Does copycat investing work?
It could! Then again maybe not.
For today’s post let’s consider how copycat investing could play out for you and me.
The essence is rather simple. Call it ‘coattail investing’ or any derivative thereof and it basically means the same thing: an investing strategy that mimics how others (money managers, institutions, investing icons such famous billionaire investors (think Warren Buffett, Carl Ichan, George Soros, etc.)) invest.
Who should you copy?
That’s up to you. Maybe nobody at all is your answer and that’s just fine – it all depends on your financial plan of course. This is because there are always risks in copying what others might do. Investing is no different.
Let’s consider however a few ways investors might copycat invest:
- Mimic Money Managers
There are tens of thousands of money managers out there. Who is the best to follow? That probably depends on what time period of course! This is because you already know from reading my blog most professional money managers get their@$$es kicked by the index they track over time. It is very difficult to consistently beat market returns over many years of investing (say 10, 20 or more years). This makes index investing a wise thing to do for most retail investors to help assure them of long-term market-like returns.
Just for kicks however I selected this popular Canadian money manager: Francis Chou.
I took a browse of his site (no affiliation): Chou’s investment philosophy “is a value-oriented approach to investing.” Following a detailed analysis of a company’s balance sheet, cash flow, industry position and a host of other factors, there is a value that can be determined in the company’s near-term and longer-term growth prospects.
In one example, owning or copying the assets of the Chou Associates Fund, would have earned you close to 9% for the last 20 years. That’s pretty darn good. It will be interesting to see how Chou and some of his funds perform in the next 20 years.
- Mimic institutions
For the purpose of this post – institutional investing implies how money is pooled to purchase securities, real estate, and other assets. Institutional investors can therefore include banks, insurance companies, pensions, hedge funds, mutual funds and more.
I actually do this to a large degree and have done so for at least seven years now. Years ago, I thought, why should I bother owning mutual funds or Exchange Traded Funds (ETFs) that charge me fees when I can own the same Canadian companies those funds hold as part of their top holdings?
Over the years I’ve decided to unbundle my Canadian ETF (such as XIU, XIC, VCN, ZCN or another popular Canadian equity ETF) and instead build my own Canadian ETF – a mixture of stocks held across many sectors in the allocations I want. In doing so I save on money management fees every year and have built a modest income portfolio I can draw from to fund future retirement needs. You can see progress of that income and insight into some of my stocks here.
This means historically owning a mixture of Canadian banks, leading energy companies, our biggest four telecommunications companies and throw in one or two railroads for good measure (stocks typically found in those top-15 holdings) and that’s close to 50% of the Canadian index – you can own that directly.
There are no guarantees for continued success in these companies of course but I’m going to continue to hedge my bets – I will continue to invest in Canada’s largest dividend paying companies for income and capital appreciation. Your mileage may vary.
- Mimic billionaires
Here is yet a third option to consider. Copycat investors could consider getting their investment ideas from super-rich investors like Warren Buffett or activist investors like Carl Icahn. By very mention of what they say about any given company, the stock price can appreciate (or decline) as soon as the news breaks related to their involvement it.
With the boom of the ETF industry you no longer have to follow the billionaire 13F filings with the SEC, the U.S. Securities and Exchange Commission. You can now own at least one ETF such as the iBillionaire’s index fund that owns 30 handpicked large-cap S&P 500 stocks most favoured by billionaire investors.
At the time of this post this ETF has returned 18% over the last year. These are early days for the fund however. Like Chou’s funds and my approach (copying large-cap Canadian companies for my own portfolio), let’s see what the long-term results will be.
While I don’t believe in mindlessly copying the trading moves of successful investors or ETFs themselves, some copycat investing moves have merit. If nothing more they can provide insight into what makes a fund manager great, why a particular ETF has performed so well over time, and if nothing more, scratch the surface of what makes some billionaire investors so revered.
Regardless of the investing path you choose take time to determine a financial plan first, then consider the products for that financial plan thereafter. Understand all investing strategies come with risks. Owning 100% stocks has risks. Owning a handful of ETFs has risks. Owning bonds has risks. Holding cash also has risks.
With copycat investing you could very well get wealthy eventually. Depending upon how you invest copycat investing could also make you poor in trying.
What’s your take on copycat investing? Have you tried to follow fund managers, mirror institutional investors, track the index or follow another strategy?