail, May 17, 2007 at 6:07 AM EDT
Forget studying stock charts or calculating brain-numbing financial ratios. There’s an easier way to invest in the stock market: Just follow the bouncing billionaires.
As yesterday’s record-breaking session on Wall Street demonstrated, snapping up stocks the world’s richest investors are buying has become a popular sport – so popular, it can almost single-handedly move the market, particularly now that the Internet makes information available to the masses in seconds.
Consider Citigroup. Yesterday, shares of the biggest U.S. bank surged 4 per cent after billionaire Edward Lampert disclosed in a regulatory filing that his hedge fund, ESL Investments, had amassed a stake of 15.2 million common shares worth more than $800-million (U.S.).
Citigroup, which has been slashing costs in a bid to boost profit growth, had the biggest advance on the Dow Jones industrial average, pacing it to yet another record close on a day that also saw Canadian stocks hit a new high on expectations of strong profit growth in the banking sector.
Evidently, investors are betting the activist Mr. Lampert will shake up Citigroup and boost shareholder returns, much as he did with AutoZone in the late 1990s and more recently by merging Kmart and Sears.
He wasn’t the only billionaire whose coattails investors were riding yesterday. In another demonstration of the trend, shares of Johnson & Johnson jumped 2 per cent after Warren Buffett’s Berkshire Hathaway disclosed that it nearly doubled its stake in the health care giant in the first quarter, boosting its holdings to 48.7 million shares worth about $3-billion.
Not to be left out, corporate agitator Carl Icahn said he bought a stake in U.S. railway CSX, whose shares rose 1.4 per cent. And billionaire George Soros roughly doubled his holding in Microsoft, which gained 0.5 per cent, although another stock in which he increased his stake – Apple Computer – closed largely unchanged.
The proliferation of websites such as gurufocus.com, stockpickr.com and coattailinvestor.com has made the task of tracking billionaire picks that much easier, which helps explain why stocks often get a big boost as soon as the latest regulatory filings are made public.
Clearly, some people are making money. But for the average investor, is copycat investing really such a smart idea? Some money managers have their doubts.
The problem is that, unless you get in before everyone else – and with so many people having access to the same information, what are the odds of that? – you risk buying a stock after it’s already had a big move. Certainly, you’ll be buying at prices that are significantly higher than the pros paid weeks or even months before their disclosures became public.
And as any value-oriented investor will tell you, buying stocks after they have shot up in price can be a recipe for losing money – or at least not making as much money as if you’d bought when the stock was still out of favour.
“If you follow the herd, you might just get caught in the middle and get trampled,” says Michael Sprung, president of Sprung & Co. Investment Counsel. “Unless you’re a short-term day trader – I’ve never met one that’s been greatly successful – it just doesn’t fit with what I think most people should be trying to achieve.”
Another danger is that, by investing solely on the basis of what the gurus are buying, you may end up with stocks that don’t fit your particular investment objectives. A growth stock may be fine for a young investor, for example, but someone approaching retirement might be better off investing in a dividend-paying company.
“One of the last reasons you should be buying a stock is just because someone else is doing it or has done it,” Mr. Sprung says.