Movers and SHAKERS
Copycat Investing, Bright Idea or Dud?
“Risk comes from not knowing what you’re doing.” – Warren Buffett
There’s a scene in the 1992 movie “My Cousin Vinny,” which, unlike the rest of the classic, is not quotable. There are no spoken words, just actions that let the viewer know exactly what is going on. Many of us can relate. The scene takes place the first day of an arraignment on murder charges. In the movie, Vinny is defending his nephew Bill and his friend Stan. The challenge is, Vinny just passed his bar exam and has never been a trial attorney. He figures out quickly, along with the audience, that he does not have enough experience to know even the basics to steer clear of the dangers of courtroom proceedings. He finds himself in a situation where the outcome is critical, yet he is very out of place. To raise the stakes even more, he is surrounded by and competing with veterans of courtroom proceedings. Everyone else knows what they are supposed to do. In the scene I’m referring to, he tries to avoid trouble by mimicking the prosecutor -- when the prosecutor sits, he sits, when the prosecutor places his briefcase by his chair, Vinny places his briefcase down, and so on. There are no words spoken to tell the viewer what’s going on. Still, it’s clear that Vince Gambini is determined to be successful, and the method he chooses is to become a copycat of the opposing attorney who is already a proven success.
If you’re familiar with the movie, you know that Vince Gambini does learn and eventually builds on his knowledge and then merges his own strengths and style with what he has copied. He is successful in the end, presenting his essential case. Many investors who are new and learning, or just more comfortable copying or riding the coattails of top money managers do something similar. It is called “copycat” investing, or “coattail” investing. The method and practice is done in many different ways. It certainly has its merits and its limits.
The concept of copycat investing is simple: by mimicking investment picks of consistently successful large investors, smaller investors can possess a well-researched and thought out portfolio with little analysis and minimal knowledge of investing.
There’s no shame in mimicking investors who have a track record you’d like to enjoy. Copycat investing is a selection method, like many other popular methods such as index investing, Dogs-of-the-Dow, or long/short. These can be just as mechanical as replicating the investment moves of well-known professional investors or fund managers.
But is copycat investing a viable investment strategy? While the evidence of its success is somewhat mixed, there are certain techniques you can use to get you closer to being the perfect copycat investor.
The Securities and Exchange Commission (SEC) requires investors who manage more than $100 million to disclose their holdings once every 90 days. This information is available on the SEC website as Form 13F; a link is included below for your convenience. When you determine the fund manager you’d like to mimic (Buffett, Ackman, Icahn, etc.), this is the first site to be updated. A secondary site worth looking at is holdingschannel.com.
A search here presents visitors with the most recent filings and the investment decisions of historically successful investors such as Berkshire Hathaway or Carl Icahn. The risk that individual investors and those who manage money for others should be aware of, is that with up to a 90-day delay in posting new information, coattail investors may be too late to participate in any early benefits the professionals enjoyed.
Investors who wish to direct their decisions by copying others should understand the objectives of those they follow and make sure it fits with their own objectives. For example, Warren Buffett is a long-term investor. He’s been quoted as saying: “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes." A long-term investor who doesn’t expect to always be transacting may be better suited to ride Warren Buffett’s coattails. Alternatively, Carl Icahn has an enviable investment record, but his intent is often to seek board seats or control and effect change within the company. This is not very straightforward, so it may not suit most smaller players.
Problems With Approach
The successful investors already have a portfolio. Their entry point in their current holdings may have been years ago and for a very different price. An investor purchasing shares in those companies now may be placing themselves in a holding that has already experienced its growth spurt. Therefore, future results may be limited. Yet, to ignore these holdings is to ignore the idea that any new positions (that you plan to mimic) may have been added as a compliment, hedge, or diversifier to what is already held. If your own portfolio only accumulates new additions, you may have lopsided risk. An identically weighted portfolio has you mis-timing transactions.
Sales are another consideration. Even long-term investors would have a hard time tolerating finding out about divestiture of a position 90 days later. Large successful investors do sell; when they do, they often help set a downward trend in the market. Investors sitting tight in down-trending positions, only to find out months later the position is no longer in their copied portfolio, are doomed for occasional large disappointments.
If you are going to practice copycat investing, the filings on the SEC website will become an important source of information. The best investors to copy are those that hold much longer than the 90-days. This may limit you to successful buy-and-hold managers, but only if you desire a buy and hold portfolio. If you prefer to be more proactive and less patient, the copycat strategy may be impossible to fully realize.
One large benefit to copycatting is that by mimicking those that are successful, you can get started investing quicker while you learn your own way around the market following the experienced money with a track record. This gives you a starting point to develop your own strategies and investment style. Success does not always come from blazing your own trail; sometimes it comes from directly copying the greats, often a mix of both creates the perfectly tailored portfolio for the individual.
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