The Buffett Self-Fulfilling Prophecy (IBM)

By: ispeculatornew
Date posted: 11.15.2011 (5:00 am) | Write a Comment  (2 Comments)

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Warren Buffett has been one if not the greatest investor of all time. Decades of strong performances with almost no bad years will give you that title. There are many perks involved in having such a title. Hanging out with the other rich guys such as Bill Gates, donating tens of billions to charity, etc. Buffett has continued to live a very simple life but I don’t think there is any doubt that being such a successful investor has helped Mr Buffett live a very complete life.

That Other Very Nice Perk

One other very interesting thing is how markets react when Buffett talks or trades. Take yesterday, when it was announced that IBM (IBM) had been an important target in the most recent share purchases by Buffett’s Berkshire (BRK.B): The result was instant. The stock was immediately seen as a good value, a smart buy and the stock did end up outperforming the S&P market by 1% or so. That might seem small but you can probably expect the trend to continue.

Take Berkshire’s purchase of Burlington Northern Santa Fe (BNI) last year, an important rail player. I have no doubt that rail and transportation in general was going to be a hot topic and a good investment opportunity. But in the weeks following Buffett’s purchase, the entire rail industry saw a huge influx of investments creating rising valuations, etc.

Which Came First, Chicken Or Egg?

The big question of course becomes: Did Warren Buffett see what everyone else was not seeing, confirming him as a great investor? The alternative would be:

Was Buffett’s investment in the rail sector the actual cause why others became interested and suddenly found the valuations attractive?

I’m sure there’s a little bit of both but it’s clear to me that every time a Warren Buffett puts his money in or out of some investment, millions of others follow hoping that he will be right as been the case for decades. I do still give him credit of course although I personally try avoiding being influenced by such news.

If Buffett Had A Twisted Mind

Of course, the power of such influence is that he could make important purchases, let the news leak, that would move the stock upwards and then start selling. You might say that if the stock only rises 1-2% the effect is very little. Believe me, when you’re investing billions of dollars at a time, a few % points can go a very long way. There have clearly been some players, especially hedge funds that have gone down this route and in this internet era, feeding news and rumors to try to move a stock is increasingly becoming an issue for investors.

Buffett Is Not Evil

As you may know if you’ve studied Buffett at all, he makes very long term investments in general. Companies or sectors might move according to his decisions and help him in the short term but I do tend to believe that over longer periods of time, it has little to no impact. As for trying to move the market by making his holdings known, I have to believe that Warren is not a criminal (yes, manipulating markets IS illegal!).

What are your thoughts on this? Do you think Buffett is being helped by his reputation? Has it influenced his returns in recent years?

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2 Comments

  1. Comment by Vitalogy80 — November 15, 2011 @ 11:33 pm

    Good post, but why not make a few more stock picks? I realize you didn’t want to have to rush in picks in the last 4 months of the year, but why not carry them into 2012? Only trades closed in 2011 would stay on the 2011 performance.

  2. Comment by Intelligent Speculator — November 16, 2011 @ 8:23 pm

    @Vitalogy – Thanks a lot for the feedback, will be considered! I recommend that you sign up for the tech newsletter, you will also get more stock opinions.

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