Imitating successful investors and how to gain from it
It pays to follow great investors and promoters of good
companies. However, the strategy comes with conditions.
All of us try to imitate our heroes, be it a movie star of a
sports star. Imitating our heroes gives us the feeling of being like them,
something which is not possible for most of us on account of various reasons.
It might be amusing and entertaining to follow our heroes and sometimes might
help us in our careers, especially in sports.
However, when it comes to investing, it imitating our heroes can be hugely profitable. The first task is to find a hero who matches our style. Everyone respects Warren Buffett and the wealth he has created, but not many are able to imitate him, though his investment strategy is well laid out and not too difficult to grasp. When someone asked Warren Buffett why people not follow his style of investing tough it is easy, he replied very few people want to earn money slowly.
In Warren Buffett’s own words his period of investment is ‘forever’. Not many of us can afford the luxury of investing for the rest of our life.
But there are many renowned investors whom one can follow. The best such investor is the promoter of the company himself. If a promoter of a company is buying his company’s shares it is a very strong indication that he feels that the future is bright. Such promoter buying is reported on a daily basis on both the stock exchanges in India. Almost every day some promoter or the other is buying his own company shares. Generally a basic study of the company will help before an investor jumps in, but insider (as is mentioned in the exchanges) buying is considered one of the safest and rewarding form of investing.
The other types of investors are those who have an established track record. Globally such type of investing is known as coattail investing, since the investor rides on the coattails of the more seasoned investors with a large number of success stories in their armour.
This is done by keeping a close watch on any news coming from the market of a buy or sell order placed by this expert. Placing the same orders would increase the probability of profiting from the same stocks which the expert placed his confidence on. It is mandatory for companies to disclose the names of all investors who hold more than one percent shares.
Buying what the expert is buying or selling when he does seems a lucrative way of profiting free of cost without paying any fee, or consultancy or even without taking the trouble of researching and racking our brains into the tedious research work.
But it is not that simple. Coattails stand a chance to win but stand a far greater chance to get wiped out in a move. The expert or Guru has huge amounts invested in a diversified portfolio which the follower is not even remotely aware of. His reasons of buying and selling a stock might be unknown and may land the follower into serious troublebylosing all his hard earned savings.
The objectives of the expert and his follower may be very divergent. Both may be deploying different time frames which itself is a factor enough to ruin the follower. The expert might be planning to hold on to a stock for long term, but the follower might not have enough liquidity or the holding strength. Further, he might not be even aware of the price at which the expert has first started buying into the position. His name would be disclosed either if it is a block deal or if his holding is more than one per cent.
For an expert it is easy to handle if he incurs a loss or two, but a follower may not have the same luxury. Another challenge following this strategy is that the follower will never know when the expert has sold his investments.
In order to use the strategy it is important to understand the temperament of people they plan to imitate. A person interested in short term trading can never make money by following a big investor whose holding period is very long.
Despite these pitfalls there are significant number of investors and even hedge funds who copy the expert and enjoy good returns. The trick lies in copying with judiciousness. If the stock has already moved up on the news of expert buying a large share, it would be better to wait till it comes in our buying range or else one should move on to something else.
In fact one should look for large capitalization stocks where money managers have started accumulating significant positions. This signals their confidence of a turnaround in the near to medium term.
It is best to stay diversified. Even while copying one must copy from experts in various sectors rather than relying only on one. By diversification we stand a greater chance to earn greater profits and minimizing our losses.
Let’s take an example here. One of our all time great Indian investor, Rakesh Jhunjhunwala bought 75 lakh shares of Spice Jet at Rs 17.88 on November 28th, 2014 which was disclosed in the stock exchanges as bulk deal. The share is presently trading at Rs 67.25 in just over a year. That’s a phenomenal 375 per cent return during the period.
But this was not the first time Rakesh bough Spice Jet. He bought 25 lakh shares in his wife’s name at Rs 38.94 in May 2013. His company Rare Enterprises bought 25 lakh shares at Rs 30.77 on July end 2012. For an investor who had bought shares looking at the block deal would be cringing in loses for over two years before he was breaking even. But as far as Rakesh is concerned he did not buy the stock short term perspective.
