Berkshire Hathaway Chairman and CEO Warren Buffett
Coattail investing is popular and sometimes even profitable. If Warren Buffett buys Wal-Mart shares, are you going to do your own research to try to find a better investment? Or just buy what he bought? If you simply follow in the footsteps of a guy who's made tens of billions of dollars in the shark tank known as the stock market, you'll do well, too, right?
In fact, being a copycat can be dangerous. Like stocks, successful investors are often a flash in the pan, or crash heavily after long winning streaks. Remember Bill Miller, the legendary stock picker who ran Legg Mason's flagship value equity fund and beat the Standard & Poor's 500 index for 15 straight years from 1991 to 2005?
Then Miller hit the skids. He underperformed the index for three straight years. True, he beat the market in 2009, but then he started to lag again. Last November, Legg Mason announced that Miller would turn over the reins of the fund this April. Miller often said that he was lucky to beat the S&P 500 for so long. In retrospect, it looks more like he was a good investor in bull markets and a bad one in tough markets. Over his whole tenure as a portfolio manager at the firm, he hasn't beaten the index.
Miller isn't the only celebrated investor who's cost copycat investors money. Remember hedge fund whiz Eddie Lampert? He generated some fat returns from big, concentrated bets. In 2003, he paid $800 million (U.S.) for control of Kmart and upped the ante in 2005 by merging the chain with Sears. The bet worked for a while, but then the wheels fell off. Sears Holdings ' share price is down more than 75% since 2007. Lampert used to be touted as the next Warren Buffett. He might be the next Bill Miller.
Here in Canada we have George Armoyan, an aggressive activist investor who made headlines by taking large positions in poorly managed companies, including Clarke Inc. , a former trucking firm that is now one of his main investment vehicles. As this magazine put it in a gushy 2007 feature story, "The mere news that Armoyan has taken a position in a company is now enough to prompt copycat investors to start buying, which drives up share prices—what one analyst called the 'Armoyan Effect.' "
The Armoyan Effect now appears to be dead, in large part because of two disasters—Shermag and Holloway Lodging. Clarke's share price peaked near $11 in 2007. It's $4 today. Armoyan may not have lost his touch; he probably never had the touch that many copycat investors thought he had. The fact is that few investors are infallible, not even Buffett.
As for which hot shot activist might hit the skids next, look no further than the headlines. For my money, it's Bill Ackman, the outspoken CEO of New York-based Pershing Square Capital Management. Like many now-fallen stars, he's had some big setbacks as well as successes. Yet Ackman still has a copycat following, which has helped lift Canadian Pacific Railway's share price since he bought a large position and began agitating for change last year.
Ackman and his imitators might make money on CP Rail if they get out in time. But if he takes on the Bay Street old boys' network, he's likely to be thwarted. That's not usually a fight you can win. The trouble with too many star investors is that they start to believe their own hype, and so do their followers. —Fabrice Taylor
THIS MONTH'S TIP SHEET
VALUE Wavefront Technology Solutions Inc. Number of patents granted and pending: 41 Despite monumental efforts to coax oil out of the ground, producers typically leave about a third of the stuff under the surface when they abandon a reservoir. They just can't get it out. Edmonton-based Wavefront has, well, a solution. It uses special tools to pulse fluid through the oil to force it up wells. Result? More than double the oil extracted from some deposits, and a huge windfall for oil companies.
GROWTH Easyhome Ltd. Forward price/earnings ratio: 6.3 Easyhome is an alternative lender and rent-to-own outfit for furniture and appliances, and it makes a pretty hefty operating profit. True, the company is coming off a couple of tough years, but has cleaned up its finances and pays a nice dividend that has averaged about 5% recently. That should rise if management's expansion plans work out. The chairman clearly likes what he sees—he's been buying stock like crazy.