Financial markets all over the world have been in a state of turmoil in recent weeks because of the Covid-19 crisis.
In uncertain times like these, you may look up to famous investors to emulate their actions. That’s understandable. After all, following authoritative figures can provide a sense of security.
But I’m here to tell you that following famous investors blindly is incredibly dangerous.
Blind faith
Story of an Occidental Investment Gone Wrong
Why the Friend Bought OXY
Reshveen Rajendran shared how his buddy jumped into Occidental Petroleum at about US$40 per share (roughly S$57). The plan was simple: “Just follow Warren Buffett.” Easy, right?
Price Drop – A Bad Turn of Events
Fast forward to the week of our video call – the stock was hovering around US$16, now about US$14 as we write this. That’s a splash‑drop of roughly 60% from the original purchase price. Suddenly, the friend was staring at a portfolio that felt more like a sad meme.
What Did the Friend Do Later?
- He/She stared at the screen, re‑reading the ticker like a horror movie.
- Then came the brainstorming session: “Sell? Hold? Maybe buy more?”
- All I heard was a sigh that sounded like a press conference for the next big panic.
Did Everyone Follow Buffett’s Playbook?
Here’s the kicker. When it comes to buying OXY, Buffett’s sheer buying power and long‑term, ripple‑effect strategy isn’t something a 2‑figure dollar investor can simply copy. The small investor got a noise‑to‑gain comparison, not the actual strategy.
Lesson for the Regular Investor
Listen. Big investments often hinge on timing and patience, not just following headlines. It’s wise to do your homework, pick a price you’re comfortable with, and set a clear exit plan.
All in All
So, the story isn’t just about an under‑priced oil company; it’s about a friend who tried to shortcut wisdom and ended up staring at a shrinking investment. Next time, the plan should be a bit smarter – or at least we all get a bit more comfortable with the market’s ups and downs.
Buffett’s bet
In August 2019, Buffett invested in Occidental through his investment conglomerate, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B). What Buffett bought was US$10 billion worth of preferred shares in Occidental.
He wanted to provide Occidental with capital to finance its planned US$38 billion acquisition of Anadarko Petroleum Corporation, a peer in the oil & gas industry.
Occidental’s preferred shares that Buffett invested in are not publicly-traded. So individual investors like you and I can’t invest in them.
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The preferred shares come with an 8 per cent annual dividend that Occidental is obliged to pay until they are redeemed; the dividend means that Occidental has to pay Berkshire US$800 million every year (8 per cent of Berkshire’s US$10 billion investment) in perpetuity or until redemption of the preferred shares happen.
Occidental has the option to redeem the preferred shares at US$10.5 billion any time after August 2029. In other words, Berkshire is guaranteed to make a return of at least 8 per cent per year from its Occidental preferred shares as long as the oil & gas company does not go bust.
Investing in Occidental’s preferred shares the way that Buffett did is very different from buying Occidental shares in the stock market.
The normal Occidental shares we can purchase (technically known as common shares or ordinary shares) don’t come with any dividend-guarantees. Occidental is also not obliged to redeem our shares at a small premium to what we paid.
If we buy Occidental shares, how well our investment will do over a multi-year period will depend solely on the business performance of the company. Buffett’s investment in the preferred shares comes with protection that we can’t get with the ordinary shares.
No cover
Occidental Cuts Dividends, Buffett Keeps the Cash Flowing
In a move that shocked longtime investors, Occidental slashed its quarterly dividend by a whopping 86 % in March 2020. The payout dropped from $0.79 per share to a modest $0.11 – a decision that saved the company about $2.2 billion in cash. For a firm that had never reduced a dividend in 30 years, the news was a stern wake‑up call.
Why the drastic step? Oil prices were tumbling, and Occidental had to shore up its finances. The company’s ordinary shares now bring investors a yearly return of just $392 million, far from the $800 million that Berkshire Hathaway’s €10‑billion stake in preferred shares is earning.
Berkshire’s Preference: The Unstoppable Dividend
Unlike the ordinary shares, Buffett’s preferred shares are locked in – Occidental has to keep paying those dividends, no matter what. While Buffett did dip a bite into Ordinary shares after his August 2019 investment, the total he put in was a mere $780 million (roughly $41.21 per share), a drop in the ocean compared to the preferred shares.
- Preferred shares: $800 million annually.
- Ordinary shares: $392 million annually.
- Buffett’s ordinary investment: $780 million.
Smart Investing or Blind Following?
Wall Street often tries to copy Buffett without understanding his playbook fully. While he’s got the clout and the capital to snag exclusive deals, everyone should learn his core strategies before jumping aboard. Betting solely on his moves could leave investors scrambling when market tides shift.
So, next time the headlines scream “Buffett buys more shares,” remember that even the giant can get hit by sudden changes in oil prices, and that not all dividends are created equal.
Following authority into disaster
Remembering the Hubble‑Horizon Lesson in Valuation
When Resh spun that yarn about a buddy who bought Occidental stock, it instantly hit a familiar echo from Morgan Housel, the seasoned VC whiz at Collaborative Fund.
Back in 2014, when he penned a satirical piece for The Motley Fool, Housel admitted his biggest blunder. This time, the tale starts with a battered lender, a “smart value investor” idol, and a phone‑call‑immediated decision that rolled into a straight‑up money disaster.
The Dripping Drop‑Fall
- Seven years earlier, Resh had zero clue about the company but followed the big fish and scooped a chunk of its shares.
- The stock became a monster holding—until the lender burst like a popped balloon, going bankrupt in less than 12 months.
The Secret Back‑door
The funny twist? The idol didn’t just swoop on public stocks. He clobbered major swaths of debt and preferred shares, all bought at slick terms that gave him the final say when the firm collapsed.
The Strange Portfolio Paradox
- The rebel teller’s portfolio had the lender’s shares weigh in at a 20% slice—double the weight in Resh’s own chart.
- Result? He lost the entire stash. Both portfolios were on the same scoreboard, but only the idol made a tidy win.
Takeaway: Don’t Let Fame Do Your Homework
Housel folded his mouthy lessons: blindly following a legend is a recipe for disaster. Let’s brave new ground by digging deeper, asking the tough questions, and staying strapped to our own research.
Want More? Dive Into These Quick‑Bite Tips
- Investigate the fine print of each investment.
- Start with a small sample run before fully committing.
- Keep an eye on company fundamentals, not just the hype.
- Talk to folks who are on the ground, not just in the press.
- Build a diversified safety net before surfacing.
In conclusion
It’s understandable if you want to follow the ideas of famous investors. That’s especially so during uncertain times, like the situation we’re in today.
But before you do, please note that a blind adherence can be dangerous. Famous investors can invest in financial instruments in the same company that we can’t get access to.
Or, their investment motives may be completely different to ours even for the same shares.
It’s always important to know why we’re investing in something. “I’m buying because Buffett or [insert name of famous investor] is buying” is not a valid investment thesis.
This article was first published in The Good Investors. All content is displayed for general information purposes only and does not constitute professional financial advice.
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