Should We Copy Famous Investors?

Welcome to a channel dedicated to Indian traders and investors. Have you ever wondered if you should just buy the same stocks as famous investors and sell when they sell? Wouldn’t that make life so much easier? This is what is called copycat investing. And although it sounds easy, it should be done with some caution.

Let me explain why. But before we do that, if you’re new to this channel, don’t forget to subscribe via building a massive library of stock market-related videos and you don’t want to miss out on all that learning.

Let’s get into copycat investing. Investing is hard. So sometimes we look for shortcuts.

We listen to the news of famous investors, such as Warren Buffet, Rakesh Juhunjhunwala, etc., buying certain stocks. We think why shouldn’t I buy the same stock after all? If the stock is good enough for them, it should be good enough for me. Well, it’s not that easy. Let me tell you why.

Issue of Fake News

The 1st is the issue of fake news. Sometimes the news of these famous investors buying a certain stock is fake. For example, let us take the case of Surana Solar. In June 2015, newspapers reported that Rakesh Jhunjhunwala had bought a significant stake in the company, but as it turned out later, the news was fake and there was another man with the same name who had made that purchase.

Now the whole thing was a very cunning pump and dump scheme and all those investors who bought the stock based on the news incurred heavy losses and the stock fell 26% from the day’s high. The same is the story with all these fake SMSs and WhatsApp messages claiming that some famous investor or mutual fund has bought a huge stake in a company.

Hence don’t always trust the news because you can become a victim of the pump and dump scheme. By the way, if you want to know more about these pump and dump schemes, do check out the video in the description below where we have explained using real-life examples, how promoters of shady companies sometimes scam investors using such schemes.

Pump & Dump Scheme: https://youtu.be/7dF1JTBdcGg

Information Gap

The 2nd issue is with the information gap. In an ideal world, if you knew exactly when a famous investor is buying, for what percentage of their portfolio and when they are exiting, copycat investing is not a bad idea, but the problem is that TV channels and newspapers frequently report the news of influential investors buying, but they hardly talk about when they are exiting.

So if Porinju Veliyath buys Leel electricals, that becomes a headline, but when he sells his shares, that doesn’t make it to the news. Let’s say you bought the shares of Leel electricals because  Porinju Veliyath bought it, now, when are you going to exit? This company’s stock prices fell 90% last year.

Are you going to keep waiting for the news of him exiting? How will you know that whether he is still invested in the company or not? He might have already sold the shares and now you see the issue.

Short-term trading

The 3rd issue is that some investors buy shares for short-term trading. For example, Jhunjhunwala bought JP associates for short term trading purposes rather than investment because the fundamentals of the company are so bad. No sane investor would want to commit to a stock like that for the long run. But if you just copied Jhunjhunwala, how long would you hold the shares of JP associates? One month, one year or even 10 years. Again, the exits of these famous investors are seldom reported and so you might be stuck with a junk stock like JP associates, forever.

Investment Horizon

The 4th reason is that the investment horizon of these big investors is sometimes very long. Vijay Kedia, for example, held the shares of Sudarshan chemicals for several years before it even started moving. An average investor, like you and me, would not have the patience to stick to any stock for that long.

Also, how would you know when or if Kedia will exit Sudarshan chemicals? What you have to realize is that these investors have a huge appetite for sitting on a loss for a long time. Radhakishan Damani might sit on a loss for 5 years before it turns into a profit because he already has so much money that he doesn’t care.

Whereas an average investor might get frustrated and book a loss.

Change in Risk Profile

The 5th and most important thing is a change in the risk profile of these investors. You need to understand that these famous investors took highly risky investments in the early part of their careers and made some serious money from them. Now their goal is not so much to get a multi-bagger but to protect the capital that they have already generated.

Therefore, the investments might be much more conservative than you think. It’s no better than buying the stocks that any mutual fund would have bought. So if you’re copying their trades and the dream of making another multi-bagger, you probably will be disappointed. Should we just ignore the investments made by these famous investors?.

Here is my advice..

Instead of just blindly copying famous investors, why not try to understand which sectors they are buying stocks from and why are they investing in sectors that you may not have considered? Maybe there is some macroeconomic trend in India that you can take advantage of. Also, there is no harm in buying the same stocks, as long as you have done the proper research and are confident about the fundamentals of the company.

But you should be very clear as to why you are buying the stock, for how long you intend to hold it and what factors would prompt you to exit the stock before that period? So the bottom line is when it comes to investing, don’t look for shortcuts. If you can spend several days researching your next mobile phone, you can easily spend a few days researching for your next stock.

That’s it, folks. That was my take on copycat investing for more investing and stock market-related videos. Don’t forget to subscribe to this channel. We are making hundreds of videos on investing and trading. So don’t miss out on all that learning.

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