Should You Try Copycat Investing to Make Quick Money?

Do you have heroes whom you aspire to become in real life? Cricketers, film stars, and leaders can inspire you to do great things. Warren Buffett, Benjamin Graham, and George Soros are great investors. India has its share of famous investors, and you may track the portfolio of Rakesh Jhunjhunwala and Radhakishan Damani. You mimic the trades of successful investors to get good returns from your portfolio. One or more stocks from the portfolio of ace investors Vijay Kedia, Rakesh Jhunjhunwala, and Ashish Kacholia have doubled the money from April 1, 2020. So, should you try copycat investing? 

What is copycat investing?

Copycat or coat-tail investing is the strategy of replicating the buys and sells of successful investors. You don’t copy the whole portfolio, but picking some stocks creates copycat holdings. 

 How to do copycat investing?

A listed firm must disclose the names of shareholders holding 1% or more in the company to the stock exchanges during each quarter. Copycat investors track this information and purchase the same stocks for the portfolio. 

You believe the stock expert knows why he buys or sells the stocks. It is a quick way to make a considerable profit and gain from a price appreciation. 

How to track the portfolio of successful investors? 

  • Listed companies must disclose the names of shareholders having a stake of 1% or more. Study the shareholding pattern and big investors. You will find the information on the NSE and BSE websites. 
  • Mutual funds disclose the portfolio every month. It helps if you looked at the stocks bought and sold by the mutual funds. 
  • Check the list of the block and bulk deals on the NSE and BSE. In a bulk deal, the total quantity of shares traded exceeds 0.5% of the equity shares of the listed company. A block deal is a trade of more than five lakh shares or a minimum amount of Rs 5 crore of a listed company. Stock exchanges publish the data on bulk and block deals. Take a look at the big investors and the price at which the stock trade took place. 
  • You can find the stock picks of famous investors on social media sites. Great investors may disclose the holdings in business journals and finance websites. 

 Advantages of copycat investing

  • Copycat investing is an easy way to make money. You must choose a famous investor and mimic the buy and sell moves. Set an alert to get an idea of the significant trades.
  • Great investors add stocks to the portfolio after a thorough analysis. You get good shares without spending time on the research. 
  • Copycat investing helps you to find the next big stock. The investor would indulge in the hard work, and you reap the benefit. You get an instant update as a mandatory disclosure makes the investor reveal the names of companies and significant trades.
  • Mutual fund managers are experienced and familiar with the stock market. You get the benefit of fund research and investment strategy without any effort.
  • Copycat investing is a successful game plan with no charges. You don’t spend money on advisory fees. It is an uncomplicated way of understanding the working of the stock market. 

Disadvantages of copycat investing

Coat-tail investing has its share of pitfalls. You must understand the dangers of the investment before taking the plunge.

  • Your financial goals are non-identical to other investors. A stock guru has a different investment horizon and financial goals. You may need to liquidate the investment soon, while the stock expert stays invested for the long-term. 
  • A stock market expert may commit an error. It has disastrous consequences for you and other coat-tail investors. The expert bears the losses, but the losses wipe out your portfolio.
  • Successful investors have a diversified portfolio of stocks. You may not have many stocks and copying the trading moves is a threat to your portfolio. You have a prominent position in the copycat portfolio. The portfolio suffers if the stock does not perform well.
  • The stock guru knows when to exit from the investment. You may confuse trading for an investment pick. It has disastrous consequences as you continue holding the stock.
  • Great investors have information on the companies where they put their money. You will exit the investment on a poor performance. The expert has in-depth knowledge of the company and continues investing for a long time.
  • You may get the information about a significant investment from social media. It’s too late for you to act on the news as the expert has invested a considerable amount. The stock price has already shot up.

Also Read: Planning to Buy Another Insurance Policy for COVID-19 Treatment?

Should you try copycat investing?

You cannot answer this question with a firm yes or no. Copycat investors have made a fortune by copying the portfolio of great investors. You may also suffer a massive loss. 

  • If you are a first-time investor in the stock market, you may struggle with the strategies of the experts. A successful investor will disclose the entry in a particular stock. However, stock experts will rarely tell you when they exit the stock. You will pay a higher price and continue with a significant holding, even after the price has fallen. You must never enter a stock without an exit strategy.
  • You will suffer heavy losses if you blindly copy a great investor. Study the company and the products before investing. You must understand why the investor has put money in the stock. The company may have a significant advantage over its competitors.
  • You must understand the investment style of the stock guru. The value-based type of investment gives you a profit after several years. If you don’t have the patience to stick with the investment, you will suffer a loss.
  • You have a delay in the public disclosures. The stock price rises or the fund manager exits the investment before you buy or sell the share. 
  • Many copycat investors react to the small bits and pieces of information, missing the big picture and losing money in the trade. You have bought the shares in the portfolio of a famous investor who sells the holdings in small quantities. You get the information after three months. The stock price has crashed before you act on the news.
  • You must follow the ideas of different stock gurus for a successful investment. Many top fund managers dominate only one particular sector. Take the investment ideas of experts from various sectors. You must prepare a list of companies and do your research. It builds confidence as you follow an investment strategy.

A famous investor says copycat investing is a wrong approach. You must try to understand the mindset and follow the strategies of the successful investor, instead of the stocks in the portfolio. The prime reason is a wrong selection of stocks erodes your wealth. 

Please beware of the pitfalls of copycat investing before you try it. It would help if you studied the entire portfolio of a celebrity investor before you invest. The famous investors have significant holdings in large companies. You may invest in penny stocks to multiply your money in a matter of months. But, you don’t have a diversified portfolio to protect you from a failed investment.

Use the information on a stock purchase by a famous investor, as a reference point. Study the stock and make the purchase only after you are comfortable with the price. You must understand your risk appetite and financial goals before trying copycat investing. 

You can invest in equity diversified mutual funds instead of copycat investing. The mutual fund scheme has a fund manager and the resources to pick stocks across sectors. You may copy the portfolio, but you need the knowledge, time, and funds for a successful investment. You can choose a mutual fund depending on your investment objectives, risk tolerance, and style. 

It would help if you looked at the stock portfolio of great investors only to enrich your knowledge. Never invest in any stock without studying the fundamentals of the company. Famous investors have a different investment strategy and time horizon. You cannot win in the long-run by copying the portfolio of stock experts. A copycat investor needs the time and resources for a successful investment.  Great investors are human beings who make mistakes. However, they have resources to survive a massive loss if a stock performs poorly. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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