They only want to buy stocks of companies when others want to buy these stocks. The perfect example of this is the stock of Bank of America (BAC). In January 2011, the company’s stock reached over $15 per share. By August 2011, the stock price declined to about $6 per share, which represents a 60 percent decline from January’s price levels.
Today, the white knight, Warren Buffett from Omaha, Nebraska, came to the rescue of investors by buying preferred shares in Bank of America. Investors were thrilled sending the stock price 20 percent higher to nearly $9 per share during the first few minutes of trading. If Buffett wants to buy Bank of America, then they want to buy Bank of America. It must be a good investment now.
Then, the media got involved. With the constant battle for viewers’ attention to satisfy its advertising clients, they got a break. Instead of searching for attention-grabbing events such as earthquakes, Libya’s unrests, Greece’s debt problems, the media chose to talk about Buffett’s investment in Bank of America. But the media spoiled the party for the investors/followers who never learned the lesson from their mothers. It reminded them that Buffett is a long-term investor and although he purchased shares of Bank of America, it does not mean that the bank’s problems are gone, and the stock price might go lower. The media gave examples of how after Buffett purchased shares of Goldman Sachs (GS) in a similar fashion, the shares declined 50 percent shortly after Buffett’s purchase.
With this “revolutionary” information, some started dumping shares immediately. Other investors did exactly what they are best at – following others. Consequently, the stock price began its decline, losing the morning gains.
If you think that Bank of America is a good investment at these price levels, then buy. If you think it is a bad investment, then don’t buy it. But don’t blindly follow other investors. Remember to do your own thinking. Bank of America will succeed or fail with or without Buffett’s involvement. He does not run the company and is nothing more than an outside investor.
Disclosure: I don’t own Bank of America (BAC) and have no opinion on whether it is a good buy or not.