How many times have you seen a headline in a financial publication that read something like "What [some prominent investor] Is Buying Now"? I know I've seen that quite often. The investor might be Berkshire Hathaway's Warren Buffett (read all about him -- he's inspiring) or some mutual fund manager, among many possibilities. Let's face it -- it's an appealing headline. Most of us are on the lookout for attractive stocks to buy, and it sure seems sensible to peek over the shoulder of successful investors.
In a recent issue of SmartMoney magazine, a cover headline teased, "What Bill Miller Is Buying Now." It worked for me. Miller is the manager of the Legg Mason Value Trust
The downside of expert tips
For starters, the investing expert may not be the hotshot you think he or she is. On financial TV, for example, many fund managers and stock analysts are trotted out to talk about what they're buying, but they're not equally brilliant and successful. Some may have just had an exceptionally great quarter or year. (In other words, recent terrific results are not the norm.) We're rarely given a comprehensive assessment of a given expert's track record.
Consider this tidbit: An April 2005 USA Today article titled "Top-Selling Funds of 2000 Deep in Red" by John Waggoner pointed out that the 50 most popular mutual funds in 2000 lost an average 42% (nearly half their value!) by 2005. The fund -- and manager -- that's hot today may well be cold tomorrow.
Next, many of the experts whose buy lists get touted have some conflicts of interest. For instance, a fund manager has plenty of incentive to talk up stocks he's been buying, because if that results in more people buying the stock, the price is likely to go up, and that will boost his performance.
Also remember that even the best investors make occasional bad calls. No results are guaranteed. Even Buffett and Peter Lynch (read about Lynch) have made mistakes.
Finally, note that even if a stock lead you get from an expert turns out well and you make some good money on it, you're not likely to hear from that expert when he or she sells it. The expert might get out before the stock sinks, but if you haven't been following the stock as closely as the expert, you may end up washed out.
The upside of expert tips
Though I initially wanted to pooh-pooh articles like the one on Miller, the more I thought about it, the more benefits I noticed. Truth be told, I liked the article and learned from it. Miller talked about why he's been buying stocks such as Citigroup
We'd do well to follow a lot of great investors out there in some way, or at least learn from their thinking and writing (perhaps via letters to shareholders that tend to be posted on fund company websites). But with mutual funds, it's hard to know what a manager is really buying in earnest at any given time. That's because we generally receive reports on a fund's progress and its holdings only every three months. By the time we learn of a fund manager's new interest in a company, he or she may have bought a big chunk of stock in it and the price may have risen. Buy now, and you may be buying at a significantly higher price. Or the manager may have sold out of the company just as you're buying in.
How to follow experts
So what should you do? You have a bunch of options. For starters, don't follow experts' leads too blindly. If you see an article that paints a rosy picture of a company, read a lot more on it. Make up your own mind on whether to invest after considering its promise and risks. If the expert didn't mention any risks, look for them -- every company faces some.
Also consider seeking out experts' tips in places such as our investing newsletters, where you not only see which stocks are recommended as promising buys, but you also find out when the experts no longer believe in them and recommend selling. Grab a free trial of one or more of our investing newsletters, and you'll be able to peek at long lists of stocks (and mutual funds) that our analysts have recommended. Each issue will make a case for one or more investments in an easy-to-read package. We've got newsletters focusing on income investing, small-cap investing, value investing, mutual funds, retirement planning, and more.
What Selena Maranjian is buying now
I suppose that given the title of this article, I should mention the stocks I'm buying -- though I'm not a world-class stock expert. I actually don't think I've bought anything in several months. I am mulling some purchases, though -- I'm thinking about adding to some positions in companies such as Home Depot, PepsiCo, Coca-Cola, and Wal-Mart. I'm also considering some international investments. But think twice before mimicking what I'm doing. Know that I'm someone who almost set a blanket on fire when making yogurt. I've melted my new car-registration stickers by accidentally microwaving some mail. I eat Lucky Charms for breakfast. You've been warned.
s are saying
Below you'll find more Fool opinions on companies mentioned in this article -- check some of them out.
- W.D. Crotty: Pepsi's Sweet Numbers
- Seth Jayson: Dumping Home Depot
- Chris Mallon: Wal-Mart's Bum Rap
- W. D. Crotty: The Coca-Cola Cash Cow
- Alyce Lomax: Sprinting Ahead?
- Jeff Hwang: IAC's Complex Report Simplified
- Charly Travers: Value in Drug Stocks?
Selena Maranjian 's favorite discussion boards include Book Club , The Eclectic Library, and Card & Board Games. She owns shares of IAC/Interactive and Pfizer. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.