Should you be a Copycat Investor?
Created on 25 Aug 2021
Wraps up in 5 Min
Read by 4.5k people
Updated on 06 Aug 2022
“At one point, I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham but, rather, set out on his own path and ran money his way, by his own rules.” - Michael Burry.
The greatest investors of all time are the greatest because of their exceptional investing strategies and techniques acquired after years of experiment, analysis, and research. Naturally, that is why their carefully planned investments have managed to make them some of the richest people on the earth. These are the people who have absorbed the nature of the market in their lives. So, of course, there is no denying that any retail investor would want to follow them blindly with the hopes of making it big, just like them.
But here’s a fact. It is a psychological limitation that we put on ourselves which eventually stops us from being creative. All those who rely on some other individual’s decisions to make a fortune for themselves are bound to lose in the long run. We must remember that all of us are uniquely empowered and are gifted with tremendous mental powers which might not necessarily be similar to others.
You have got a brain of yours; put it to work!
And so, this discourse is based on one such aspect of copying where we will be discussing whether or not you should blindly copy the portfolio of successful investors.
Is Portfolio Cloning good for you?
Everyone wants to make money in the stock markets, but contrary to popular beliefs, doing it by portfolio cloning may not be the best thing. I know that some people may beg to differ by putting forth the points like Mohnish Pabrai, who is beating the markets and clocking returns over 10% by following the cloning strategy. Unlike successful celebrity investors, we are not equipped with rich tools to enhance our research and analysis.
But, there are certain factors of paramount importance that these arguments often fail to justify. So, let’s try to understand why blindly photocopying portfolios will never be beneficial for retail investors like us.
Differences in Financial Goals
Do Warren Buffett or Rakesh Jhunjhunwala have the same financial or life goals as you do? Do they wish for a dream house with a jacuzzi, or are they dreaming of a luxury sports car? Are they trying to save up for their kids’ marriage? Maybe yes, maybe no!
We are all on different paths with different goals in our lives, so how can you expect someone else’s decisions to benefit you? Investing isn’t about making it to the Forbes list of richest people; it is about leading a life free from financial stress. Therefore, you need to acquire securities that can finance your needs rather than mimicking a successful investor’s stock picks.
Varying Investment Horizon
Big investors often invest huge amounts of money in stocks and forget about them for long periods of time. It is often this strategy that earns them such huge returns.
However, for retail investors adapting to the same investment horizon might not be the right thing to do because of the further difference in financial goals and risk appetites. For instance, if you need to achieve a financial goal within the next 3 to 6 months, a low duration fund might be a far better option than a stock pick with an anticipated growth of 15% in the next 5 years.
Different Risk Appetites
A person in his 40’s, with the responsibility of financing their child’s education and creating a retirement fund for themselves, might not offload his earnings into just equity investments and would prefer to add some debt instruments for stability. On the other hand, a person in his early 20’s can have an entire portfolio of equity investments across different segments and sectors. Why do we have such differences?
It is simply because of the factor of risk appetite. The risk of losing a thousand bucks might not be the same for a person blessed with a six-figure salary and a person who can barely earn hand-to-mouth. So, naturally, it differs from person to person and from investor to investor.
In books, diversification is a technique of investing across different asset classes to prevent exposure to a particular asset or risk. In simple words, diversification means not put all your eggs in one basket as a single act of mishandling can make you lose it all.
But, to not put all your eggs in one basket, you need more baskets, and to have more baskets, you need to shell out more money, and to shell out more, you ought to have more money!
What you need to understand from this is that you will need more money to diversify, which successful or institutional investors have in plenty, and which you, a retail investor, might not have. So, it is better not to copy someone else’s portfolio if you want to reap benefits from your own investments.
The big investors can enter and exit markets without your knowledge. The market timing of when they buy a particular stock is critical since the data of what such big investors are buying at what cost and when becomes available to the public only when they hold at least 1% of shares of that company.
For instance, let’s say a successful investor A bought 100 shares of a company called XYZ at Rs 100 per share. The fact that he has bought the shares of XYZ becomes known to the public when the value of his holdings becomes 1% of the company's total share capital. So, if a super investor already holds 0.99% of the share capital of any company, this data isn’t public. When disclosure is made to the public (if he purchases more) and retail investors start buying, it might be possible that the stock becomes overvalued (due to a sudden increase in demand). Now, it might not be able to provide returns to the investors.
Going through portfolios of super investors can be fruitful if you want to generate stock ideas. You can choose to then invest after a thorough analysis of the market as well as the stock. At the time of investment, one thing that should be kept in mind is that if a super investor has more than 1% of shares of a listed company, it is already one popular company and must be trading at a high P/E.
Long story short, financial management, in general, is quite subjective. What might be appropriate for the other person may not be suitable for you. (and vice-versa). That is why, before jumping into investments, it becomes essential for you to understand your financial profile, risk appetite, goals, etc., and accordingly, plan out the best asset allocation strategy for you. That’s where Recipe by Finology comes in. What makes it all the more unique is that it understands you before suggesting the appropriate asset allocation and recommendations. Well, we’ll leave you here.
At last, we’ll leave you with an inspirational quote from Michael Johnson, which we think might keep you off from blindly copying:
“When you are gunning to be like other people, you are foolishly repeating their mistakes, and the worst of it all is that you can't even correct yours.”
Instead, why not go for a clever tool that understands you, eh?
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