Follow Process Not Trades
It's important to look at a great investor's moves in order to learn from his or her investment process but following his or her trades just because that person is buying or selling is always a bad idea, even if the trade ends up into a great profit. The reason is simple: Activist investors could be buying or selling shares for strategic reasons related to another investment – which is a typical Icahn move. Hence, you should never imitate any investor blindly. For example, if you now sell Take-Two Interactive Software's shares, the reason must be related to your own work on the company's valuation. This means that the decision you are taking must be related to “the stock is not cheap anymore” or “there is a better alternative investment” rather than to the fact that Icahn is selling his stake in the company.
This does not mean that you shouldn’t be attentive to where “smart money” is going. You should always look at what successful investors are buying or selling in order to ask yourself one golden question: “Why is he or she buying or selling this shares?” If you believe you can answer such questions and you agree with the investor you admire, then it's reasonable to follow his or her moves. Actually, this is what chief investment officers do when their analysts bring them ideas.
Argentina's biggest oil and gas company, YPF (NYSE:YPF), could be a good example of how to think over investments made by great money managers. One of my favorite investors, George Soros, has been buying YPF shares. Hence, I got really interested and took a look at the company. I discovered that YPF owns the third biggest shale oil and gas reserve in the world in its Vaca Muerta formation and nearly runs a downstream monopoly in Argentina. In addition, for 2014, YPF is expected to grow its EBITDA by 27% year over year to $4.7 billion. I assigned to this state controlled but professionally managed oil business in the politically agitated Argentina, a 5 times EV/EBITDA price target, which is a discount to its peer group average. When I discover YPF is selling for 2.5 times 2014 EV/EBITDA, I follow my investment hero.
As a fixed income investor, I always like to look at what David Martinez from Finitech, Diego Ferro from Greylock or Paul Singer from Elliot are doing. For decades now, they have proved to have a solid reasoning that has led their clients to make money. Every time they make a move I take a deep look in order to learn. That said, before committing money to an investment, I do my homework. If you do not have the time or will to think over a trade, it's always better to invest in an index fund such as SPDR S&P 500 (SPY), which trails the S&P 500 index. Alpha exists, but you need to work hard in order to get some of it.