Copycat Investing – Is It A Real Thing? | srei

Copycat Investing – Is It A Real Thing?

Copycat investing refers to the strategy of replicating the investment ideas of famous investors or investment managers. But is copycat investing a viable investment strategy? While the evidence about its success is somewhat mixed, there are certain techniques you can use to increase your chances of becoming the perfect copycat investor.

Mixed Evidence – Buffett Bootleg versus Miller Mime

The long-term success of legendary investor Warren Buffett has attracted a host of copycats over the years, and that could be because replicating Buffett’s strategy has made people money. According to a 2008 study by Gerald Martin and John Puthenpurackal, a hypothetical portfolio that invested in Berkshire Hathaway’s investments a month after they were publicly disclosed would have outperformed the S&P 500 by an annual average of 10.75% from 1976 to 2006.

On the other hand, fund manager Bill Miller joined the pantheon of great investment managers after his Legg Mason Value Trust Fund beat the S&P 500 for 15 years in a row, from 1991 to 2006. In the five-year period to March 2012, the Value Trust fund posted an annual return of minus 6.9% even as the S&P 500 gained 2.0%, underperforming the benchmark index by almost 9 percentage points on an annual basis. Investors who had mimicked Miller would have rued their decision if they had continued to do so after 2006.

Copying the Copycats

Copycat investing is more widespread than one would think, although it is often done discreetly and without much fanfare by institutional investors like mutual funds and hedge funds. The earliest copycat investors would routinely scour regulatory filings from mutual fund companies to discover which stocks star managers had loaded up on in recent months. Nowadays, websites such as tickerspy.com and gurufocus.com offer an alternative to this arduous process by tracking and displaying holdings of the best investors and investment managers.

Who Should You Copy?

Investors considering a copycat strategy should consider replicating investment ideas from the following sources:

  • Successful money managers 
  • Buy-and-hold managers
  • Activist investors

 

What are the risks?

Like any other strategy, copycat investing has its share of risks, such as the following: 

  • Success is not guaranteed
  • Stock may have already moved:
  • Too many copycats
  • Differing investment horizon/objectives

 

How Should You Do It?

Here are some suggestions to consider while implementing a copycat investment strategy:

  • Stick with the tried-and-tested money managers
  • Exercise patience - Chasing a stock is never a good idea. If a stock has already moved up on news that an investing heavyweight has taken a position in it, the best course of action may be to wait for it to come within your buying range.
  • Look for accumulation: Large-capitalization stocks that are having hard times may be a great opportunity for patient investors.
  • Follow investment pros in different sectors
  • Conduct your own due diligence

 

The Bottomline

While copycat investing has its risks, common-sense measures – such as following successful investors, exercising patience, looking for accumulation, diversifying with different sectors and conducting your own due diligence – can help you become a (near) perfect copycat and improve your chances of investment success.

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Source: Investopedia