Celebrity investors should be observed, not followed

In today’s celebrity-obsessed world, it’s natural for some investors to place a premium on celebrity-investor endorsements.

More and more investors seem to look on the involvement of celebrity investors like Warren Buffett or Bill Gates as something of a pedigree for a stock. They reason that if Bill or Warren is involved, the stock must have some good qualities. So, they wonder, how far wrong can they go if they buy too?

As a general rule, ordinary investors should resist the temptation to copy celebrity investors

It’s important to remember that prominent investors, like celebrity investors, don’t expect to profit in every investment they make. In addition to making mistakes, they sometimes invest for strategic or political reasons, rather than profit.

To profit by copying the decisions of prominent investors, you have to copy what they do with the bulk of their money, not with token amounts of it. For that matter, you have to do what they do when they are doing it. You can expect delays between the time they buy or sell an investment and the time you hear about it.

It’s also common for prominent investors to keep their best investments hidden until they want to sell.

Gold investing enthusiasm and celebrity investors

One current gold enthusiast is celebrity investor George Soros. Mr. Soros gained lasting fame in September 1992, when the United Kingdom was trying to maintain an artificially high value for the pound sterling. Soros was one of a number of speculators who believed the Bank of England would fail to maintain that value, and that a devaluation of the pound was inevitable. He made a short sale of $10 billion U.S. worth of pounds. When the Bank of England quit trying to support the pound at the former high level, the pound slumped and Soros made a profit of $1 billion U.S., virtually overnight. Since then, he has sometimes been called “the man who broke the Bank of England.”

Soros credits his success in part to the fact that he continually reevaluates his investments and quickly gets out of those that fail to go as he hoped. He also obviously has far better access to information and trading facilities than ordinary investors. Still, he sometimes guesses wrong and loses money.

In any event, gold investing is a poor choice for most investors. For one thing, it involves a lot more guesswork than other aspects of investing.

Bonus tip: The best way to invest in gold

One special risk to gold investing is that some investors take it to extremes. They invest too much capital, and some use options, futures or margin loans to gain leverage. This magnifies their losses when they are wrong on gold-price trends.

If you want to invest in gold, the best way to do so is to include some gold stocks in your stock portfolio. But don’t go overboard. Limit your gold exposure to a portion of the exposure you would otherwise devote to the resources sector of the economy.

A better way to profit from rising gold is by investing in the stocks of gold-mining companies. That way, you benefit from increases in the price of gold, and you give yourself the potential for capital gains and income. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.

The volatility of gold stocks

We continue to recommend that gold stocks only make up a limited portion of your portfolio’s resources segment because of their volatile nature.

The markets for widely traded goods like gold are inherently unpredictable. These markets are so big that there is no practical limit to how much you can trade in them. It follows that if you could predict them, you could wind up acquiring a measurable proportion of all the money in the world. Nobody ever does that.

We think it’s a mistake to build your portfolio in such a way that you have to do the impossible, such as predict the future direction of gold or any commodity. You’re better off focusing on investments that can generate current income plus long-term capital gains. Three key choices for that kind of investing are stocks, bonds and real estate.

Have you followed the strategies of celebrity investors before? How has it worked for you? Share your story with us in the comments.