It Doesn't Always Pay to Follow Buffett's Lead

by: Lawrence Schnurmacher November 24, 2008 | about stocks: AXP / BRK.A / BRK.B / GE / GS / WFC    

Lawrence Schnurmacher

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If you invest $10,000 and the investment declines by 75%...then increases in value by 100%...how much are you down? 50%. Ouch!

$10,000 x 0.75 = $7,500. $10,000 - $7,500 = $2,500. $2,500 x 1.00 = $2,500.

$2,500 + $2,500 =$5,000...still down 50%.

How does that feel? How realistic is it to expect a double in an investment that was so impaired or damaged? Hoping for this outcome seems fruitless and unlikely to happen.

Many investors are not only hoping that they get this or a better result from their existing long-term investments, they are making the decision to invest more in these impaired assets. They are looking forward to doubles and triples as the stock market will surely recover and surge to new heights, at least according to many pundits on CNBC.

A quick look at the "Japan Experience" and its "Lost Decade", which is turning into two decades, shows quite clearly that further asset destruction is possible and may even be likely, based on recent US government efforts that look alarmingly similar to Japan's actions which perpetuated the economic malaise.

I have a few clients that decided to ride on Warren Buffett's coattails in mid-October. They read Warren's NY Times' Op-Ed, "Buy America. I Am", published on October 17th, and that was enough to put their fears to rest and allow them to ignore their devastated portfolios for just long enough to encourage them to say "buy me some of what Warren's buying". That has proven to be a very poor decision - to the tune of 30-50% in many high quality blue chips stocks, including GE (GE), Goldman Sachs (GS), American Express (AXP) and Wells Fargo (WFC), all Buffett favorites.

So I ask you, how does that feel? And what's the likelihood that you will do that again?

Disclosure: no positions

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This article has 11 comments:

  •  
    Nov 24 03:28 AM
    You'd make a lousy poker player cause you can't stand to lose a hand
    Reply | Link to Comment
  •  
    Nov 24 03:30 AM
    if you write a good article next time then you can instantly reduce your stupid article average from 100% to 50%.
    Reply | Link to Comment
  •  
    Nov 24 08:06 AM
    " OUCH " is correct....Buffett's days are over..!!
    Reply | Link to Comment
  •  
    Nov 24 08:31 AM
    Buffett didn't buy GE or GS common, and AXP and WFC are very long-term investments. That you are already writing such an article after just ONE month proves that you should look for another job. Investing is something for more patient people.. like Buffett.
    Reply | Link to Comment
  •  
    Nov 24 09:40 AM
    Buffett's losses just demonstrate that NOBODY knows what to do in this current marlket.
    Reply | Link to Comment
  •  
    Nov 24 10:57 AM
    Another article that shows you how little people understand about Buffett and his investments. GE and GS were preferred stock investments, earning 10%. Even if GE or GS goes to $1/share BRK.a would still get preferential treatment to the common shareholder.

    Furthermore, comparing the one month performance of your clients is irrelevant, since BRK.A holds stocks primarily as long term investments, unless they are special situation type investments.

    Reply | Link to Comment
  •  
    Nov 24 11:28 AM
    So much financial jargon is just that... jargon. I understand the concept of losing 50% of value, then having to regain 100% to get back to where you were. However, it is still really about cash, not percentages. I've had many stocks over the years that have dropped $10/share, for example, then regained the $10/share. Some do it quickly, some take time, some don't.... That's life. However, I suspect that when Buffett looks at a company's books & furture prospects, then buys in, no matter how he does it, he doesn't think that the company will fail. He's not been known for slicing & dicing & selling the pieces.

    Another factor that often goes unmentioned is that things are "relative."

    Prices in general, not just stock prices, drop...

    Therefore, it may be that rather than needing $1 million to retire upon, $50,000 will be sufficient. Of course, not all prices drop.... the prices of things not necessary drop to what the market will bear... The prices of necessities often rise. However, it's amazing how few items actually are necessities.

    The real terror is hyper-inflation.
    Reply | Link to Comment
  •  
    Nov 24 11:29 AM
    & I've got a Bridge to sell you.


    On Nov 24 08:06 AM Richard Raia wrote:

    > " OUCH " is correct....Buffett's days are over..!!
    Reply | Link to Comment
  •  
    Nov 24 11:41 AM
    check back in 5 years
    Reply | Link to Comment
  •  
    Nov 24 01:17 PM
    I have bought a lot of COP and BNI because Buffett did . This will pay for itself . Buffetts phrase be fearful when others are greedy comes to mind.

    If over a 5 or 10 year span the mirroring doesn't work then you could make this call but a month after , hmmmm thats not a fair time frame for a long term investor.

    As Monish Pabri said , a monkey could make money following Buffet
    Reply | Link to Comment
  •  
    Nov 24 11:09 PM
    When the author has 50 years of "in the trenches" investment experience and has amassed $50B of personal wealth, and has made many of his friends multi-millionaires, his opinions may well be worth listening to. Until then I'll hold my "Killer-B's"... A lot of the current Buffett bashing sounds very similar to 1998-2000 when Buffett had "lost his touch" and "was hopelessly out of date". BTW, If any of you have not read "Snowball" it's a GREAT read!
    Reply | Link to Comment
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