Have you ever bought a stock because Warren Buffett bought
a stock? You know, like
Goldman Sachs (NYSE: GS) or
Johnson & Johnson (NYSE: JNJ)?
If so, you're not alone. In fact, thousands of investors
follow Buffett's every move, and that's such a hassle for the
Oracle of Omaha that he has actually (and unsuccessfully)
lobbied the SEC to give him a dispensation from disclosing
his stock picks.
Heck, it got so bad that in 1999
Coca-Cola was trading for as much as
40 timesearnings -- an unbelievably high number for
a steady consumer staple that sells sugar water.
Yet if you believe Alice Schroeder's account in her
Buffett biography
The Snowball, Buffett wouldn't sell Coca-Cola even
then because "the price of Coca-Cola could plunge as a
result."
After all, if folks had mindlessly followed Buffett in,
thereby driving up the price, they would just as surely
follow him out.
This has a name
When investors follow other investors into and out of
stocks or use another investor's decision to buy or sell to
justify their own decision to buy or sell, you have a
phenomenon called "herding."
While Buffett has been wary of passing along his stock
ideas since the 1950s and '60s, it wasn't until 1990 or so
that financial research established herding as a prevalent
and powerful day-to-day force in the market's gyrations.
And recent research from professors Amil Dasgupta, Andrea
Prat, and Michela Verardo of the London School of Economics
allows us to quantify how herding affects stock prices over
both the short and long terms.
We'll spoil the ending for you: Herding isn't much benefit
to anyone.
Survey says ...
It turns out that institutional herding around a few
supposedly great ideas ultimately leads to
overvaluation and
underperformance.
Money managers, in trying to avoid being outdone by their
colleagues, flock to the same sets of stocks. In the words of
the professors, "money managers tend to imitate past trades
(i.e., herd) due to their reputational concerns, despite the
fact that such herding behavior has a first-order impact on
the prices of assets that they trade."
It's a broken system that punishes investors who aren't
courageous enough to think on their own.
But wait!
Not everyone agrees that herding depresses the
returns investors can look forward to. Just look at
"Imitation Is the Sincerest Form of Flattery: Warren Buffett
and
Berkshire Hathaway ."
The authors studied Berkshire Hathaway from 1976 to 2006
and found that "a hypothetical portfolio that mimics
[Berkshire's] investments at the beginning of the following
month after they are publicly disclosed also earns
significantly positive abnormal returns of 10.75% over the
S&P 500 index." Wow.
So we should all be poring over Berkshire's 13-F filings
and buying what Buffett and team did, right? Not so fast.
Those findings are eye-opening and impressive, but in our
view, they don't offer much for
prospectiveinvestors for two reasons:
It's this latter point that got us to thinking about one
of our favorite Web resources, GuruFocus.
What now?
GuruFocus is a website that tracks "the buys, sells,
and insights" of the world's "investment gurus." This is a
list that includes long-term outperformers like Warren
Buffett and Seth Klarman.
It's a neat website that sends out neat monthly emails,
but we waver on this question: Is it a truly valuable
service, or is it merely an
interestingservice?
After all, you shouldn't be buying or selling stocks
because other investors are, and doing so may give you a
false sense of security about your decision. As Ben Graham
once said: "You are neither right nor wrong because the crowd
disagrees with you. You are right because your data and
reasoning are right." And that's true even if it's a really
smart crowd.
So what are the current "Consensus Picks of Gurus" (i.e.,
the stocks the most gurus are buying)? The list includes
Hewlett-Packard (NYSE: HPQ),
Humana (NYSE: HUM),
Leucadia (NYSE: LUK), and
Strayer (Nasdaq: STRA) -- a decent list of
businesses, to be sure.
But are these
surewinners over the next year, or five, or 10?
No. Continued... |