Copying successful deals
By Elvis Picardo Updated May 28, Copycat investing, as the name implies, refers to the strategy of replicating the investment ideas of famous investors or investment managers.
How to Be the Perfect Copycat Investor
The strategy is also known as coattail investing since the investor rides on the coattails of those who presumably have much more investment prowess. But is copycat investing a viable investment strategy? While the evidence about its success is somewhat mixed, there are certain techniques you can use to increase your chances of becoming the perfect copycat investor. Key Takeaways Copycat investing, also known as coattail investing, is an investment strategy that involves mimicking famous investors.
Copycat investing has mixed results, although there has been a strong rise in the strategy in recent years. The best investors to copy are successful money managers, buy-and-hold managers, and activist investors.
Look around your industry. Study your competition.
The key risks to copycatting are that the investor has different investment objectives or horizons or the stock has already moved before you learn about the investment.
To successful copycat, an investor should exercise patience and do their own due diligence.
Buffett Bootleg vs. In the five years to Marchthe Value Trust Fund posted an annual return of negative 6.
Investors who had mimicked Miller would have rued their decision if they had continued to do so after How to Be a Copycat Copycat investing is more widespread than one would think, although it is often done discreetly and without much fanfare by institutional investors like mutual funds and hedge funds.
The earliest copycat investors would routinely scour regulatory filings from mutual fund companies to discover which stocks star managers had Asian option type up on in recent months.
Services such as TD Ameritrade's Autotrade enable an investor to link investment accounts to portfolios actively managed by other investors or investment professionals, and automatically mirror every investment move that the latter make within specific allocations set by the investor. The obvious difference between copycat investing and mirror investing is that the former attempts to duplicate trading ideas only of well-known and recognized investment gurus.
Who Should You Copy?
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Investors considering a copycat strategy should consider replicating investment ideas from the following sources. This is a great source document for copycat trades.
Buy-and-Hold Managers Copycat investors would be much better served by getting ideas from long-term managers who believe in buy-and-holdrather than investment pros who are short-term traders.
This is because the time lag between an actual trade and its reporting may be a detriment to effective trade replication.
What is copy trading?
Icahn often shares his investment plans through Twitter, which makes it easier for copycat investors to act on them rather than waiting for regulatory copying successful deals. What Are the Risks? Like any other strategy, copycat investing has its share of risks, such as the following. Success Is Not Guaranteed No investment strategy is a sure-shot winner. For example, a copycat investor may have to stick with the strategy for many years if he or she is following a value-based manager since value stocks sometimes take an eternity to turn around.
In this case, losing patience and abandoning the strategy prematurely may result in substantial losses.
Best Forex Brokers for Social Copy Trading
Stock May Have Already Moved A stock may have already moved significantly between the time it was acquired or disposed of by a money manager and the time this copying successful deals is made public.
Too Many Copycats Too many investors—retail and institutional—are watching the top hedge funds and money managers. Given the speed of information dissemination and trading nowadays, an investor who is a little late to a copycat trade is at a huge disadvantage, because the stock may have already moved quite a bit in a short time span.
Differing Investment Objectives Your investment horizon and objectives may differ from that of the money manager.
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For example, you may have a very short-term horizon, while the manager you are copying may be in for the long haul. Or the money manager may have a risk tolerance level that is much higher than your own. How Should You Do It? Here are some suggestions to consider while implementing a copycat investment strategy.
Copying trades of successful traders, or social trading
Follow Credible, Successful Professionals Stick with the tried-and-tested money managers, since you may occasionally come across a stock that could be a spectacular success. Exercise Patience Chasing a stock is never a good idea.
If a stock has already moved up on news that an investing heavyweight has taken a position in it, the best course of action may be to wait for it to copying successful deals back within your buying range. If it does not, move on to something else.
Look for Accumulation Large-capitalization stocks that are having hard times may be a great opportunity for patient investors. Look for such stocks where money managers have commenced accumulating significant positions since this signals their confidence copying successful deals a turnaround in the near- to medium-term.
Many top managers copying successful deals investors in a specific sector have a considerable degree of overlap in their holdings.
Diversify your copycat strategy by replicating investment ideas from gurus in different sectors.
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Conduct Your Own Due Diligence Do not assume that copying trades from the best money managers around absolves you of the responsibility to conduct your own due diligence. Ensure that copycat stock you are considering is suitable for your investment objectives and risk tolerance before you acquire it.