Thursday, August 14, 2008 1 comments ++[ CLICK TO COMMENT ]++

Risk with Following "Gurus"

This probably doesn't apply to too many reading this but those blindly following so-called "gurus" need to be on top of the ball. Eric DeCloet of The Globe & Mail has a good article pointing out the shortcomings of following others. He uses Eric Sprott, a very investor, and his investing team in Canada as an example, although the example can apply to anyone. The problem is most acute with momentum investors--Sprott and his hedge funds are,--sector rotation investors, macro investors, and growth investors. If you follow a long-term investor you generally don't have as big of an issue.

I have no reason to doubt the ethics of Eric Sprott so it isn't a question of anything immoral. Rather, the problem is that small investors can't stay on top of these investors. Of those reading this blog, the most vulnerable would be those following Jim Rogers, Marc Faber, or such investors. These guys move in and out so quickly that small investors can be light years behind. I am a huge fan of Marc Faber but have no idea what his position is half the time. Recall how Faber was bullish on Vietnam a few years ago. Is he still long or did he sell out? Who knows! How about how Jim Rogers is bullish on China? Is he still long or did he sell out last year and avoid the complete meltdown that is China these days?

You avoid all these problems with long term investors. Many long term investors tend to be value investors and their holding period is often quite long. Those blindly following Jean-Marie Eveillard or Warren Buffett are probably ok...

No currency is more valuable on Bay Street than a good investment idea. The problem is they're hard to find, so a lot of people attempt a shortcut by buying what the smart money is buying. “Coattail investing,” they call it.


Good read for those blindly following others...

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1 Response to Risk with Following "Gurus"

August 15, 2008 at 2:45 PM

I'm not for blindly following the pros. But for individual investors (I'm one) I like and employ the concept of "reverse engineering."

Pick 2 or 3 top investors, and review their holdings and moves. Use these names as your list of potential candidates for investment. Note the word potential. Sometimes a stock has moved by the time it's a reported holding of Whitman, etc.

The appeal of this strategy is that the top professionals have analysts who do nothing all day but research stocks. I can't do that because I'm one person, and I have to work for a living ;-)

And, you're right, this type of thing works best for investors, and not traders or those making quick, in-and-out moves.

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