Want to Lose Money? Do What Buffett Does
Looking for a sure-fire way to lose money? Follow what Warren Buffett does.
Instead of mimicking big players, savvy investors figure out if any given stock is right for them, given their own parameters of risk, income and diversification, “Mad Money” host Jim Cramer said Tuesday.
For example, coming into this year Cramer kept an eye on three money managers who have been on a hot streak: Dave Tepper of Appaloosa Partners, Bruce Berkowitz of Fairholme Capital Management and John Paulson, the hedge fund honcho who famously bet against housing.
“All three were drawn ineluctably to the banks,” Cramer said. “They made huge bets on a whole bunch of financials, but especially Bank of America. What a disaster. It’s been one of the worst stocks in the world.”
Anyone following the trio would have to reconcile what to do with BAC, which Tepper dropped while Paulson keeps buying it.
Paulson, Cramer noted, also bought Agnico-Eagle, a mining company trading down 38 percent from the beginning of the year.
“Who knows if he’s lost it?” Cramer said. “You want to follow him? Be my guest.”
More cautionary tales come from the Oracle of Omaha.
Buffett’s big bet on IBM — accumulating 5.5 percent of the company through Berkshire Hathaway — drew plenty of attention Monday.
But Buffett was able to keep his buy secret until yesterday because he doesn’t have to disclose what his company is buying at the same time as everyone else — not a good move to follow blindly.
“You have to wait to see the filing,” Cramer said.
Also, it doesn’t necessarily make sense to follow Buffett’s long-term bets.
Bank of America: Buffett said yesterday on CNBC’s “Squawk Box” that his purchase of preferred stock was an endorsement of BAC, but “he had a better piece of paper than you will ever get with the preferred, and you are underwater big time if you bought the common stock at the time his deal was announced,” Cramer said.
Johnson & Johnson: Buffett unloaded 5.2 million shares, leaving Berkshire-Hathaway with 37.4 million shares. “Does that mean Buffett no longer likes JNJ? Or was it just a trim?” Cramer said. “Who knows?”
Kraft: Buffett voted against CEO Irene Rosenfeld’s purchase of Cadbury. But when the company announced it would split in two, Buffett told CNBC’s Becky Quick that he supported the deal, implying that he supported the Cadbury acquisition.
“All that said, I certainly want to know what Buffett’s doing. He’s the best investor of our time,” Cramer said. “That means, to me, that you buy Berkshire Hathaway.”
The real scoops come with insider buying — what company executives buy with their own funds. “Unlike with hedge funds, they can’t flip for a quick gain,” Cramer said. “They are making long-haul bets.”
Following what smart money pros do is a great way to start, but ultimately you have to do your own homework.
“Piggybacking has been disastrous in 2011 — disastrous” Cramer said. “It’s a much harder way to make money than you might realize and a much easier way to lose your shirt.”
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At publication time, Cramer's charitable trust owned BAC and IBM.
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