Mom and pop investors love to read about the stocks that billionaires have been buying or selling. The media is happy to oblige. After all, what is good for the likes of Warren Buffet and Carl Icahn has to be good for mom and pop, right? Wrong!

Let me explain why it is often highly misleading to buy or sell on reports of the buying and selling by billionaires. Certain investors are required to file form 13Fs with the Securities and Exchange Commission (SEC). The media picks up on these filings. Here is why I am raising a big red flag against acting on these media reports.

  • Form 13F only shows holdings at the end of a quarter.
  • The 13F does not show when something was bought or when something was sold.
  • The 13F is filed with a delay of 45 days.
  • The 13F does not tell about the position of the hedge fund or investor at the present time.
  • The 13F includes only long positions. It does not tell about any hedges or offsetting positions, such as shorts the hedge fund may have owned.

Typically, stocks run up on the media reports of billionaire buying. The euphoria presents a perfect opportunity for the billionaires to lighten up or sell their positions to mom and pop. After the euphoria dies, prices pull back.

Skilled traders can use this phenomenon to their advantage. For example, typically these stocks run higher in the morning after the report, and there is a dip around noon. This dip is usually buyable with a tight stop. A very helpful indicator is a seven-period RSI on a 15-minute chart. When RSI goes over 80 and shows signs of rolling over, it is time to exit the position…Read more at MarketWatch