Whale Watch: Why Copying Big Investors Is 'Dangerous'

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Published: Tuesday, 15 May 2012 | 1:44 PM ET
By: | Finance Editor

It's a little easier to buy like Buffett than to trade like Tepper — a lesson worth keeping in mind when filings come out indicating where the big investors are putting their money.

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Tuesday is the day when market whales like Warren Buffettand David Teppersubmit their 13f forms with the Securities and Exchange Commission. The filings indicate individual positions for the big investors and are widely perused by market participants big and small alike.

But there's danger in following the big guns — specifically, that the forms often are backward-looking and thus can be misleading about where someone like hedge fund giant John Paulson is putting his money.

"There's some benefit in" following the 13f filings, says Michael Yoshikami, CEO and founder of Destination Wealth Management in San Francisco. Yoshikami advises following "not exactly what they're doing but more following the theme of what they're saying."

Disclosures that say Kynikos head Jim Chanoshas upped his position in Amazon or that Steve Cohen at SAC Capital has increased his stake in Boeing could be old news by the time they become public.

"It's dangerous for investors merely to mimic what large investors are doing, because you're always going to be late," Yoshikami says. "That includes not just buying but, importantly, selling. If you're looking at a 13f and deciding what to buy, you're not only buying late but by the time that asset you want has been sold you find out it's been sold for a while."

One exception is a value investor like Buffett.

The head of Berkshire Hathaway doesn't trade stocks like a Tepper or Paulson but instead holds them for long-term value. So his positions would be more relevant for a retail investor looking for a buy-and-hold play.

Beth Larson, principal at Evermay Wealth Management in Washington, D.C., says investors need to differentiate between positions taken by mutual funds and hedge funds. Filings by someone like Buffett or Bruce Berkowitz at Fairholme Funds — which prospered in 2010, got clobbered in 2011, but has come back strong in 2012 — would set a more apt tone for a mom-and-pop investor.

"If you're talking about Warren Buffett's 13f, that would be quite useful because he is well-established as a long-term value-oriented investor," Larson says. "So you can be pretty sure that his 13fs are not changing dramatically from quarter to quarter. They will morph over time but you're not going to see Geico go from being included in his 13f this quarter to being excluded next quarter."

Conversely, David Tepper, of Appaloosa Management, was one of the hottest managers out there and credited with triggering the "Tepper Rally" in a CNBC appearance in September 2010. At the time, Tepper advised investors to follow the government's lead and said the Federal Reserve would be there to backstop the stock market.

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But Tepper changes his portfolio rapidly, especially so this year when he has taken positions in Apple , Bank of America and Ford among a slew of other companies during an extremely active quarter.

Those positions, though, could have been vacated by the time his 13f hit the financial press Monday.

"It's extremely challenging trying to profit from short-term trading when the release of this data comes out," says Rob Lutts, chief investment officer at Cabot Money Management in Salem, Mass. "Everyone rushes out to buy because so-and-so initiated a position. By the time that information comes out and you try to act on it, that's already been reflected in the stock price."

Following the 13f filings requires a scorecard as well, for a trader or longer-term investor.

"A word of caution is that the hot hand sometimes turns cold for a while," Lutts says. "Short-term, if you think you're going to buy on that 13f and sell two days later and make money, you're crazy."

"It's dangerous for investors merely to mimic what large investors are doing, because you're always going to be late," says one market pro. "That includes not just buying but, importantly, selling."
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