“«When the greatest investor of our time makes a purchase or a sale, he moves the markets.»
Gary Kaltbaum, Investment Advisor
Warren Buffett, the Chairman of the Board of Directors and Executive Director of Berkshire Hathaway Holding, has long held the status of a truly legendary investor. As one of the richest people on the planet, Buffett has rightfully earned such nicknames as the Seer, the Sage of Omaha, and the Oracle. His business transactions are so accurate and successful that it seems they were done by a truly clairvoyant person. And sometimes it is thought that the market itself is following the actions of the greatest speculator and, depending on him, decides whether to go up or down.
The most interesting thing is that it is partly true. Hundreds of thousands of traders around the world, from beginners to pros, are closely watching the steps of the Seer, and if he takes any action, a flurry of identical transactions occur. As a result, the market really follows the guru, doing what he does. This phenomenon has been called the «Buffett effect».
To date, there have been quite a few cases when stocks that Buffett got rid of, instantly dropped in price, and when they were bought, took off. It may seem to an inexperienced person that this phenomenon is a good tool in the hands of a novice trader. Indeed: follow the financial sharks and do as they do — what could be easier?
But it is not so. Experts believe that the Buffett effect is a very random phenomenon, and that it would be a huge mistake to base a trade on it. The world of financial speculation is full of rumors, «insiders», and speculation. This is a real scourge of the media world which even reputable media are not protected from. But in order to really achieve success in any business, you need to be able to take responsibility for your actions.
Here is just one example: in 2013, Buffett surprised the entire investment community with the purchase of Heinz. This deal seemed very strange, because the premium was as much as 20%. Thoughtless repetition of Buffett’s actions would have led other investors to lose money. However, it later turned out that the investor had invested only $4 billion in ordinary shares of the company, and another $8 billion went into preferred shares with a guaranteed rate of return of 9%.
Thus, the Prophet did not risk anything in that deal because even if the ordinary shares did not increase in value, the investor would still have earned 6% from the preferred ones. The only real risk was the bankruptcy of the company. But even in this case, the debts would most likely be restructured. The devil is in the details, and just knowing how a guru is looking at the market is not enough. The little things are very important and the subtleties could be imperceptible at first glance.
An investor is the architect of his trading system — and they should focus on creating it correctly and strictly following the rules. And repeating someone else’s transactions will not make you rich, because everyone is mistaken at times and everyone pursues their own investment goals.
Only by hard work and careful control of your actions can you bring any profit on a long-term basis. Adventurism and maximalism should be left at the poker table. Warren Buffett himself also adheres to this opinion. He has repeatedly said that success in the stock market can only be achieved by learning to think independently and acting without following the crowd.