What is the ‘Buffett Effect’?

Warren Buffett, the chairman of Berkshire Hathaway, is not only the world’s top investor, but also one of the most influential people in the financial world. Wall Street gurus are constantly watching what Buffet does so they can emulate him, hoping for a tiny bit of the same success. Every time that Berkshire Hathaway changes its portfolio around, there is a rush of articles title things like “Buffett Bought (some stock). Should You?”. Analyists go into overdrive trying to interpret the decisions of the Oracle of Omaha, and investors begin looking closer at each of Buffett’s decisions.

In short, in the aftermath of that flurry of emulation, stocks that Buffett buys tend to go up while stocks he sells tend to go down. This is commonly known as the ‘Buffett Effect.’

“When the greatest investor of our time takes a big position in something, it moves markets,” Gary Kaltbaum of Kaltbaum Capital Management told USA Today earlier this week.

To see an example of this in action, one needs only review the actions of Buffett’s SEC filing, which was released last week. We reported on it here, but in recap, Buffett dumped shares of Walmart and bought up quite a bit of Apple, among other things. Seemingly in direct response to Buffett’s actions, Walmart’s share dropped by 3% and Apple’s rose as investors decided to take a second look at the tech company.

The “Buffett Effect” is impressive, but investors tend to warn that it’s not a permanent change. If there’s one thing that’s true, it’s that Wall Street is full of gossip, rumors, and fads and following Warren Buffett seems to be one of many.

So the next time you’re tempted to click on a ‘Buffett Effect’ article that claims you, too, can be a multi-billionaire by buying the same stocks, just remember that Buffett himself has often pointed out that the path to success lies not in following the herd, but in saying no and thinking independently.

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