We all have people we look up to, right? We adore them and their behaviors so much that we even try to copy or imitate their actions. It may be our friends, family members but it’s mostly some public figures. Hey, we’ve all tried to hit that helicopter shot, haven’t we?! Similarly, even in the investing world, people keep track of various investment gurus and try to copy their actions. Common investors replicate the portfolios of famous investors. Unlike school, no one’s behind you checking if you’re copying someone. They may not copy the entire portfolio but that’s one way to pick a stock. This is known as copycat investing or coattail investing.
How to know their portfolio?!
In this digital era, there is no such thing as ”lack of data”. Whenever an investment expert like Warren Buffet picks up a stake in a company, the media goes gung ho and we will be eager to know what’s the fuss. Besides that, by law, all listed companies must disclose investors who hold more than 1% stake in the company. Also, the stock exchanges release daily data on bulk deals on companies. Another source of information may be social media. Nowadays, some popular investors take it media and share their portfolio and stock picks.
Does copycat investing really works?!
Alright, now we know where to look for such information. No doubt copycat investing is an easy strategy but the main question is whether it leads to gains for the investors.
The answer is yes and no. Copycat investing makes it easy to pick a stock since popular investors make an in-depth analysis before picking up stake in a company. But it is not a sure shot technique to gain from and it may not work consistently. You may think since we replicate experts and popular investors, what could go wrong?! But wait, there is a catch. There are some drawbacks which you have to be aware of.
The pitfalls of copycat investing
Differing investment purpose:
We know that investments must be made while keeping a fixed goal in mind. But this goal may not be the same for all. One of the main reasons why copycat investing may not work is because of varying investment goals. The expert may invest for long time growth while you may want quick cash or vice versa.
Difficult to copy investment horizon:
It may be possible to pick the same stock as an expert. But copying the investment timeframe, that’s difficult! He may put a lumpsum money in a stock and hold it for a decade or so. But it may not be so easy for us to do the same because we may not have such cash lying around at our disposal.
Too many copycats:
Not only you are watching the successful investors and money managers. Many investors, in fact too many are doing the same. The speed of information dissemination and trading poses a peril for an investor who is a little late to a copycat trade. It’s because the stock may have already moved quite a bit in a short span.
This is quite common and we are not strangers to it. Except for the disclosures made by the companies, other sources of information may be completely fake. It may be purely to pump up the prices of a particular stock. The authenticity of the information found in the media may be tampered.
No news on selling:
This happens a lot! A copycat investor will get a company’s stake as soon as the news of big investor is out in open. But in most cases, media may not disclose when the big investors exit or reduce their stake. By the time this news of exit reaches the common investor, the stock price is already low.
Delay in information:
Generally, copycat investors rely on public sources or social media for information. This obviously is the last source of information chain. By the time, this information is out, it is already a little late. Big investors would have already built up a major part of their positions in the stock via several entities without triggering the disclosure norms. This delay in information is one of the reasons why copycat investing may not work at all times.
While it may look good on paper, it is often much harder to mimic the investments of successful investors. Having said that, it can be agreed that tracking their stock picks can be a useful source of investing ideas. Then again, you have to do the necessary homework to understand the reason behind the stock pick and not copy them blindly. We all know the quote, right.
It is not so wrong to follow a successful investor. But we should always keep in mind that even experts may have chinks in their armors. We all make mistakes.
This is exactly why we need to take action. It is one of the reasons why it is important to make your own analysis in a company rather than mindlessly following someone.