Many years ago, the people that ran Berkshire Hathaway noticed that when they announced a new position in a company, that company often saw a huge jump in price over the next several trading sessions. This trading strategy has become known as “The Buffett Effect,” named after renowned investor, Warren Buffett. The Buffett Effect can prove to be very lucrative to short term traders, too, especially when they use binary options to help offset risk. Here, we’ll take a quick look at what this strategy looks like, how it works, and what you should avoid with it.
Application of the Buffett Effect
The Buffett Effect has a very simple principle: if Warren Buffett has bought something, then you should buy it too. Buffett’s illustrious record as an investor has given him a sort of celebrity status when it comes to the world of finance, and when he buys something, history points to the fact that the company will do well.
This is actually a very simple strategy on the surface. You should be tuned in to what Buffett is saying and doing in public, and attempting to discern what stocks he has picked up recently through following him. There are a number of media outlets that report on him, and having a streaming service or update notification subscription to Buffett-related news can give you a small edge here. Many of his positions are very public, such as his stances on Geico or Coca Cola, have been in the past. Many other positions are not known until well after the fact. This has made following Buffett an art form, and many investors enjoy doing it.
As short term traders, we should be looking for breaking news investment updates so that we can take out call options through a binary options broker in order to ride the short term waves of profits that these companies will see when the stakes are made public. Not all of Berkshire Hathaway’s investments are in big companies like Coca Cola, so this can be tough at times, but it is still beneficial to pursue, especially at brokers that have large selections when it comes to U.S. stock offerings. From time to time, this can be applied to commodities like gold and silver, but not as often. Timeframes should be a little bit longer than many traders are used to; typically to the end of that current trading day.
Drawbacks to this Price Action
This trading strategy is not quite as effective as it was ten years or so ago, and it can actually backfire if you aren’t aware of the risk involved. For one, by the time that the announcement that a purchase has been made, much of the gains that were expected may already have been realized. It’s hard to tell exactly when purchases have been made for holdings because Berkshire Hathaway is not subject to the laws that govern funds. At one point, they did not need to announce transactions for a year after they were made. All of these combine to make using this method really unreliable.
Additionally, Berkshire Hathaway is one of the hardest to follow companies in the United States. They are a huge conglomerate, and monitoring them is something that even the most talented analysts in the world have trouble with. Listening to what Buffett himself says is helpful, as is reading his annual letter to shareholders. But even at the best of times, you will be acting with incomplete information. We recommend avoiding this method because of this. However, acting off of trader sentiment that is created by the Buffett Effect can be beneficial to your trading. This is really only slightly different, but the end result should be far more favorable to you thanks to limited exposure through binary options.
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