A To Z of Copycat Investing..!
By Ms. AARATI KRISHNAN, Investment
ADVISOR
If you bought a stock just because a big investor
did, you could be hit when the stock goes through a bad patch
Making money from stocks may look easy as pie in
a bull market, but regular investors know that unearthing winners is far from
easy. One short-cut that has gained ground globally is copycat investing, also
known as coat-tailing or side-car investing.
Copycat investors simply keep an eagle eye on the
investment moves of a renowned market wizard, and faithfully replicate his or
her buys and sells.
While investors in the US markets look at the
quarterly portfolio filings of large funds to hang on to their coat-tails, Indian
copycat investors have multiple sources to rely on.
Quarterly shareholding updates filed with the
exchanges can reveal new investors who own more than 1% equity. Monthly
portfolio disclosures of equity funds can tip you off to buys and sells.
Bulk deals data disseminated daily by the stock
exchanges, post market hours, can tip you off to trades in which more than 0.5%
of the outstanding equity in a stock changed hands.
Of late, there are also many investment blogs and
fan sites (gurufocus.com, rakesh-jhunjhunwala.in, alphaideas.com, for instance)
dedicated to tracking the above filings and offering readymade data on what
your favourite investors bought or sold.
Lately, there’s also the social media, where
legions of followers eagerly seek stock tips from well-known money managers on
Twitter.
But if you’re a newbie investor who thinks that
making big money in the markets is as simple as following a Rakesh Jhunjhunwala
fan site, or mimicking the bulk deals of Porinju Veliyath, Ramesh Damani or
Mohnish Pabrai, you’re quite mistaken. Copycat investing carries risks.
Often, big money in the stock market is made not
through the act of swooping in on the right stock, but by holding on to it
through thick and thin. This kind of perseverance requires a lot of conviction
about the business and your reasons for owning a piece of it.
If you
simply bought a stock because a big investor did, and didn’t pay much attention
to the business, you could experience a lot of mental turmoil when the stock
goes through a bad patch.
SEBI’s recent crackdown on ‘shell companies’
abruptly suspended daily trading in 331 stocks. Among the stocks that were hit
were Prakash Industries, where Rakesh Jhunjhunwala owned a 1% stake (June 30
shareholding) and J Kumar Infraprojects, where a clutch of top mutual funds
owned stakes (July 2017 portfolio disclosures).
Now, when hit with this thunderbolt, a
Jhunjhunwala or a HDFC Mutual Fund may assess the business and decide to hold
on, if they believe the company has a fundamentally-sound business that will
eventually shake off this crisis.
But if you are a copycat investor who has not
studied the business as deeply, it will be hard not to panic.
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| AARATI KRISHNAN, Investment ADVISOR |
Even stock market wizards do make mistakes. This
May, Warren Buffett admitted to making a blooper in buying IBM six years ago
and said that he had sold a third of his position in the preceding months.
Mr. Rakesh Jhunjhunwala’s bet on the 2010 IPO of
A2Z Infra Engineers backfired, with the stock losing over 75% in the two years
after the IPO.
What makes Buffett or a Jhunjhunwala ace
investors is not the fact that they never make mistakes, but the fact that they
own large portfolios where winners far outnumber losers.
Copycat investors are often focused on finding
out the latest big bet made by their idol and don’t bother to look at their
entire portfolio. By mirroring the individual buys or sells of big investors,
they run the risk of picking up their duds, while missing out on their winners.
Delayed information..!
The price at which you acquire and liquidate a
stock in your portfolio can be a big decider of returns.
Copycat investors who look to public sources or
social media for tips from their gurus, may get delayed or half-baked
information.
Professional managers who oversee portfolios for
private clients or investors will seldom tip off the market to their buy or
sell decisions before they make them.
After all, doing so will bid up or batter down
the price of the stock they want to buy or sell, and undermine the investors’
returns.
Even private investors may not want to tip their
hand to the markets while they’re in the process of building or liquidating a
position.
On July 21, 2017 the stock of debt-laden
infrastructure player, Jaiprakash Associates, soared by 17% after the company’s
shareholding disclosure for June 30, revealed a 1.03% stake held by Mr. Rakesh
Jhunjhunwala.
The March 31 holding did not feature this stake.
Many copycat investors no doubt hopped on to the risky infrastructure player,
believing that Jhunjhunwala had picked up the stake this quarter. But it is
quite possible that he held a less than 1% position earlier, which he only
topped up.
Stomach for risk..!
Rather than look for established names, many
copycat investors today are keen to know of penny stocks picked up by big-name
investors, which can multiply money in a matter of months.
Now, high net-worth investors may bet on
distressed companies or turnarounds, because they are okay with all-or-nothing
bets. They may have a risk management strategy in place where they hedge their
bets, or only a part of the portfolio is devoted to risky stocks.
But copycat investors who follow them may not
have an equally sound understanding of risks. They may end up with their
fingers singed if these bets backfire.
Overall, tracking the stock moves of big
investors can be a useful source of investing ideas. But before you bet your
money on it, do your own homework.
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