Guru Stock Tips Are Helpful, but Investors Need to Be Careful

The stock market can be a big, complex place for those investors who are just starting out. Indeed, by some estimates, it takes up to a decade of trading experience to fully understand the market and your own market temperament.

However, unless you are a professional investor, it is very difficult to find enough time to devote to individual stock and market research. This is why many investors often turn to guru tips to help them find potential investments.

There is nothing wrong with this approach. Combing through the holdings of the world's professional investors can turn up some great opportunities, but this approach should always be used with caution.

Blindly following anyone into a stock is never a good idea. The investor who came up with the stock in the first place may know more about the sector than you and may be investing with a different timeframe or outlook. What is more, when it comes to guru tips, one needs to remember that these stock ideas are published in 13Fs, which are released a maximum of 45 days after the end of the calendar quarter. A 45-day lag is enough to change an investment thesis, especially for those gurus who tend to trade a lot. Moreover, the 13F is only a snapshot of the portfolio at one point in time. The only data surrendered on the form is the company, number of securities held and the total value of the securities. The form does not reveal when the securities were acquired, what price was paid or if the securities have been acquired as part of another transaction. Put simply, the 13F is only a snapshot of what one particular guru owned at the end of the quarter and is almost entirely useless for equity research.

Having said all of the above, 13Fs and guru ideas can be a great place to start looking for investment ideas. If you know and understand the investment manager’s investment philosophy and can understand why the manager has entered the position, a 13F can be very instructive. Hedge fund letters, presentations and op-eds help greatly in this respect. You maybe be asking why is it important to do your research when the guru has already done a bunch of research for you. Well, one needs to understand that when you follow a guru into a position, at the point of clicking ‘buy,’ you are on your own. After you have acquired the security, there will be no further support from the guru, and you will be at the mercy of the market. This is a disastrous position to be in for any investor. If you do not understand the company, what it does, how it makes money and the opportunities, strengths, risks and threats to the business, you are no longer an investor. You are a speculator betting purely on price. Unfortunately, this scenario throws up even more problems. Limiting downside by cutting losers and maximizing upside by letting winners run is an essential part of investing, but if you do not understand the business, how are you supposed to know when to bail out? Moreover, when is the right time to take profits if you don’t know how much further the business can grow and whether or not current growth is sustainable?

All in all, blindly following a guru’s stock picks can be disastrous for your wealth. The time saved by copying positions is not worth the potential losses if the trade does not go to plan. Even if the trade does go to plan, how do you know if it is going to plan if you don’t fully understand the investment thesis? Still, guru ideas can be a great starting point for further research, and if you can get hold of a hedge fund letter detailing the investment thesis behind the idea, you can save a lot of time and maximize your upside.

“It has always seemed to me the height of damfoolishness to trade on tips. I suppose I am not built the way a tip taker is. I sometimes think that tip takers are like drunkards. There are some that can’t resist the craving and always look forward to those jags which they consider indispensable to their happiness. It is so easy to open your ears and let the tip in. To be told precisely what to do to be happy in such a manner that you can easily obey is the next nicest thing to being happy – which is a mighty long first step toward the fulfillment of your heart’s desire. It is not so much greed made blind by eagerness as it is hope bandaged by the unwillingness to do any thinking.” – Reminiscences of a Stock Operator

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