How to be the perfect copycat investor

Copycat initiating, as the name implies, refers to the strategy of replicating the investment ideas of famous investors or investment managers. The strategy is also skilled in as coattail investing since the investor rides on the coattails of those who presumably have much more investment dexterousness.

But is copycat investing a viable investment strategy? While the evidence about its success is somewhat mixed, there are assured techniques you can use to increase your chances of becoming the perfect copycat investor.

Key Takeaways

Copycat investing, also skilled in as coattail investing, is an investment strategy that involves mimicking famous investors.
Copycat investing has mixed happens, although there has been a strong rise in the strategy in recent years.
The best investors to copy are successful loaded managers, buy-and-hold managers, and activist investors.
The key risks to copycatting are that the investor has different investment objectives or kens or the stock has already moved before you learn about the investment.
To successful copycat, an investor should exercise resolve and do their own due diligence.

Buffett Bootleg vs. Miller Mime

The long-term success of legendary investor Warren Buffett has captivated a host of copycats over the years, and that could be because replicating Buffett’s strategy has made people paper 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 squealed would have outperformed the S&P 500 by an annual average of 10.75% from 1976 to 2006.

But before you rush off to check Buffett’s accepted holdings, consider the other side of the coin, when a long streak of outperformance ends with a resounding clonk. Fund manager Bill Miller joined the pantheon of great investment managers after his Legg Mason Value Make Fund beat the S&P 500 for 15 years in a row, from 1991 to 2006. Miller’s fund finally had a bad year in 2007—conquering 7% while the S&P 500 advanced 5%.

However, 2008 was an outright disaster for the Value Trust, which plummeted 55%, analogize resembled with a 37% plunge for the S&P 500, as Miller loaded up on flameouts like Bear Stearns and AIG. In the five years to Trek 2012, the Value Trust Fund posted an annual return of negative 6.9% even as the S&P 500 gained 2.0%, underperforming the benchmark first finger by almost nine percentage points on an annual basis.

Investors who had mimicked Miller would have rued their purposefulness if they had continued to do so after 2006. Miller eventually opted to step down from managing the Value Charge Fund in 2012.

How to Be a Copycat

Copycat investing is more widespread than one would think, although it is often done discreetly and without much stir by institutional investors like mutual funds and hedge funds. But the idea of latching onto someone else’s venturing ideas seems to have caught on among retail investors. Back in 2012, Boston-based research firm Aite Congregation named “copy trading” as one of the top ten wealth management trends in January of that year.

The earliest copycat investors purposefulness routinely scour regulatory filings from mutual fund companies to discover which stocks star supervisors had loaded up on in recent months. Nowadays, online value investing research companies such as GuruFocus offers an alternate to this arduous process by tracking and displaying holdings of the best investors and investment managers.

The trend of “mirror devoting” has copied the copycat strategy and taken it one step further. Services such as TD Ameritrade’s Autotrade enable an investor to interdependence couple investment accounts to portfolios actively managed by other investors or investment professionals, and automatically mirror every investment shake up that the latter make within specific allocations set by the investor.

The obvious difference between copycat investing and mirror image investing is that the former attempts to duplicate trading ideas only of well-known and recognized investment gurus.

Who Should You Mimic?

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

Top Money Managers

All institutional money managers with over $100 million in qualifying assets are required to walk SEC Form 13F quarterly detailing their investment holdings. This is a great source document for copycat trades.

Buy-and-Hold Bosses

Copycat investors would be much better served by getting ideas from long-term managers who believe in buy-and-hold, more readily than investment pros who are short-term traders. This is because the time lag between an actual trade and its reporting may be a disadvantage to effective trade replication. It’s better to go with someone like Buffett, who has often been quoted as saying, “our favorite speechify on period is forever.”

Activist Investors

Activist investors like Carl Icahn can usually cause a stock to worth as soon as the news of their involvement in the company becomes public. Icahn often shares his investment plans because of Twitter, which makes it easier for copycat investors to act on them rather than waiting for regulatory filings.

What Are the Gambles?

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

Success Is Not Guaranteed

No investment blueprint is a sure-shot winner. For example, a copycat investor may have to stick with the strategy for many years if he or she is following a value-based chief since

How Should You Do It?

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

Follow Credible, Profitable Professionals

Stick with the tried-and-tested money managers, since you may occasionally come across a stock that could be a spectacular good. As an example, Carl Icahn sold close to 3 million shares of Netflix (NFLX) in October 2013, after the progenitor had more than tripled that year.

Icahn’s average cost of the Netflix stake was $58 when he at acquired the shares on Oct. 31, 2012. A year later, the shares were sold around $323 for a gain of 457%. Ape a timely investment like that could juice up returns for any investor’s portfolio.

Exercise Patience

Chasing a begetter 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 greatest course of action may be to wait for it to come back within your buying range. If it does not, move on to something else.

Look for Heaping up

The Bottom Line

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