The chill has fallen from the market; casual investors are no longer afraid that buying stocks is like throwing money down the drain.
That doesn’t mean everyone is eager to blindly jump back in, though. There’s a natural tendency to seek a little guidance in times like these, after so many nest eggs were pillaged by the recession. So why not turn to the big names? Warren Buffett and Bill Gates can’t steer you wrong, right?
Not always. It seems like an easy choice to match the picks of “celebrity” investors when looking to add some shimmer to your portfolio. But it’s not so simple: Mimicking celebrity picks can create a false sense of security and meddle with your personal investing objectives.
“There are a lot of people coming in who’ve never bought stocks, or stayed out for many years, and they’re thinking they’ll buy something really safe,” says Pat McKeough, an investment analyst and publisher of investor newsletter service TSINetwork.ca. “So they’ll pick the Warren Buffett or Bill Gates stock.”
This approach can cause trouble in numerous ways. First, a famous name attached to a stock doesn’t necessarily mean an endorsement – they have just been asked a question about it on the record, Mr. McKeough says. And if they are holding that stock, there’s always the chance they’re on the cusp of dumping their shares when the price is right.
So those investment ads with Mr. Buffett’s name on it might not be selling you the gains you’re looking for. “You can’t just take something out of context, even assuming it’s a heartfelt opinion,” Mr. McKeough adds.
Even when investing titans take big, clear stakes in a company – say, in Exxon Mobil Corp. – it might not be wise to follow suit.
“We know what Warren Buffett does very well,” says Eric Kirzner, the John H. Watson chair in value investing at the University of Toronto’s Rotman School of Management. But the objectives of celebrity investors, he says, “may be radically different than yours.”
While Mr. Buffett or Mr. Gates may buy into a company to hold forever – remember that Mr. Gates began his fortune by holding onto his early Microsoft shares – they may also buy shares in a company to sell more quickly, or to build synergies within their own portfolio. Those shares might not pay off as well for every retail investor.
“You’ve got to make sure you’re consistent with the objectives you set for yourself,” Mr. Kirzner says. “Injecting somebody else’s pick into your portfolio may not be a good thing if it doesn’t fit.”
That’s the takeaway point – if you’re going to put your dollars at stake, you should have an investing plan that’s geared toward your personal goals. After all, it’s your retirement you’re saving for – not Mr. Buffett’s.
That said, the Berkshire Hathaway Inc. magnate’s choices can still make good guideposts. “It’s a good filtering device,” Mr. Kirzner says.
There are numerous ways to shortlist stocks that best fit your portfolio, from celebrity-investor endorsements to filtering for metrics such as strong price-to-book or price-to-earnings ratios.
The approach Mr. McKeough recommends is to look for companies with a strong history of savings, earnings and dividends. “That’ll eliminate horror stories,” he says. From there, he says, see how new stocks would affect the sector weightings in your portfolio, making sure it doesn’t throw your holdings off balance.
Once you shortlist potential new stocks, you can take them to your adviser to see whether they fit your plan.
“A celebrity portfolio might make a good filter, but unless you do research, it’s not going to do you any good,” Mr. Kirzner says.
And no one’s right every time. Even Mr. McKeough picks a favourite stock every year and sends it to his readers, but can never promise perfection. “Some do great, some do not so great. But we make a claim – this is not a portfolio, it’s a stock. All my favourites don’t turn out to be great successes.”