Do you remember a time when you were a child and and you wanted to do something but your mom prevented you from doing it? Then, you responded, “Mom, but John is doing it. Why can’t I do it?” Your mother responded, “If John jumped off of the top of a building, would you follow him?” What a great lesson this has been for me. Unfortunately, the majority of people never learned this lessons that their mothers tried to teach them. Instead, they keep following others, refusing to think for themselves. However, this time around, they are too old to have their mothers follow them around and prevent them from doing stupid things like giving their wealth away by selling dirt cheap stocks just because other people are selling them. It becomes even more ridiculous – they graduated from following other people to following brainless computers who are responsible for many of the trades on the exchanges.

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.

What Worked in the Stock Market for Long-Term Investors?

Extensive research has found that the companies with predictable revenues and earnings outperform the market average; they also suffer lower probability of loss. As a matter of fact, this kind of companies are exactly what Warren Buffett wants to buy and hold forever. Please read the research about what worked in the stock market:

Part I: What worked in the market from 1998-2008? Part I: Predictability Rank
Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety

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