It is thus important to align your interest with the expert whom you are imitating. In the stock market there is no room for blind followers. Copycat strategy works with conditions. Like all other strategies it has to be followed with patience, discipline, intelligence and of course keeping oneself updated of what is going on in the market.
However, when it comes to investing, it imitating our heroes can be hugely profitable. The first task is to find a hero who matches our style. Everyone respects Warren Buffett and the wealth he has created, but not many are able to imitate him, though his investment strategy is well laid out and not too difficult to grasp. When someone asked Warren Buffett why people not follow his style of investing tough it is easy, he replied very few people want to earn money slowly.
In Warren Buffett’s own words his period of investment is ‘forever’. Not many of us can afford the luxury of investing for the rest of our life.
But there are many renowned investors whom one can follow. The best such investor is the promoter of the company himself. If a promoter of a company is buying his company’s shares it is a very strong indication that he feels that the future is bright. Such promoter buying is reported on a daily basis on both the stock exchanges in India. Almost every day some promoter or the other is buying his own company shares. Generally a basic study of the company will help before an investor jumps in, but insider (as is mentioned in the exchanges) buying is considered one of the safest and rewarding form of investing.
The other types of investors are those who have an established track record. Globally such type of investing is known as coattail investing, since the investor rides on the coattails of the more seasoned investors with a large number of success stories in their armour.
This is done by keeping a close watch on any news coming from the market of a buy or sell order placed by this expert. Placing the same orders would increase the probability of profiting from the same stocks which the expert placed his confidence on. It is mandatory for companies to disclose the names of all investors who hold more than one percent shares.
Buying what the expert is buying or selling when he does seems a lucrative way of profiting free of cost without paying any fee, or consultancy or even without taking the trouble of researching and racking our brains into the tedious research work.
But it is not that simple. Coattails stand a chance to win but stand a far greater chance to get wiped out in a move. The expert or Guru has huge amounts invested in a diversified portfolio which the follower is not even remotely aware of. His reasons of buying and selling a stock might be unknown and may land the follower into serious troublebylosing all his hard earned savings.
The objectives of the expert and his follower may be very divergent. Both may be deploying different time frames which itself is a factor enough to ruin the follower. The expert might be planning to hold on to a stock for long term, but the follower might not have enough liquidity or the holding strength. Further, he might not be even aware of the price at which the expert has first started buying into the position. His name would be disclosed either if it is a block deal or if his holding is more than one per cent.
For an expert it is easy to handle if he incurs a loss or two, but a follower may not have the same luxury. Another challenge following this strategy is that the follower will never know when the expert has sold his investments.
In order to use the strategy it is important to understand the temperament of people they plan to imitate. A person interested in short term trading can never make money by following a big investor whose holding period is very long.
Despite these pitfalls there are significant number of investors and even hedge funds who copy the expert and enjoy good returns. The trick lies in copying with judiciousness. If the stock has already moved up on the news of expert buying a large share, it would be better to wait till it comes in our buying range or else one should move on to something else.
In fact one should look for large capitalization stocks where money managers have started accumulating significant positions. This signals their confidence of a turnaround in the near to medium term.
It is best to stay diversified. Even while copying one must copy from experts in various sectors rather than relying only on one. By diversification we stand a greater chance to earn greater profits and minimizing our losses.
Let’s take an example here. One of our all time great Indian investor, Rakesh Jhunjhunwala bought 75 lakh shares of Spice Jet at Rs 17.88 on November 28th, 2014 which was disclosed in the stock exchanges as bulk deal. The share is presently trading at Rs 67.25 in just over a year. That’s a phenomenal 375 per cent return during the period.
But this was not the first time Rakesh bough Spice Jet. He bought 25 lakh shares in his wife’s name at Rs 38.94 in May 2013. His company Rare Enterprises bought 25 lakh shares at Rs 30.77 on July end 2012. For an investor who had bought shares looking at the block deal would be cringing in loses for over two years before he was breaking even. But as far as Rakesh is concerned he did not buy the stock short term perspective.
It is thus important to align your interest with the expert whom you are imitating. In the stock market there is no room for blind followers. Copycat strategy works with conditions. Like all other strategies it has to be followed with patience, discipline, intelligence and of course keeping oneself updated of what is going on in the market.
Happy Investing
Source:Moneycontrol.com
No comments:
Post a Comment