Should You Buy What The Pros Buy?

The recent filings disclosing the fourth quarter holdings of big name professional investors caused its usual stir among retail investors. The investment media as well as many investors carefully watch what the big name pros, the superstars of investing, are doing, and try to follow suit. Should retail investors do this?

Buffett, Soros And Paulson, Oh My Many retail investors pay particular attention to Warren Buffett, the living legend who still runs Berkshire Hathaway. Buffett continues to be newsworthy. While many individual investors claim to follow him closely, it's not clear whether they're watching as carefully as they think. John Paulson, star hedge fund manager who won big by betting against subprime mortgages, is another investor closely followed, and George Soros, a longtime superstar, has been in the news lately.

What Are They Buying?
Let's look at some of the highlights of these super-investors' activities in the fourth quarter. Soros opened a 95 million share position in Citigroup, along with doubling his investment in Spider GoldTrust ETF. Paulson bought an additional 200 million shares of Citi, and also held large positions in gold. Paulson also opened a new position in Wells Fargo, a favorite holding of Buffett. The street took note of these buys as well - Citi shares rose 4% the day after these filings were made.

Reading The Signs
Obviously, a big stake in a position is a big bet. But what attracts the bettors? In the case of Citi, many pros have long talked up the bank even though it has horrid fundamentals. Still, Paulson and Soros aren't saying how long they're going to hold Citi shares, nor do they give their rationale for buying them. In Buffett's case, he added to his Wells Fargo position, which is the kind of fundamental investment he likes. The franchise looks solid, especially considering what other banks, including Citi, look like. Most interesting is Soros' gold play after he'd been quoted talking about gold as a bubble. Many have tried to read the tea leaves on his talk versus action; most investors will have to figure it out for themselves.

Look Before You Leap
Individual investors should keep several things in mind. First, these filings show fourth quarter activity. We're already more than halfway through the first quarter of the new fiscal year, so the star investors' positions probably have changed. Warren Buffett, who is regarded as only a long-term buy and hold investor by many, opened a huge position in Exxon-Mobil in the third quarter, only to trim it by 70% in the fourth. Buffett, like Soros and everybody else who's ever invested, makes mistakes and has losers too. It's something followers should keep in mind. Also, in the case of Paulson, he runs a hedge fund, which may involve complicated positions most investors can't and don't want to get involved in. If a huge bet by one of the super-investors goes against him, it likely won't permanently dent his wealth. Can most individual retail investors say the same? Having billions of dollars at hand as the star investors do is a wonderful, implicit hedge against risk.

The Bottom Line
Citi is still a bad bank fundamentally even if Paulson and Soros are buying it. Interestingly, fundamental investor Buffett hasn't piled into Citi. How you regard gold, fundamentally or more speculatively, colors any investor's stake in the metal. These snapshots of portfolios are really like looking at distant places in the universe through the Hubble telescope, they are already messages from the past. Do you know what Paulson and Soros are doing today? Better yet, tomorrow? You can invest directly in Buffett's decisions by buying Berkshire Hathaway shares, but otherwise it's better not to take the super-investors' plays out of context or to slavishly imitate them. Study them and learn from what goes on, but do your own investing and make your own decisions.