Copycat investing, as the name indicates, describes the strategy of replicating the financial investment concepts of famous investors or investment managers.
The method is also referred to as coattail investing, because the investor rides on the coattails of those who presumably have far more investment adeptness.
But is copycat investing a practical financial investment approach?
While the evidence about its success is somewhat mixed, there are particular techniques you can make use of to enhance your possibilities of ending up being the best copycat financier.
Mixed Evidence– Buffett Bootleg versus Miller Mime
The lasting success of fabulous investor Warren Buffett has attracted a host of copycats over the years, which might be since replicating Buffett’s approach has actually made people cash.
According to a 2008 research study by Gerald Martin and John Puthenpurackal, a hypothetical portfolio that invested in Berkshire Hathaway’s financial investments a month after they were openly revealed would’ve outperformed the S&P 500 by an annual average of 10.75 % from 1976 to 2006.
[Read: What’s Warren Buffet’s Investing Style?]
But before you scamper to examine Buffett’s current holdings, think about the opposite of the coin, when a long streak of outperformance ends with an unquestionable thud.
Fund manager Costs Miller joined the pantheon of great financial investment managers after his Legg Mason Value Trust Fund beat the S&P 500 for 15 years in a row, from 1991 to 2006.
Miller’s fund had a bad year in 2007– losing 7 % while the S&P 500 advanced 5 %.
But 2008 was an outright catastrophe for the Value Trust, which plummeted 55 % compared to a 37 % plunge for the S&P 500, as Miller loaded up on flameouts like Bear Stearns and AIG.
In the five-year period to March 2012, the Value Trust fund published an annual return of minus 6.9 % even as the S&P 500 gained 2.0 %, underperforming the benchmark index by nearly 9 portion points on an annual basis.
Investors who’d simulated Miller would’ve rued their choice if they’d actually remained to do so after 2006.
Copying the Copycats
Copycat investing is more prevalent than one would think, although it’s commonly done discreetly and without much fanfare by institutional investors like shared funds and hedge funds.
But the idea of latching onto another person’s investing ideas truly appears to have caught on amongst retail investors.
[Check out: Are You Investing or Wagering?]
In fact, Boston-based study firm Aite Group called “copy trading” as one of the leading 10 wealth management trends for 2012 in January of that year.
The earliest copycat financiers would routinely scour regulatory filings from mutual fund business to find which stocks star managers had actually packed up on in recent months.
Nowadays, internet sites such as tickerspy.com and gurufocus.com offer an alternative to this arduous procedure by monitoring and displaying holdings of the very best financiers and investment managers.
The trend of “mirror investing” has copied the copycat strategy and taken it one step further.
Services such as Covestor and Ditto Trade enable an investor to link financial investment accounts to portfolios actively handled by other financiers or financial investment professionals, and automatically mirror every investment move that the latter make.
[Review: Making use of the Mirror Trading Technique for Stocks]
Covestor has over 150 portfolio managers whose investment holdings can be mirrored by financiers, and discount brokerage Ditto Trade has countless what it calls “lead traders” with about 3 to five fans per trader.
The evident difference in between copycat investing and mirror investing is that the former efforts to replicate trading ideas only of famous and recognized financial investment masters.
Who Should You Copy?
Investors considering a copycat approach need to consider replicating financial investment ideas from the following sources:
- Successful money managers: All institutional cash managers with over $100 million in certifying assets are needed to file quarterly an SEC Type 13F detailing their investment holdings. This is an excellent source document for copycat trades.
- Buy-and-hold managers: Copycat financiers would be much better served getting concepts from long-term managers who think in buy-and-hold, rather than financial investment pros who’re short-term traders. This is because the time lag in between a real trade and its reporting may be a detriment to efficient trade duplication. It’s much better to go with somebody like Buffett, who’s actually often been priced estimate as stating “Our preferred holding period is permanently.”
- Activist investors: Activist investors like Carl Icahn can typically trigger a stock to value as quickly as the news of their involvement in the business becomes public. Icahn, in fact, frequently shares his financial investment strategies through Twitter, which makes it simpler for copycat financiers to act upon them as opposed to waiting for regulatory filings.
What’re the Risks?
Like other technique, copycat investing has its share of risks, such as the following:
- Success isn’t guaranteed: No investment technique is a sure-shot winner. For instance, a copycat investor could need to stick to the technique for many years if he or she’s following a value-based manager, since value stocks occasionally take an eternity to turn around. Losing persistence and deserting the method too soon may result in considerable losses in this case.
- Stock may have already moved: A stock may have currently moved substantially in between the time it was obtained (or disposed of) by a money manager and the time this information is made public. This has a negative impact on the stock’s risk-reward profile for the copycat financier.
- Too many copycats: A lot of investors– retail and institutional– are watching the leading hedge funds and money managers. Given the speed of details dissemination and trading nowadays, an investor who’s a little late to a copycat trade is at a huge drawback, since the stock could’ve currently moved quite a little bit in a short time period.
- Differing investment horizon/objectives: Your financial investment horizon and objectives may differ from that of the cash manager. For instance, you could’ve a very short-term horizon, while the manager you’re copying may be in for the long run. Or the money manager could’ve a danger tolerance level that’s much higher than your own.
How Should You Do It?
Here are some ideas to consider while implementing a copycat financial investment method:
- Follow trustworthy, effective professionals: Stick with the tried-and-tested money managers, considering that you could occasionally discover a stock that could be a spectacular success. As an example, Carl Icahn offered near to 3 million shares of Netflix (Nasdaq: NFLX) in October 2013, after the stock had more than tripled that year. Icahn’s typical cost of the Netflix stake was $58 when he originally acquired the shares on Oct. 31, 2012. A year later on, the shares were sold around $323 for a gain of 457 %. Copying a timely investment like that could juice up returns for any investor’s profile.
- Exercise patience: Chasing a stock is never a great concept. If a stock has actually already moved up on news that an investing heavyweight has actually taken a position in it, the very best strategy may be to wait for it to come within your purchasing array. If it does not, proceed to something else.
- Look for accumulation: Large-capitalization stocks that are having hard times might be a terrific opportunity for patient financiers. Search for such stocks where money managers have commenced collecting considerable positions, considering that this signals their self-confidence of a turn-around in the near to medium-term.
- Follow investment pros in different sectors: Do not put all your eggs in one basket by focusing only on financial investment experts in a couple of sectors. Numerous top managers and investors in a certain sector have a considerable degree of overlap in their holdings. Diversify your copycat strategy by duplicating investment ideas from masters in different sectors.
- Conduct your own due diligence: Don’t assume that copying trades from the very best cash managers around absolves you of the obligation to perform your own due diligence. Ensure that copycat stock you’re thinking about is suitable for your financial investment objectives and run the risk of tolerance prior to you obtain it.
The Bottom Line
While copycat investing has its threats, common-sense measures– such as following successful investors, exercising persistence, searching for accumulation, diversifying with various sectors and conducting your very own due diligence– can assist you end up being a (near) best copycat and improve your chances of investment success.