Invest Like The Pros?
The Dynamic Wealth Report
December 12, 2008
"Follow The Leader" Is A Dangerous Game
How time flies. The holidays are quickly approaching. It means
more time for shopping, eating, and friends… and less time in the
office. Best of all, it means more time with my family.
You probably already know I have a huge family.
Holliday gatherings are always huge. It’s not uncommon to have 30 or 40
people over to the house on the big day. Everyone’s always welcome.
With 4 generations of family members sitting around (or if you’re young
enough – running) the house gets quite crowded. Despite all the noise
and commotion, everyone has a great time.
The best time however is probably had by the grandkids. My brothers’
kids are all quickly growing up. Four under the age of 4 make quite the
pack. Their energy and excitement is always turned on high. Shrieks of
excitement always leave a ringing in everyone’s ear… and a smile on
everyone’s face.
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At the last big gathering, the game of choice was
follow-the-leader. Up over chairs, under tables, around trees. They even
played follow-the dog for a while (until she went and hid). Anything the
kids do is done with enthusiasm.
Do you treat your investment funds like a game of follow the leader?
Too many investors blindly follow the advice of others. Often without
performing any of their own research or diligence. It’s most obvious
with big, well known, money managers.
Just look at Warren Buffett.
Whenever he makes a new investment, the stock seems to jump on the news. It’s a sign of investors playing follow-the-leader. Now, Buffett’s a
savvy investor. He’s got a great long term track record. Best of all his
results are nothing short of phenomenal.
However, just blindly following his moves could be a recipe for
disaster.
The reasoning behind an investment may be flawed, or his timing might be
off. Just look at two of his latest investments Goldman Sachs (GS) was
at $132 a share (now trading around $70) and General Electric (GE) at $22
a share (now trading at $17). If you followed him into those investments
you’d be showing a huge loss right now.
It’s the same the world over…
Two brand name Mexican Billionaires are investing big chunks of money
into questionable companies. Companies whose futures are less than
certain.
Ricardo Salinas controls a chain of electronics stores in Latin America.
He’s making billions in television, and cellular phones. Recently he
bought 5.5 million shares of Circuit City (CCTYQ). The electronics
retailer now in bankruptcy.
Here’s the strange thing. The 5.5 million shares were purchased after
the company went into bankruptcy. He was adding to a stake of 16.8
million shares he no doubt bought at much higher prices.
Now, I’ll tell you this. This isn’t an investment I’m about to follow
any time soon. Not only is Circuit City in bankruptcy, they’ve lost
money 7 of the last 8 quarters. Their competition – Best Buy (BBY) – is
eating them for lunch. Not exactly my type of investment.
Another Mexican Billionaire is Carlos Slim.
If the name rings a bell, we’ve talked about him in other articles.
However instead of singing his praises, I’m questioning his sanity.
Carlos makes his fortune in the telecom industry. With the money he made
he established Inmobiliaria Carso, a family holding company. Through
Inmobiliaria, Carlos recently purchased 7.5 million shares of Saks (SKS). The very luxury retail store Christmas shoppers are avoiding like the
plague this year.
To me, this looks like another mistake.
I’ve been talking for some time about how the retail industry’s heading
for the trash heap. Apparently Carlos doesn’t read my articles. (If
anyone knows him feel free to pass this along).
Because of his most recent purchase, Mr. Slim is now the largest
shareholder in Saks. He owns more than 17% of the company… about 25
million shares. According to the Wall Street Journal, a significant
chunk of his shares were purchased around the $10 level.
Saks shares recently traded at a 52-week low of just over $2 per share.
Now, I’m not saying these investments won’t work out. Given enough time
and the right circumstances all of these investments could be big
winners. But from where I sit today, it’s a good reason not to play
follow-the-leader. You could wind up with disastrous consequences.
• Urban Outfitters (URBN) was upgraded to a “Neutral” at Pali
Research. The specialty retail store continues to struggle in the tough
environment and the stock recently traded at a new low.
• DryShips (DRYS) was downgraded by Credit Suisse to
“Underperform”. The stock’s down as the Baltic Dry Index (a measure of shipping
costs) is
down more than 90% this year.
• Deutsche Securities just started research coverage on American Express
(AXP) with a “sell” rating. Once again I ask the question… Why cover a
company you don’t want people to buy?
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