Warren Buffett & The Unpredictability Of Stock Markets

In today’s article, we wanted to explain something called the Bandwagon Effect and what better place to start than talking about Warren Buffett’s recent change of heart.

The Sudden Shift

On August 14, Warren Buffett’s Berkshire Hathaway purchased nearly 21 million shares of Barrick Gold worth $563 million, representing 0.3% of Berkshire’s holding. The important thing to note here is that Barrick Gold is a gold mining company based in Canada.

This sudden shift matters because Buffett is a value investor. Value investing is an investment strategy that involves choosing stocks that appear to be trading for less than their intrinsic or book value. Value investors pick those stocks which are being underestimated by the stock market.

Since Buffett is a value investor, he saw little to no value in gold, which is why he stayed away from it. Buffett has been vocal about his dislike for the metal. He once stated, “It (gold) doesn’t do anything but sit there and look at you.” He even went on to say that it “has no utility” and once wrote, “Anyone watching from Mars would be scratching their head” over how we treat gold on Earth.

This is not the first time Buffett has made a U-turn in his investment strategy or statements.

The Aviation Bet

After Buffett’s $358 million investment in US Airways didn’t pan out the way he wanted, the ace investor kept his distance from airline stocks. He said, “But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.”

However, he made a U-turn and bought stocks worth nearly $1.3 billion in four big airline companies in 2016. He made a U-turn again in May 2020 by completely dumping his investments in airline firms. Once Buffett sold all of the airline stocks owned by him, shares of airline companies traded lower. Because everyone was thinking the same thing — If Buffett has sold his investments in airlines, it might mean that airline stocks might not recover at all.

The biggest plot twist is that the airline stocks in Wall Street have rallied in the past few months.

But what does any of this have to do with the Bandwagon Effect?
The bandwagon effect is a cognitive bias and it is where people see that others are infusing money into the market, they tend to also invest more, which can eventually lead to speculative bubbles and market crashes. So, all we want to say is that it doesn’t matter whether it is Warren Buffett or Rakesh Jhunjhunwala or any other ace investor, they all can get their bids wrong sometimes. Because the stock market is unpredictable and that’s a good thing. This unpredictability is what makes it a fair playing field for everyone.

In conclusion, it is always better to not follow others blindly and try to make your own decisions. Let’s do our own research and not jump on the bandwagon just because Warren Buffett is doing it because even he can get it wrong and that’s the beauty of the stock market!

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