Copycat investing
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.
Thesis
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.
Note: Did you know the top-15 holdings typically comprise about 45% of the assets in Canadian ETF XIC?
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.
Copycat takeaways
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?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I don’t think it’s good to copy fund managers as I believe they have different motivations due to their compensation packages. They don’t make money from the fund per say, they make money on the fund’s short-term performance usually.
As for billionaires, there is something to be said about learning from them but then again, we usually gravitate towards those who think like us so you are essentially looking for someone that will validate your thought process. Unless you are willing to change your ways 🙂
When it comes to Canada, everything is limited … Not many companies and a small market. Our large companies with the banks are not as big when it comes to the US market. I will echo another commenter, most mutual funds or ETFs will have the same Canadian Blue Chip stocks anyways …
“When it comes to Canada, everything is limited … Not many companies and a small market. Our large companies with the banks are not as big when it comes to the US market.”
Agreed and this is why I’ve long since decided to own the same companies that the big ETFs own directly. Thanks for stopping by.
Research & more research, learn from all of the ‘copycats’, build your own, paper trade before investing.
Many folks wont buy funds, ETF’s, ETN’s, closed end funds, PPN’s, split share corp or even preferred shares or Bonds – yet when it comes down to it, most all the money managers of every fund either inside or outside the banks are copycats. The make up of what they use OPM to invest in varies slightly, in the end they all look the same.
As an individual investor that gets it right may copycat/mimic or do a slight variation to pick companies they know or have a particular liking too – to the flavour of the week or month. What was that some money manager/analyst guest saying on CNBC or BNN?
Let me give you an example, take the US market with the huge selection choice of fund managers, fund types, as many ETF’s that could make you dizzy. So I looked at etf.com, simply typed in the dow jones index ‘symbol DIA’ to see the top 30 companies are what most portfolio managers have peoples money in. The same with the S&P ‘symbol SPY’ or the Nasdaq symbol ‘QQQ’. All of these pay dividends as well each of them have options on their underlying stock symbol.
So for those folks that have built there own individual portfolio of 10, 25, 50 even 100 individual stocks, bonds, funds, I say great & trust that it works for you.
You raise a interesting point that at the end of the day – at least in the Canadian market – many money managers are copycats to some degree.
The number of U.S. ETFs is dizzying for sure. For me, and my investing approach, there are only a handful or so I would consider so that makes it easier for me. Thanks for being a fan John – good to hear from readers.
My fear with copycat investing is that the copycat investor won’t actually understand what they’re buying and the risks involved. You have no idea why a particular fund manager has made a purchase, you only know that they did.
There is also a lag in reporting that could make a difference between returns of the manager and returns of the copycat.
I admit, it’s neat to follow the general strategy of these fund managers, but I wouldn’t blindly copy their investments.
Exactly what I was thinking. I think copycat investing just enables people to skip the basics and blindly buy whatever the successful investors are in on right now. Learning the fundamentals and knowing why you are purchasing a security is important. But I guess you could hypothetically ride the coat tails of these big players for the remainder of your investing career and never have to learn. Just my two cents.
I think learning from money managers, ETFs, other individual investors has great merit as long as you learn from them to tailor your own investing goals and objectives. Good to hear from you Dan.
I wouldn’t blindly follow them either Owen. But I do learn from what works and try to make my own financial plans/investing decisions accordingly. Cheers.
I was actually browsing through the latest 13F’s last week. I think it is useful to see what the big guys are buying. I also like to check the financials of companies they are purchasing, especially if it is a smaller one I have never heard of. I think it sharpens my stock skills.
I do my own thing though.
Like my post indicated, I think following others to a point can be wise if only you learn to understand what could work or not work for you. Otherwise, blindly following any advice in life could be rather bad.
Thanks for visiting and hope to you see you here again.
There is probably some logic and positive results one can expect by taking the time to access and then establish a course for your investments, by doing some of your copycat suggestions. I don’t know if it would work or not, but if one is willing to put in that much effort and time, why not develop your own or learn enough about investing to establish an investing strategy.
How often have you heard the phrase “Do as I say, not as I do!” There is good advice available from various sources: Books, Blogs, General Internet, Financial forums and even some of the Financial News. Don’t try to copy what others have done, but learn from their advice and opinions and decide on a strategy that suits you personally.
I heard that a few times when I was growing up: “Do as I say, not as I do!” 🙂 Kidding aside, absolutely and that’s really the essence of this post – personal finance remains and will always be – personal. Learn from others, figure out your plan, tailor it and monitor it to meet your needs. Thanks for being a fan cannew.