The question that arises in my mind is whether it’s a good investment technique to simply replicate a veteran investor’s portfolio and buy and sell those shares as they do. In other words, should I create a replica of a famous investor’s portfolio?
Searching for good companies is not an easy task, especially for individuals who are not actively involved in the stock market and prefer passive investing. Therefore, investing to some extent in stocks where a veteran or super investor has entered may be beneficial. However, entirely replicating someone else’s portfolio needs a good discussion. In this article, we will explore whether this approach is advisable or not.
Famous investors are the people who have absorbed the nature of the market in their lives. So, of course, there is no doubt that any retail investor would want to follow them blindly with the hopes of making it big, just like them. It is also true that we limit our creativity with our minds. People who count on someone else’s choices to get rich will probably end up losing in the future.
Many people aim to make money in the stock market, but copying others’ portfolios might not be the best way, despite some success stories like Mohnish Pabrai’s strategy. Unlike famous investors, we lack advanced tools for research. However, there are crucial reasons why blindly copying portfolios isn’t good for regular investors like us. So, let’s explore why blindly copying other people’s investment portfolios isn’t helpful for everyday investors like us.
Difference in Financial Goals
Have you ever noticed if two different super investors share the same goal? Are they aiming for a dream home with a jacuzzi or fantasy for a luxury sports car? Are they setting aside savings for their children’s weddings? Perhaps yes, perhaps no! We all have unique paths and different life goals. It’s unrealistic to expect someone else’s decisions to directly benefit you. Hence, it’s crucial to invest in securities that align with your financial needs instead of merely imitating stock picks from a successful investor.
Different Investment Horizon
Big investors often invest huge amounts of money in stocks and forget about them for long periods. 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 due to further differences 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
Every individual has different risk appetites, making it challenging to match the same risk appetites with these super investors. It’s primarily due to the factor of risk appetite. The risk of losing a thousand bucks isn’t the same for someone with a substantial salary versus someone barely making ends meet. Therefore, it naturally varies from person to person and from investor to investor.
Diversification is a crucial factor in portfolio construction, ensuring balance and protecting investors from becoming overly aggressive in any specific sector, industry, or stock. However, it’s essential to understand that replicating a diversified portfolio demands a significant amount of capital. These investors possess substantial funds and can further increase their investment, which is challenging for an average investor.
Entry and Exit
Big investors can enter and exit markets without your knowledge. The timing of when they buy a particular stock is critical because information about what these big investors are buying, at what cost, and when, becomes available to the public only when they hold at least 1% of the shares of that company. By the time this information reaches the public, the share price may have already reacted to that specific news. Consequently, it becomes too late for someone who has replicated the same portfolio as the famous investor.
Reviewing portfolios of successful investors can be beneficial for generating stock ideas. Subsequently, someone can opt to invest after conducting a comprehensive analysis of both the market and the specific stock. However, it is important to note that when a super investor holds more than 1% of shares in a listed company, it is likely a well-known company already, often trading at a high P/E ratio.