Beware Following Famous Investors’ Trades | The Investors Edge
By John Stewart, chief investment officer at Farmers Trust Co.
Week in Review: Inflation Reaccelerates
After many months of decelerating inflationary pressures, which I explained on the last edition of the Investors Edge, it was reported earlier this week that inflation reaccelerated in August with consumer prices rising 0.6% for the month and 3.7% over the past year.
The previous month’s reading was 0.2% and 3.2% year-over-year.
It shouldn’t be much of a surprise to anyone who drives that energy prices drove (no pun intended) much of the gain, rising 5.6% on the month, an increase that included a 10.6% surge in gasoline.
The jump in headline inflation caused real average hourly earnings to decline 0.5% for the month, that is wages net of inflation.
Just as many investors and the stock market seemed to be getting comfortable with a more reasonable rate of inflation, the most recent data shows that it may be premature for the Fed to declare victory over rising prices. We’ll get to hear what they have to say on the subject at their upcoming meeting next week.
Featured Insight: Beware Following Famous Investors’ Trades
With all the information sharing that goes on these days with the modern technology that we have at our fingertips, it’s fairly easy to gain access to what well-known investors are doing with their money.
You should be careful jumping in on the heels of the trading activity of other investors, however, no matter how good their long-term track records are.
I say this for several reasons. First of all, it can be difficult to know how much time has passed between their trade and when you get the information. By that time, the price may have moved significantly, changing the risk/reward trade off for you. It’s even possible they may have exited their position.
Second, sophisticated traders use a lot of hedging strategies to manage their investments. If you don’t have a complete picture of their portfolio, you may not know whether the trade you are copying is simply a hedge for another position in their portfolio rather than a stand-alone investment.
Lastly, good investors play a long-term game of odds. They don’t expect every investment to be a winner. A 60% win rate can lead to very good performance results over time. Unless you’re able to follow every single trade they execute (and at the same price they receive), you might be at risk of getting more of their losers than you do of their winners.
Looking Ahead: Another Fed Decision
The Fed meets again next week, and it ceases to amaze me how quickly 6 weeks goes by.
The consensus of investors currently believes that the Fed will stand pat on interest rates by keeping its target Fed Funds rate in a range of 5.25 to 5.50%. Futures markets are pricing in a 97% chance of no change in fact.
There is a 40% chance, however, that the Fed will increase the funds rate by another quarter point at the beginning of November, sticking with its current pattern of a rate hike at every other meeting.
Given that inflation seems to be proving tougher to reign in than originally thought, higher rates are likely to stay in place for a while – and if you’re hoping for lower rates, it’s likely something bad will have to happen in order to get them anytime soon.
Copyright 2024 The Business Journal, Youngstown, Ohio.
