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Back in the day, when the highlight of CNBC’s Fast Money was that it featured Jeff Macke’s wit, I can vividly remember one of his funniest lines being when he referred to Warren Buffett as “The Octogenarian of Omaha.” Macke’s sardonic humor struck a cord because of how widely worshipped Buffett truly is, to the point where many investors blindly follow him after each new investment that he makes. The “Buffett Effect” has become ubiquitous in the sense that If he initiates a new position, or raises his stake in an existing one, the stock will often see a nice pop during the next several trading sessions. Unwilling (or unable) to think for themselves, many so-called “deep value investors” run so fast to try to piggyback Buffett that they often end up tripping over their own pocket protectors in the process.
There are a couple of reasons as to why blindly following Buffett is not a good idea. First, Buffett is managing a ridiculously awesome sum of money, and therefore it would behoove him to dabble in some of the smaller cap names, which actually offer more of an edge to the individual investor because they are less followed by the street. Thus, he is usually focused on mega cap, low beta names. There is nothing wrong with investing in those kinds of firms. However, keep in mind that Buffett himself has repeatedly said throughout the years that if he were managing a smaller sum of money, his portfolio would look completely different.
Next, Buffett has the discipline and patience of Job. He is not going to panic or allow himself to get shaken out of a core holding. Instead, he is the one who is waiting for YOU to be shaken out, so he can “buy the blood.” You simply must be honest with yourself before following Buffett into an investment. Do you have the stomach to watch your new holding decline 50%, and continue to follow Buffett as he adds to his position the whole way down? Easier said than done, my friend. Also, keep in mind that Buffett has openly made several mistakes over the years ($PIR, e.g.), which reinforces a major point that there is no such thing as a sure thing in the market.
Finally, as we saw in 2008 with his $GS and $GE loansharking, Buffett is often not playing the same game as the investing proletariat. Note that in both of the above cases, Buffett received perpetual preferred shares, which were well above you, the schmuck, buying common stock in those firms in an attempt to piggyback grandpa.
With that said, the price action in Buffett’s own firm, Berkshire Hathaway, has become an increasingly reliable broad market “tell” over the past few years. One reason for this phenomenon is because of his continued investment in some of the more economically sensitive sectors. As an example, look at Berkshire’s most recent major purchase, the rail company Burlington Northern Santa Fe. What is more economically sensitive than a key component of the trannies? Accordingly, I will be watching Berkshire’s share price as a guide to whether the much anticipated autumn selloff will occur this year.
Beyond the macro backdrop, the weekly chart of $BRKA, seen below, illustrates that the stock has been working its way through a multi-year triangle, and is now reaching the apex. Note the tighter price action, signaling that a big move is coming, and coming soon. Keep an eye on Berkshire in the coming weeks, as a break in either direction would be significant.
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