When Goliath Is Buying, David Should Buy, Too

When Goliath Is Buying, David Should Buy, Too

It’s no coincidence that Warren Buffett kept quiet about his $1 billion Apple purchase as prices declined and he bought, or that he revealed it only when he was ready for prices to rally. He profited from Monday's rally, but so did small traders who blended with the trend he helped start.



Warren Buffett by Asa Mathat/Fortune via Flickr CC 2.0
Warren Buffett by Asa Mathat/Fortune via Flickr CC 2.0

A slew of high-profile bids and purchases of major companies inspired waves of copycat buying in US stocks Monday. Big companies bought, small traders bought, and some tried—and failed—to pick the top along the way. Overnight, the market pushed slighly higher before giving in to profit-taking on the NYSE open. 

The highest profile news was Warren Buffett’s revelation that Berkshire Hathaway had bought $1 billion in Apple shares. The S&P 500 Index rose almost one percent to 2,066.66, rebounding from a three-week decline, with Apple making its biggest move up in 10 weeks.

Other stocks saw increased demand on news of buyouts and bids. Anacor Pharmaceuticals Inc. rose after Pfizer Inc. announced its purchase. Memorial Resource Development Corp. rallied as Range Resources Corp. agreed to buy it. Tribune Publishing Co. jumped 14 percent after Gannett Co. raised its all-cash offer.

Buffett is also said to be part of a group bidding for the Internet assets of Yahoo! Inc. His group has competition from Verizon, which looks to have a better chance at the winning bid. Yahoo’s share price jumped on the news of Buffett’s interest, which he hasn't denied. That’s nice for Yahoo shareholders, but it also puts the squeeze on Verizon, who may now have to raise their offer to fend off competing bidders.

Sometimes even just talking about purchasing a company will boost its stock. Bayer is seeking to buy Monsanto Company to acquire its patented seeds and pesticides, including RoundUp (the world’s most widely used herbicide, which a recent study found even in organic foods and breakfast foods, including eggs and coffee creamer). Despite the controversy, Monsanto stock surged last week on the news.

Peer pressure buying

Value investors are supposed to look at factors like P/E ratios and balance sheets. But Monday's bounce was all follow-the-leader. Never mind that iPhone sales fell last quarter for the first time in years. Warren Buffett likes Apple and that’s reason enough for others to like it, too.

And of course, their copycat buying drives up the value of Buffett’s stake, which he amassed while others were selling and Apple prices were sliding. See how that works?

Sometimes, maybe most of the time, joining the big players is a better strategy than trying to outguess them.

Goliath runs the market, not David

The story of David beating Goliath is inspiring, but not always the right way to think about trading. One of the least helpful expressions you hear in the financial media is “beat the market.” TV reporters ask their guests for tips on how to beat the market. Traders and investors are inundated with ads for systems and newsletters and insider secrets on how to beat the market.

Of course, you can’t beat the market any more than you can buy an umbrella that will beat a thunderstorm. The best that you can do is protect yourself and stay dry.

Individual traders, like those trading binary options on Nadex, can actually do better than just protect themselves from the big players. The Davids of the market can join the Goliaths and profit right along with them.

That doesn't mean you just buy whenever Warren Buffett smiles and nods at a reporter’s question. But if a rally starts and then gets pushed into a sustained uptrend by a piece of news, that isn’t the time to try and pick the top. Sure, there will be levels of consolidation and profit-taking along the way up, but smart traders look at the larger context. If the long-term trend is up, don’t stay short for very long.

At Nadex, we offer short-term trading from weekly binary options down to fast, challenging 5-minute forex contracts. The members who profit consistently work within their time frame. If they short to fade a rally, they don’t hold on for very long. Since Nadex binary options and spreads let you exit at any time before expiration, you can decide when to exit.

Warren Buffett knew what time frame he was working in. He saw Apple investors selling their shares after last quarter’s disappointing earnings and he was ready to buy what they sold. It’s likely he bought more the cheaper it got, even though the shares he already held were losing money.

It’s true that he has deep pockets and can withstand the losses. But he also has faith in his method. He knew Apple wasn’t in long-term decline. Its shares were just being transferred from less steady hands to more confident ones—his. Now he may well get to watch Apple stock climb to new highs, to the benefit of not only Goliaths like him, but the Davids who were smart enough not to fight him, but join him.


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