We all have our investment heroes.
These are the gurus you read about all the time and appear frequently in the news.
They are constantly in the limelight and are commended by the financial media for their keen insights and savvy investment skills.
When I first started on my investment journey, I was voraciously reading investment books and learning more about stocks from blogs and websites.
Back then, I also had an investment hero– Benjamin Graham, who is widely recognised as the “father of value investing”.
It was his elucidation of a formal, structured process to analyse companies using their financial statements that got me interested in digging deeper into stocks.
His seminal book “The Intelligent Investor” guided my thinking and established the principles and process which I still adopt to this day in having a long time horizon and watching out for investment risks.
But no matter how much you may respect or admire an investment hero, you should stop short of putting them on a pedestal.
Worshipping someone may not only be dangerous for your financial health but can lead to disillusionment should the guru fail to live up to expectations.
Here are several reasons why we should maintain a healthy relationship with the investment personalities that we see in the media.
Everyone plays a different game
Every investor is playing his own game and invests based on personal rules, objectives. and principles.
Warren Buffett may be one of the world’s best investors but do not assume that he shares the same investment goals that you have.
For instance, he may be perfectly happy with an 8% compounded return, but you may gun for 10% to 12% instead.
Also, there is no point in following another investor if he or she has a different set of investment rules, beliefs, and processes.
There has to be some alignment in investment philosophy and process if you are trying to emulate an investment hero.
Even then, you should view his or her buy and sell decisions as merely a guide.
For instance, in Buffett’s case, 46% of his Berkshire Hathaway (NYSE: BRK.B) stock portfolio is invested in one company: Apple (NASDAQ: AAPL).
While the Oracle of Omaha has his reasons for this large position, as an individual investor, you may not want to place so much of your wealth in the smartphone company.
Remember that no one cares about your money more than yourself!
You can, of course, use your heroes’ holdings and investment moves as starting points.
But you should also do your due diligence and decide how you wish to allocate your money.
After all, ideas can be borrowed but the conviction to hold a stock comes from yourself.
You have the responsibility to play your own game and not deviate from your goals and objectives to follow someone else’s instead.
Not even when they are your investing hero.
Gurus are not infallible
This next point may seem obvious, but investors who are enamoured with an investment hero may fail to realise it.
Investment heroes are not infallible as they, too, are human.
Take Michael Burry for instance.
He is the founder of Scion Asset Management and became well known as the protagonist in the movie “The Big Short” for correctly predicting and profiting from the subprime mortgage loan crisis during the Great Financial Crisis of 2008-2009.
On January 31 this year, he tweeted the word “Sell”, and it was interpreted by his thousands of followers as a signal that the market will soon dip again.
Instead, the NASDAQ Composite Index entered a new bull market on 31 March, leading Burry to admit that he was wrong.
Meanwhile, Seth Klarman, another popular billionaire investor of Baupost Group, predicted in June 2022 that the US Federal Reserve will “chicken out” at some point and stop raising interest rates.
With the benefit of hindsight, we now know that it didn’t happen either.
Instead, the central bank has continued to raise rates for the 10th consecutive time as the unemployment rate remained low and job growth stayed healthy.
At the time of writing, officials at the Federal Reserve are even contemplating if rates should be raised for an 11th time or if a pause is needed.
The two examples above show the folly of trying to predict the direction of markets or macroeconomic events.
Not even your investing heroes will get it right.
Losing their Midas touch
Even investing heroes can lose their Midas touch.
Bill Miller displayed this with his fall from grace.
The veteran investor once headed the famous Legg Mason Capital Management Value Trust that beat the S&P 500 every year from November 1990 through 2002.
The fund achieved an annualised return of 14.5%, four percentage points ahead of the benchmark index.
This period also allowed him to cement his reputation with a 15-year streak of beating the S&P 500 (from 1991 to 2005).
Sadly, this streak would come to a shuddering halt.
In the mid-2000s, Miller avoided energy stocks and also failed to recognise changes that adversely impacted his 1990s growth stock darlings.
By April 2012, the fund delivered a flat 10-year return that was way behind the performance chalked up by the S&P 500.
Miller left Legg Mason amicably in August 2016, leaving behind a list of disappointed investors in his wake.
Another celebrated investor is Cathie Wood, the investment manager for Ark Invest’s ARK Innovation ETF.
Her fund delivered a stunning 152.8% gain in 2020 as her stock picks performed extremely well during the pandemic.
In 2022, however, the fund lost two-thirds of its value after suffering a 23% loss in 2021.
An investor who put S$1,000 in her fund at the beginning of 2020 will still end up with a 36% loss at the end of 2022.
More recently, Cathie appeared in the news for the wrong reason.
The fund sold the bulk of its stake in chipmaker Nvidia (NASDAQ: NVDA) just before a massive rally that added US$585 billion in market value.
There are lessons to learn here.
Tracking and following a manager too closely means you risk making the same mistakes he or she makes.
Get Smart: Learn but do not blindly follow
Let’s get one thing straight.
It is perfectly all right to have investing heroes.
These are people we can admire and inspire us to become better investors.
But we should stop short of worshipping them.
After all, they are still human and will make painful mistakes along the way.
Always remember: a billionaire who loses half his wealth will still be at least worth $500 million. Most of us, however, will be devastated if our wealth is cut in half.
Instead, the best thing you can do is to learn from their wisdom and experience and find the best ones which work for you.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Royston Yang owns shares of Apple.