Experienced investors know that some of the best results come from discovering a smart investment long before the crowd ever catches on. So when you read about what "Big Money" investors are doing with their portfolios, does it pay to follow them -- or are you better off walking your own path?
The big money view
Barron's recently published its semiannual look at what U.S. money managers think about the economy, the stock market, and investments in general. Overall, the pros had a fairly rosy picture of the near future for stocks, with most expecting mild increases in the major indexes between now and the middle of next year. Thanks to an expected continuation in double-digit percentage earnings growth for the S&P 500 over the next year, pros have high hopes for large-cap stocks in particular. With their favorite sectors including energy and health-care, sector ETFs like SPDR Select Energy
Yet not everyone is convinced the market will move straight up. Two-thirds of respondents expect a 10% correction by the end of the year. And while they have high hopes for stocks, money managers fear the continuing decline in the dollar, which could tarnish stock market gains.
As for individual stocks, consensus picks include popular tech names Apple
A herd of individuals
The sense of a cohesive viewpoint among hundreds of money managers may seem valuable as the sign of a collective brain trust. But in reality, trying to follow a consensus view isn't neither truly possible nor advisable.
For one thing, even the notion of a consensus is misleading because it's always in flux. If you talk to two advisors, one of whom is extremely bullish and the other of whom is very bearish, one way to come to a compromise conclusion would be to split the difference and argue that the market will stay flat. Yet in that case, no one truly believes in the "consensus" view, making it virtually worthless as a predictive measure.
More importantly, just because money managers are Wall Street professionals doesn't mean that they're immune from the same problems that plague ordinary investors. One recent study examined nearly 1,000 mutual funds to look for trends across the industry. Among the study's findings were that most funds tended to prefer stocks that were current favorites among investors and shun those that were unpopular or otherwise out of favor. As a result, as other studies have concluded, those funds tend to underperform since they buy overvalued stocks at the height of their popularity and miss out on bargains while they're cheap.
The problem stems from the conflict between the duty money managers have to their current investors versus the need to attract new clients. Because investors reward money managers who load up on popular stocks, there's a perverse incentive for money managers to follow the crowd even if it means that they give up the chance to outperform their peers.
Go your own way
The conclusion you should draw from all this is that it's never been more important for you to come up with your own strategies for investing your hard-earned money. As attractive as it may be to join up with a consensus view you can cling to, the dangers of following the herd off the next bear-market cliff are simply too great to chance.
Sure, it's scary to come up with and follow your own investing opinions, if only because you have no one to blame but yourself if you turn out to be wrong. But in terms of gaining valuable experience, there's no substitute to developing your own plan and implementing it. The sooner you give up the crutch of blindly following big-money investors, the sooner you'll truly gain the expertise you need to invest successfully.
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Fool contributor Dan Caplinger is going to have "Big Money" from Rush stuck in his head all day. He doesn't own shares of the companies mentioned in this article. Salesforce.com is a Motley Fool Big Short short-sale recommendation. Microsoft is a Motley Fool Inside Value pick. Salesforce.com is a Motley Fool Rule Breakers recommendation. Apple and Netflix are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a bull call spread position on Apple and a diagonal call position on Microsoft. The Fool has created a bull call spread position on Cisco Systems and owns shares of Apple and Microsoft. Alpha Newsletter Account, LLC has bought puts on Netflix and owns shares of Cisco Systems and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy leads where others only follow.