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.

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    See that is the problem. Buffet never buys what he doesn't understand and you want to do the opposite. – DumbCoder May 29 '14 at 12:01
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    When Warren Buffett buys a gazillion shares of IBM, it affects the price of IBM stock (guess how!) and when a million followers of Buffett try to buy 100 shares of IBM each the next day when news of Buffett's purchase becomes public, the market is very different. – Dilip Sarwate May 29 '14 at 12:59
  • For what it is worth, Berkshire stock B almost identically follows the A stock. – Triplell89 May 29 '14 at 20:51

The best answer here is "maybe, but probably not". A few quick reasons:

  • Investing in something which you yourself do not understand is a risk. Do you know what IBM does, what their forecasts are, etc.?
  • Blindly following another investor is not the best plan either. Mr. Buffett has several billion dollars and is a professional investor. I think we can safely assume that you do not have a billion dollars. Your investment strategies will need to be different from his.
  • As pointed out in the comments, large investors inherently move the market when they buy, sell, or even talk about investing. This means that you will always pay more and sell for less if you follow behind Mr. Buffett.

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".

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    Actually, it would be quite easy to "follow" Buffett's investments perfectly - just buy some Berkshire Hathaway stock... – Michael Borgwardt May 29 '14 at 16:00
  • @MichaelBorgwardt +1 for the lovely advice! I only wish that I had enough cash on hand to buy a round lot (100 shares) of Berkshire Hathaway Inc., priced at about $191K per share today. – Dilip Sarwate May 29 '14 at 19:51
  • @DilipSarwate: That's the A stocks of which there are only 181. There are also B stocks with a market price of only $128. – Michael Borgwardt May 29 '14 at 22:22

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:

  • When a professional investor buys a stock, the risk/reward is calculated based on his portfolio. It may be optimal for his portfolio, but may not be for yours. Ask yourself: What does such purchase mean for my portfolio? Also, the opportunity cost can be different.
  • It is not entirely true that you have to buy at a higher price than the professionals. One example: David Einhorn has recently purchased Resona (TYO:8308) at an average price of JPY547. Now (May 30, 2014) it is traded around JPY532. If you decide to buy Resona right now, you actually get a better deal than David Einhorn ;) Just for the record: David Einhorn is one of my favorite.

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