Piggy Backing On Other People's Trades

Barry Ritholtz Over at the Big Picture put out an excellent post a week ago about blindly following how other big name money managers or billionaires invest.  There has developed over the years a whole subculture in studying how so called "Whales" like Buffet, Soros and Bill Gates invest their money.  One basic lesson to remember is that these  "Whales" are also human.  They can be and often are wrong with how they place some of their own money.  Ritholz illustrates another point regarding  these big boys with a quick post about Michael Dell.  An excerpt:

From The Big Picture

Lost amongst the Greeks, the Discount Rate hike, and that unpleasantness with Tiger Woods last week was Dell’s earnings news. It was not particularly good....Dell’s disastrous stock performance creates a “teachable moment.” That lesson is simply “Do not blindly follow the investing strategies of billionaires.”

Recall a purchase of stock by Michael Dell himself in 2006. That was $70 million worth of stock at $23.99. This was remarkably Mr. Dell’s first ever purchase of his namesake company’s stock. According to data from Thomson Financial, he had been selling steadily every year since 1988.

At the time, {Ritholtz} wrote:

“Like all too many things financial, the headline looks much better than the detailed reality beneath. This much is true: Dell did make the aforementioned $70 million purchase: But lets put this buy into some actual context:In the 2005 publication of the Forbes 400, Dell was listed as the 4th richest man in the United States and the 18th richest person in the world. He has net assets of $ 18.7 billion. Dell reportedly owns the 15th largest home in the world."

Put those figures into context: This $70 million purchase was less than 0.37% of his Mr. Dell’s assets. In terms of relative wealth, it is the equivalent of someone who earns a $100k per year buying 100 shares of Dell stock.

Yet that did not stop many pundits and analysts from looking at the purchase as if it were an enormous vote of confidence.  A year later, {Ritholtz also} noted:

“Billionaires are different from you and me. To begin with, they have more money. But its more than that — they invest differently, because they have very different goals and objectives. And (shocker thought it may be) they can afford different things than you."

Yet that doesn’t seem to stop people from wanting to “tag along.”......{Billionaires} are not concerned with saving for retirement. One should consider that before chasing their most recent buys.

Link:  Dell serves as a reminder