Cramer Remix

Why it's dangerous to follow Warren Buffett

Cramer: Long believer in doing homework

Have your own opinion. That was Jim Cramer's lesson to investors who were burned by Warren Buffett's moves on the stock market Wednesday.

"I've long been a believer in doing your own homework and finding your own comfort level with individual stocks," said the "Mad Money" host.

That means it is a bad idea to blindly piggyback on the investments made by anyone, let alone Warren Buffett or even Jim Cramer. And if you are an investor who is not willing to do the homework on individual stocks, then Cramer recommends investing in an index fund.

"I love index funds. They allow you to eliminate what's known as single stock risk," he added.


If that is the route that you choose to take, than Cramer recommended an index fund or one that has total market return on U.S. stocks. He also likes funds that have dividend income as well.

However, many investors do not agree with Cramer's view and insist upon copying the moves of famous money managers or CEOs. They think if they link their investments to a rich star, they can reap the benefits without any real work.

Nothing is for free and will always come at a price, as was seen when the piggy backers were taken to the woodshed with Buffett's investment in Exxon-Mobil this week.

Prior to July of 2013, Buffett accumulated a large position in Exxon-Mobil. Investors did not learn about this purchase until November 14th and instantly the stock shot up to $95 from $93 on this news. That is a big jump for such a large stock.

Meanwhile, on Tuesday night the market learned that Buffett sold his entire position of Exxon last year. As a result, the stock immediately plummeted. No one knows why Buffett sold it, yet for some reason when investors found out that Buffett sold the stock, they also decided it wasn't worth owning.

But what Cramer thinks is important to expose the dangerous risk with following Buffett—he does not explain why he does what he does. No one knows why he bought Exxon back then. And guess what? He doesn't have to. That's why you need to do your own homework.

"If you like oil, you should own Exxon. If you don't like oil, you should sell it. Don't try to mimic Buffett—you'll just get burned," Cramer added.

Read more from Mad Money with Jim Cramer
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The idea of simulating stock trades from a famous investor is nothing new. It's been happening for ages. But Cramer just doesn't think it's worth it to rely on someone else to make your investment decisions. Rely on your own brain and your own research. That is the only way to really make good money in the market.

In fact, Cramer thinks it might even be a good idea to buy a few shares of Berkshire Hathaway instead of replicating his investments months later. At least this way there is more transparency than just blindly buying something.

"Imitation is the sincerest form of stupidity," said Cramer.

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