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If billionaire sells, should you sell too?

Monday, 10 Feb 2014 | 6:35 PM ET
Never dump a stock you have conviction in: Cramer
Monday, 30 Dec 2013 | 6:25 PM ET
Mad Money host Jim Cramer explains why selling off 13-F filings after hedge fund managers sell their investments could be a huge mistake.

(Click for video linked to a searchable transcript of this Mad Money segment)

Every quarter you hear about billionaire investors closing out positions in a stock. When big money sells, should you sell, too?

Jim Cramer says absolutely not.

"I'm telling you right now, right here, that's a mug's game," Cramer said on "Mad Money."

Sometimes called Whale Watching, Cramer is referring to the phenomenon in which investors parse through 13-F forms that big name investors such as Carl Icahn or George Soros must file by SEC requirement.

Regularly, these 13-F filings show that a billionaire investor or a hedge fund has closed out a position.

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"A lot of people make the mistake of assuming they must be wrong if they happen to own any of the stocks that these big boys happen to be selling, so they dump those stocks," Cramer said. That is, investor second guess their holdings believing the billionaire's decision to sell is a referendum on the fundamentals.

That's a big mistake.

Although the 13-F filing discloses the sale, it doesn't provide a reason for the selling. "You just don't know why the stock was sold," Cramer explained.

"Maybe the portfolio manager who specifically followed that stock has left the firm. Maybe the billionaire investor cashed out to buy another kind of asset. Maybe some hot-shot investor thought he had insight and bought the stock for a trade, then turned around and sold it when the insight proved wrong," Cramer said.

None of those reasons are good reasons for you to sell out of a position if you've done your homework and believe the investment is sound..

"I've got a painful example of how selling off of these 13-F filings tends to be a huge mistake. Years ago my charitable trust decided to sell Union Pacific, the big railroad, in large part because Warren Buffett's 13F showed he'd exited his position in the stock," Cramer said.

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On the surface, the 13-F filing made it look as if Buffett no longer had an interest in rails, but over time, it became apparent Buffett sold his Union Pacific because he intended to buy Burlington Northern.

"Of course there was no reason for Buffett to keep holding stock in one railroad when he was about to buy another. But it was a huge mistake to assume something was wrong with Union Pacific just because Buffett sold it."

Since Cramer drew the wrong conclusion from the 13-F and sold out of his Union Pacific position, the stock doubled. "What a regret!" exclaimed the "Mad Money" host.

Cramer hopes you learn from his mistake.

"The point is that you don't know why a billionaire investor or a hedge fund is selling from the 13-F. And basing an investment decision around something unknowable is always a bad idea.

The preceding insights are discussed in far greater detail in Jim Cramer's new book Get Rich Carefully.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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