Be wary of investment tips from the rich and famous

An edited version of this article was published in the 13 April 2019 issue of TODAY.

Every wannabe investor dreams of investing like Warren Buffett. Or perhaps George Soros or Carl Icahn, even Ray Dalio or Stan Druckenmiller.

With the billions they have generated through shrewd investments over the years, they represent the pinnacle of investment success and have received plenty of media coverage – particularly on the size of their transactions and the vast profits they have made. They have captivated generations of starry-eyed investors wishing that they, too, could possess the investing acumen of these legendary greats. Books on their success stories, trading strategies and famous quotes are snapped up and perused by this large following of hopefuls who hang on to every word they say, hoping to pick up some useful tidbit that could be their own ticket to unimaginable wealth.

However, one thing that ordinary investors may not realise is that basing your investment decisions on the wise words of the rich and famous can be extremely dangerous to your financial health. This is especially so if you are NOT rich and famous.

Since 1995, more than 3,000 of the world’s savviest portfolio managers and private investors have gathered annually at the Ira Sohn Conference in New York. The conference began as an initiative to raise funds for pediatric cancer, but is now more popularly known as an event for those big names to flaunt their best money-making ideas.

In 2013, Quartz magazine reported on a Financial Times study showing that an investor who had followed the top picks of those prescient investors would have made 19% over the year. That is not a bad return, but investing hassle-free in a liquid, lower-cost index fund would have produced an even more impressive 22% return without expending all that effort.

Other reports from CNBC and Bloomberg tracked the performance of these "top investment ideas" and concluded that, on average, they don’t fare very well. To be fair, some ideas produced very good returns, but how do you sort out the wheat from the chaff?

In Warren Buffett’s 2018 annual letter to Berkshire Hathaway shareholders, he wrote that it was a big mistake for investors to hold long-dated bonds or measure their portfolio’s risk level by its ratio of stocks to bonds. He is not the only person to openly “hate” bonds. In a recent event hosted by JP Morgan Asset Management, their CEO, Jamie Dimon, was asked for his thoughts on the various asset classes. “I wouldn’t own any,” he said. This was not the first time he had expressed his derision for fixed income.

You could very well use those opinions as a reason to sell all the bonds in your portfolio. But perhaps you should not rush to do so. For starters, what is Warren Buffett’s or Jamie Dimon’s time horizon? More importantly, could you – like them – afford to lose hundreds of millions in the stock market and just shrug it off as an unfortunate mistake?

A quick search shows that Mr Buffett’s current net worth is about $90B. Mr Dimon’s is around $1.5B. Even if they were to make a huge mistake and lose as much as 50% of their assets in a crisis, they would still have $45B and $750M respectively – more than enough for several very comfortable lifetimes, and unlikely to make a dent in their lifestyle or retirement plans. The same probably can’t be said for most of us mere mortals.

Similarly, George Soros and his former protégé, Stan Druckenmiller, are some of the more famous traders known to investors. Some of you may recall how Soros famously made $1 billion from betting against the British pound in 1992. As for Druckenmiller, some of his famous exploits are detailed in Jack Schwager's book, The New Market Wizards.

Among the many interesting stories in the book is one about Druckenmiller's trade just before the 1987 Black Monday Crash. In this story, Druckenmiller had been short (expecting the market to go down). Nothing happened. The day before the famous crash, he then shifted to a 130% long (expecting the market to go up) position. In the very first hour of trading the next day, the market tanked... and he realised he had made a mistake. So, he sold everything he had and returned to his initial short position.

He ended the day with a profit! Druckenmiller said that one of the best things he learnt from Soros was to never worry about being wrong, but to focus instead on how much money he could make by being right.

Of course, Buffett, Soros and Druckenmiller are sometimes wrong. Some of Buffett’s famous blunders include his $444 million loss on British retailer Tesco and a $2.7 billion 2018 loss on Kraft Heinz.

Over the past few years, Soros was noted for being bearish on the stock market and had created very big positions to profit from any market decline. However, the market has been consistently going up, resulting in Soros reportedly losing $1 billion following the rally after Trump was elected as President in 2016. Druckenmiller similarly had a bearish view on the market during the same period, telling the audience at an investment conference to sell all their stocks and buy gold. A few months later, he opined to CNBC that he was optimistic about the economy following Trump’s election. In fact, he had sold all his gold on that very night itself. What a U-turn! Anyone who had dutifully followed his advice would have been blindsided by the quick turnabout.

Even Nobel laureates are no strangers to mistakes. Harry Markowitz, the father of Modern Portfolio Theory and someone who has done vast amounts of research into diversification and optimal investing techniques, admitted in an interview that his behavioural problems and stress over seeing stocks fall made him split his portfolio 50/50 without any type of efficient frontier. In a later article, he admitted that his equity portfolio was also suboptimal. He had taken large bets in industrial and construction stocks, wagering on infrastructure spending.

The takeaway from all this is that the ultra-high net worth are not your typical long-term investors. They can take all sorts of liberties with their money precisely because they have so much of it. This gives them a lot more leeway to make mistakes or pursue wild investment ideas that may never come to fruition. They also have the ability to change their minds in the blink of an eye, based on last-minute reassessments that they are unlikely or unable to share with other investors in time.

However, most of us are neither wealthy nor smart enough to be investing in this manner. We don’t have spare assets available to lose on a whim in some fancy investment scheme or interesting-sounding trade. Instead, most of us have retirement plans to fund, children to send to school and university and parents’ medical bills to take care of, with limited resources to pay for it all.

So, while it can be fun to hear what these famous investors say, it is best to treat their views as nothing more than entertainment – interesting to know about, but not particularly relevant to your own financial reality.

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(This is part of a series of articles that we have been writing for Singaporean investors.)