what is Coat Tail Investing meaning

What is Coat Tail Investing?

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. 

( Source)

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

Closing Thoughts 

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. 

Is copycat investing hurting your portfolio

Is Copycat Investing Hurting Your Portfolio?

Is copycat investing hurting your portfolio?

When I was a child, I used to play ‘Chess’ with my grandfather. And my favorite strategy was to mimic his moves. I enjoyed watching my grandpa taking a lot of time to decide his next move and on the other hand, I just copied what he did earlier.

Many a time, this strategy worked for a long part of the game. However, in the end, I had to come up with my own ideas, otherwise, I would have lost the games. The point was that I was always a step behind. And if you want to win, then you have to think ahead, instead of clinching to the back.

The same is applicable to the share market.

What is copycat investing?

Copycat investing is simply tracking the investments of the big players in the market and replicating their buy/sells.

These big players have already proved their expertise in the market in the past and hence, it makes sense the keep an eagle-eye on their investments.

This type of investing is also called as side-car investing or coat-tailing investing.

Also read: 3 Insanely Successful Stock Market Investors in India that you need to Know.

How to track the buy/sell of ace investors?

There are a number of ways by which a regular investor can track the buying or selling of the ace investors of the market for copycat investing. Few of the easy ways are discussed below:

  1. Company disclosure: Each company has to disclose the names of all the investors who hold more than 1% of stakes in the company on their quarterly reports. You can read these reports to find the names of the big investors if any.
  2. Block/bulk deal: You can find the details about the investors involved in the block deal and bulk deal on the stock exchange websites. These details are published daily. You can read more on how to find block/bulk deal details here.
  3. Monthly portfolio disclosures of equity funds: The equity funds release their monthly portfolio. As most of these funds are managed by the ace investors, you can track their portfolio from these monthly disclosures.
  4. Investment blog/ fansites/ News channels: There are a number of fansites and investment blogs who track the investments of their favorite investors. You can subscribe to these sites. Moreover, many a time, the news channels and financial websites also highlight the top picks of the big investors of the market.
  5. Social media: Sharing information of the newest investment is not new to the social media. You can follow these big players social profiles like Twitter, where many a time these players release their latest picks.

Do copycat investing works?

There are a number of regular investors who claim to make huge fortunes by copycat investing.

As a matter of fact, theoretically, this type of investing should work. However, if you keep copying the portfolio’s of the big players, you won’t be able to keep winning for the long term.

We are going to discuss why copycat investing fails ‘most of the time’ in the next section.

Also read: How To Invest Rs 10,000 In India for High Returns?

copycat

What copycat investing is not a good strategy?

Here are the few reasons why it’s not a good strategy to blindly invest in the shares of ace investors like Rakesh Jhunjhunwala, Dolly Khanna etc:

1. You both do not have the same financial situation.

The big investors can easily remain invested in that stock for a long period of time say 5-10 years. On the other hand, you might need to raise fund in hurry sometimes in order to buy a new home, pay for children’s school, emergency fund etc. An early exit from the stocks in such situation may lead you to book heavy losses.

2. An expert has diversified portfolio:

While trying to copy the stocks of the ace investors, you need to understand that those big investors have a diversified portfolio. For example, let’s say that Rakesh Jhunjhunwala has 20 stocks in his portfolio. His portfolio is well-diversified and the risk is mitigated.

On the other hand, if you buy just 1 stock on which Rakesh Jhunjhunwala invested recently, your risk-level won’t be same as that of Mr. Jhunjhunwala. You will have a high risk. In such scenarios, it’s better to copy the entire portfolio. Copying one stock from Rakesh Jhunjhunwala and other from Dolly Khanna, won’t help you to diversify to reduce the overall risks in your portfolio.

3. Not knowing the WHYs of Investment:

If you do not know the reason why you have invested in that stock, then you will not believe in the company for long-term. In such scenarios, if the company doesn’t perform well soon enough, you might lose faith on your investment and exit early from the stock.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

4. Keeping tabs on their investment is tough:

One busy week and you might never know when these big investors left that stock. It’s difficult to precisely copy the actions of these investors. Most of the big players in the market are full-time investors or fund manager. A regular investor with a 9-to-5 job does not have so much flexibility to remain actively involved in the market.

5. You do not know their exit strategy:

You may copy the portfolio of the big investors but how are you going to understand their exit strategy?

Maybe they planned to remain invested for 10 years and your investment goal is just for 2-3 years. Or maybe they are planning to exit just after booking a small profit of 50-60% as they do not believe in the stock for long-term, but you bought the stock for a long-term perspective. How will you understand these? It’s foolish to enter in a stock without having an exit strategy.

6. Delayed information:

While copycat investing, it’s really important to know the entry and exit point of the ace investors. Any delay can be a great decider of the returns. You might know that the big investor has invested in that stock. But if you do not know the entry price and willing to enter at twice the price at which he/she entered, then this delayed investment can greatly affect the overall returns.

7. Ace investors can make mistakes:

The big investors are also humans and capable of making mistakes. However, they can afford the losses as they have planned everything.  But can you afford the same loss?

Summary:

Overall, theoretically, it sounds good to mimic the portfolio of big investors in the share market. However, in practical, copycat investing is tough. A retail investor cannot match the resources,  opportunities, and flexibilities available to these big investors.

The best you can do it to keep an eye on the investments of the ace investors and then make your own investment strategy for that stock. Tracking stocks is a good idea, however, not doing your homework before investing can definitely hurt your portfolio.

New to stocks? Want to learn how to select good stocks for consistent long-term returns? Here’s an amazing online course which is definitely worth checking out: HOW TO PICK WINNING STOCKS? The course is currently available at a discount.

I hope this post on copycat investing helps the readers. Happy Investing.

Tags: Copycat investing, is copycat investing good, copycat investing India, risks of copycat investing