A Guide to Coat Tail Investing Strategy: If you had invested Rs. 1000 in Berkshire Hathaway, in 1970 it would have grown Rs 48.6 lakh by 2014. Stunning isn’t it! How many times have you been hit with stats like this? Always leaving you wishing that you knew what Warren Buffet or your investing hero knew then.
Lucky for us there is a whole strategy based on mimicking portfolios of those whom we look up to in order to make the same gains. Today, we discuss a strategy popularly known as Coat Tail Investing which would help us mimic the investments made by our idols.
What is Coat Tail Investing?
Coattail investing refers to an investment strategy where an investor replicates the trades of well-known and historically successful investors. Smaller investors here ride the coattails of their idols in hopes of multiplying their investments. The investors that are worth replicating in this context are those who have enjoyed continuous success for a period of 20-30 years. The strategy is based on the logic that if these top investors would buy a stock for their own portfolio then it must be a great investment and hence we should buy them too.
Simple as it sounds it’s amazing that more people don’t do it. It may interest you to know that even Institutional investors tend to track several successful investors to see what they are investing in according to a report by Aite Group. In fact, even investment guru Warren Buffet admitted that much of his early success was the result of “coat-tailing” great investors like Benjamin Graham.
How to Coat Tail Invest?
Thanks to regulations put in place by SEBI and media coverage individual investors like you and I are quickly informed about where these big investors are investing their money. Following are some of the means that have made this possible:
– Due to Company Disclosure requirements put in place it is mandatory for a company to disclose the names of all the shareholders holding more than a 1% stake in the company. The company reports would include the names of the major stockholders of the company.
– Mutual Funds are required to disclose their portfolios every month. This allows investors to gather information on what stocks have been bought or sold by the fund.
– Whenever there is a block or bulk deal takes place the Stock exchanges publish data of investors involved, no. of stock traded, no. of stocks that exchanged hands, and the price at which the trade took place on a daily basis on the NSE and BSE website. A bulk deal is when the total quantity of shares traded exceeds 0.5% of the equity shares of the listed company and a block deal is a trade of more than five lakh shares or a minimum amount of Rs 5 crore of a listed company.
– Media outlets, business journals, finance websites also disclose the portfolios of big investors. Of late there are even sites specifically dedicated to this purpose.
Quick Note: You can follow the investment portfolio of big investors in India using our Trade Brains Portal here.
(Source: Trade Brains Portal)
Advantages and Disadvantages of Coat-Tail Investing?
Coat Tail Investors to date have made significant fortunes by copying the portfolio of great investors. But they also have suffered a massive loss due to this purpose. Following Advantages and Disadvantages shed some light on why this has been so
Advantages of Coat-Tail Investing
– It is easy to implement
The requirements for this strategy are to find an investor you admire, and then start copying his market moves. The heavy-duty which includes analysis and research is already done by the investors. This helps us save a lot of time and effort and at the same time reap the benefits.
– It costs us nothing
Big investors and institutional investors spend millions of dollars on creating teams specifically for identifying these stocks. The end info that they spend so much on is made available to us free of cost after they make the trade.
– Chances of Succes are high
Here investors who are already familiar with the industry or stock put in their years of expertise. Therefore following these big investors increases the odds of success.
Disadvantages of Coat-Tail Investing
– Abrupt exits may catch us off guard
Big Investors do not announce that they will be exiting the stock as this may negatively affect their gains. The news of a big investor buying or selling stock will have positive or negative effects on the share price respectively. If investors continue to hold the stock even after the big investor has sold and the price has fallen the investor may incur losses.
– Different interests
Your financial goals may not match the investors. Some investors may want to buy stock in order to make quick profits from trading, blindly copying them oud prove to be disastrous. Also, investors who want to make quick profits i.e. in the next 6-12 months may not have much to gain if they follow investors like Buffet who make investments for a lifetime. If is easy for one to confuse trading with investment picks or vice versa.
– There are too many investors already applying this strategy
Every move made by these investment gurus is constantly watched by lakhs of people. Technology has made it possible for information to be transferred in less than seconds. As mentioned earlier this now causes the prices of shares to fluctuate wildly with the smallest sign of the investors moving in or out due to market reactions. If an investor is delayed even by the shortest period of time he may end up in losses.
– Everyone makes mistakes
It is very much possible for even stock market experts to make errors. These errors, however, may result in severe consequences for those that blindly follow them. The best example, in this case, would be Warren Buffet picking IBM. He later admitted that his thesis on IBM was flawed
After observing the disadvantages above it doesn’t take a genius to note that the stacks are piled against the common investor. Then how can one even make this strategy work?
For this, we can take notes from Mohnish Pabrai one of the most famous names in Dalal Street. Unknown to many Pabrai himself has adopted the coning approach. He is known to have joked that he’s never had an original idea in his life, but this doesn’t bother him. “ we copy the best ideas and make them our own.”
It is the latter part – ‘making them our own’ which is most important. Most of the problems that the strategy has can be eroded simply if the individual assesses and does his own research after gathering information. The investors we pick to follow are also of importance in this strategy.
Picking Buffet with the aims of making quick profits would not make any sense just like picking any other activist investor when the investor has the aims of the long term. As long as we keep ourselves updated, pick the investors whose strategies meet our aims, and do our own research after gaining trade information, Coattailing may actually lead us to personal gains.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.