Warren Buffett is one of the greatest investing minds of all time. But that doesn't mean you should blindly follow his lead.
The multitude of copycat investors trying to replicate Buffett and Berkshire Hathaway's (BRK.A) (BRK.B) portfolio is a well-known phenomenon, so much so that the company has tried to hide its holdings in petitions to the SEC.
"We recognize that there have been a number of occasions where disclosure of Berkshire's stock purchase or selling programs has resulted in temporary spikes in the market, and may to varying extents "foreclose [Berkshire's] ability to increase its holdings in that security at prices Mr. Buffett concludes are attractive," the commission acknowledged in 2003.
As an indicator in more recent memory, Berkshire Hathaway's latest stock selection of Amazon (AMZN) is sending shares of the e-commerce and cloud giant soaring on Friday, fomenting a 3% run to the upside.
Atypical for Buffett, and it was not Buffett himself who pulled the trigger on the investment to be fair, it would be difficult for disciples of Benjamin Graham to make a value argument. Likewise, there is no bad news creating an opportune buying time, something Buffett has been vocal in his fondness for.
However, Amazon is as close to a sure bet as there is in the market. As such, a long-term investor, and especially one with billions to spare, can wait as long-term share growth comes through even if there is volatility in the short term.
What investors need to consider is how long they can wait (it's likely not as long as Berkshire typically holds) and whether or not Buffett's disclosures make stocks unduly expensive.
Buffett's biggest holding at this point is Apple (AAPL) , a long-term bet that has paid off handsomely.
However, his investment blessing on Apple was certainly picked up on by short-term traders, as was evidenced in the price action and trading volume.
When his initial investment was announced on May 16, 2016, Apple trading volume spiked and within 10 days, the shares surged from around $90 per share to over $100. Two months from that point, trading volume normalized and the stock receded to the level Buffett bought in at.
While Apple has unquestionably been a good long-term investment, many trying to ride the wave of momentum built by Berkshire were likely left disappointed.
Oracle (ORCL) was a similar story when the Oracle of Omaha arrived in late 2018.
Upon the news that Buffett had bought over 40 million shares, the stock was lifted from around $49 per share to a high of $57.53 in the ensuing days. By year-end, the stock fell back to around $45 per share and it was announced in the following quarter that Berkshire had liquidated its position abruptly.
It is also worth noting that Buffett can be wrong, as he is human after all.
Investors chasing Kraft Heinz (KHC) or International Business Machines (IBM) after his big investments in each were left severely sore as earnings results came in. No one can be right 100% of the time.
Nonetheless, Buffett is right more often than he is wrong, which is why he gets the immense credit he deserves.
The issue investors should realize is that the stock pops his disclosures generate may make investments unattractive in the short term.
"As a rule, I do not chase stocks," Real Money's Stephen "Sarge" Guilfoyle recently told investors.
Counter-intuitively, Warren Buffett's bets may be a great data point to prove the rule.