Why Investors Shouldn't Play Follow the Leader

Welcome to the Wide World of What Would Warren Do, a.k.a. WWWWWD? On today's episode, we'll ask the zillion-dollar question: How does Warren Buffett invest his dough, and how soon can we copy his moves?

But first, a more pertinent query: When is it prudent, if ever, to follow your favorite guru or pundit and duplicate his or her investment strategies?

In Buffett's case, for example, you may want to dig deeper and crack open Benjamin Graham's "The Intelligent Investor," the book Buffett says changed his life. Then you'd get a sense of his overall philosophy, something arguably more valuable. But why think for yourself, you might counter, when you can let someone else do the grunt work for you?

"The idea of following a pundit or guru is as old as investing itself," says Michael J. Driscoll, clinical professor and senior executive in residence at Adelphi University's Robert B. Willumstad School of Business. "It is almost human nature to think that someone out there knows more about investing than you do."

But is it wise to act on that opinion? "Individuals have to be very careful in trying to mimic the strategies of the pros," Driscoll says. "By the time that information is disseminated to the investing world, there's a good chance that the manager has moved on to some other theme."

Jim Wright, chief investment officer at Harvest Financial Partners in Philadelphia, agrees. "You'll get information on what Warren Buffett and others are buying 45 days after the close of a quarter -- potentially four months later than they made their purchase. So even if the purchase has done well, you may miss out on an ideal sale."

Many experts sound similar notes of caution. "I think it's fine for people to use external sources as a way to identify potential investments," says Robert Stammers, director of investor education at CFA Institute in New York. "However, all sources -- including Warren Buffett -- cannot replace one's own research and analysis."

Stammers raises another point: Nothing matches your own careful study of stocks, securities and funds, "not just to calculate value and understand how that value is derived, but also to understand the specific risks -- and being comfortable taking those risks."

Still, you might want to learn and emulate the moves of champions. That can be useful, especially for younger investors learning the ropes of the broader market.

"Following the philosophy of great investors is an excellent thing to do because there is no reason to reinvent a strategy that's already working," says Kevin Kautzmann, founder of EBNY Financial in New York.

But as for "set it forget it"? Fuggedaboudit.

"It's unwise to go on autopilot and invest in exactly the same things as a great investor such as Warren Buffett," Kautzmann says. Simply put, you just don't have his clout. (And just how many of us do, when you think about it?) "Someone like Mr. Buffett is able to influence the price and the conditions at which he buys because of the size of his investment and influence."

So let's say you want to tag along with another stock-market soothsayer. Once again, investment professionals favor a large degree of savvy self-reliance. Put another way: Network TV executives have a different set of priorities than you do.

"I don't take relationship advice from contestants on 'The Bachelor,' and I wouldn't recommend taking investment advice from Jim Cramer," says Daniel Kern, president and chief investment officer of Advisor Partners in Boston. "Jim Cramer is an entertaining commentator, and I'll admit to enjoying his act. However, his time horizon is the polar opposite of Buffett's -- arguably measured in hours rather than years -- and he's more a reality TV star than an investment analyst at this stage of his career."

"Investors should remember that many of these pundits are brought in to drive ratings," says Chris Paleologus, vice president of Blue Bell Private Wealth Management in Philadelphia. "They focus their attention on only a small number of investments, typically with a short time horizon."

"Honestly, I don't listen to a lot of the 'next great investment deal' pundits," says Lauren Bigelow, CEO of Growth Capital Network and executive director of the Accelerate Michigan Innovation Competition. "To me, many are trying to sensationalize one company over another, using tea leaves and gossip to fuel the drama and excitement."

And soggy tea leaves, it turns out, make a poor substitute for solid data. "Instead, I'll listen to different podcasts on the economy, policy, investment and technology to inform where I'm going to place my capital," Bigelow says.

At least one set of wannabe prognosticators gets a fairly universal thumbs down: the friend or family member who claims to be a master of market timing, or has some "secret formula" that's eluded the rest of the investment world.

In the end, the best authority may not sound as glamorous as a billionaire or loud TV persona -- and you can't get away from doing research if you want to succeed. But with time, picking the right leader means following your own personal rock star.

Paleologus puts it this way: "Investing is an emotional endeavor. Having an advisor manage your investments helps eliminate a lot of the mistakes investors make when they let emotions affect their investment decisions."

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