It is commonly accepted wisdom that to improve at a given vocation, taking on a mentor who has done it before themselves is a beneficial endeavour. In the absence of a mentor to coach oneself directly, it is likewise advantageous to observe and mimic the behaviour of experts.
For example, to get better at golf, it would be useful to take note of [prime] Tiger Woods’ golf swing and his pre-shot preparation. For tips on shot-making in tennis, there is no better model than the great Roger Federer.
The technique employed by these sports professionals is on display for all to see. Their general intention is to win the game through the use of movements they have practiced thousands of times in training.
Things get a little dicier with trying to emulate or follow financial personalities. There are countless ways to define oneself as an investor and the differences are not always clear to the mass of onlookers trying to learn the game of money for themselves. This can make it difficult for the novice investor trying to decide who best to listen to. Further, it can complicate matters when trying to discern between what is simply noise in the market and what actually counts.
In its most basic form, there are two types of investors; the short term traders looking for a quick buck and the long term investors who seek to acquire companies and then hold them over time to profit as the company’s operations improve over time. On this site, we focus on a long term investment model fundamentally rooted in a dividend growth investing style that emphasizes increasing cash flows. After all, it is my growing stream of dividend income that will allow me to achieve semi-financial freedom within around five years.
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Short Term Traders
A short term trader seeks to maximize their potential for profit and minimize their risk in the shortest possible time frame. They may seek to ride the momentum of a stock over a period of a few days or even just a few minutes before cashing out again. Having as much current, relevant information as possible and being in-the-know is eminently important to such a trader. If they bought a stock in the morning and saw it rise by 5% by the end of the trading day, they would be happy to cash out and walk away altogether.
Activist “Investors”
Operating with a similar mindset to short term traders are the activity “investor” class. I use quotations because I hesitate to call most activists actual investors. One of their chief tactics is to gain control of a large block of shares, put their people in positions on the board of a company, and then squeeze management to do what they want.
Layoffs of general staff, breaking the company into smaller pieces, and instituting new management are just a few of the components in the toolbox of an activist. They are generally outspoken as they try to get average shareholders and Wall Street broadly on board with their new plan to improve the company. However, improving the underlying company is rarely what they are after. Ultimately, once things “improve” (in the minds of most, this means the share price has risen), the activist will typically dump their shares and move on to the next live body to be shredded.
Consider the famous words of Gordon Gekko in the original Wall Street film when asked why he decided to wreck a given company: “Because it’s wreckable, all right?!”
There are few more apt descriptions of your typical corporate raider than Gekko himself. Beyond the multitude of altruistic reasons an activist will advocate for in the public arena, their intentions tend to go not much further than acquiring the asset at depressed prices to unload it at a higher nominal value at some time in the future. It’s basic capitalism.
The Problem With Trying To Follow Others
One of the most tried and true pieces of investment advice is to do your own homework. To be investing on one’s own implies a burden of responsibility to do research and figure out which investments work best in one’s portfolio.
With so many examples of great investors out there, it is easy to get lazy and simply try to mimic what someone such as Warren Buffett is doing and invest in the same companies as he holds in his behemoth Berkshire Hathaway (BRK.A). The problem is that you will always be lagging behind as these companies and investors only need to reveal what they have done on a trailing basis. So, you will never be up-to-the-minute on what they purchased. Further, you may not understand their reasoning for doing so. Beyond that still, they may simply get it wrong.
When looking at activists, there is a good chance that if you try to follow behind them, you will only find out they’ve dumped their stock too late. It is not uncommon for a holding of theirs to get punished even further in the market once news breaks that they have done so and it is unlikely for the small average retail investor to be able to get out before the Wall Street machine has done so already. There is a high cost in attempting to play monkey-see-monkey-do in the stock market.
Conclusion
The business world tends to glorify those with the most money. Portfolio size often acts as a scoreboard for who is best in the business. However, not everyone achieves wealth in the same ways and as such should not be taken as role models for investors with dissimilar objectives.
There is no substitute for doing your own investigative work and investing in companies that actually fit within your portfolio. While it is useful to see what others are doing for comparative purposes, you are still responsible for your own financial future.
The key to long term success is to steadily accumulate assets and allow time for your investments to grow.
– Ryan
Which investment professionals do you follow?
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