Last Updated on 5 months by Mohit Pareek
Copycat investing is rapidly gaining popularity among retail investors. Selecting the right stock and that too at the right price is one of the most difficult tasks in the stock market for any investor.
It requires skill, experience, research and proper knowledge of the stock market.
Everyone who invests in the stock market is aware of the fact that investment in the stock market requires a lot of research, fundamental analysis, in-depth knowledge and understanding of the business of companies. Choosing the right stock and that too at the right price is not an easy task. How much hard work it takes, but still there is no guarantee that we will be able to earn profit or not. Forget about profit, more than 90% of investors lose money in the stock market.
On the other hand, there are many investors who have made a lot of money in the market. These investors not only made money but also left their mark in the market. These big and successful investors have many years of experience in the stock market. They do a lot of research, fundamental analysis before investing their money in any stock.
But small retail investors like you and me neither have that much time nor experience.
Then what should small retail investors do?
Many retail investors start following these big investors. What the big investors buy, the retail investors start buying, what the big investors sell, the same retail investors start selling.
Retail investors neither have that much time to research the stock market nor do they have enough skill, resources and experience to choose the right stocks.
Therefore, many retail investors start copying the portfolios of successful investors or institutional investors to build their portfolios. For many retail investors, imitating successful investors or institutional investors who have done a lot of research before investing their money seems like the right approach. There is no doubt that these successful investors and institutions have already done a lot of research and have in-depth knowledge of the particular company they are investing in.
Many investors find copycat investing to be the easiest and most efficient way to invest in the stock market. Just follow any successful investor or any institutional investor and find out the stocks they invest in. If you follow them, you don’t need to do so much research and you can take advantage of their due diligence and research knowledge.
There are many successful investors in the investment world like Warren Buffett, Peter Lynch, Rakesh Jhunjhunwala, Radhakishan Damani etc. We admire them so much that we start imitating them. If they buy a stock, then we also buy that stock thinking that it will be a good investment.
But copycat investing sounds more easy and profitable in theory but the reality is different.
What is copycat investing?
Copycat investing is a strategy to track successful investors or investors’ portfolios. Track their buys and sells and replicate it across your portfolio.
You don’t need to copy their entire portfolio, but stocks here and there (based on your personal preference) and stocks to create a portfolio of stocks that can be referred to as a copycat portfolio.
How to do copycat investing?
Thanks to regulations and media coverage, retail investors are quickly becoming aware of where big investors are investing their money.
A company is required to disclose the names of all the shareholders holding more than a 1% stake in the company.
Mutual funds have to disclose their portfolio every month. It allows investors to gather information about which stocks have been bought and sold by mutual funds.
Media outlets, business journals, financial websites also disclose the portfolios of large investors.
You can track block and bulk deals in the stock market. When there is a block or bulk deal in NSE or BSE, the stock exchange publishes the data of the investors, traded stock, and the price at which the trade took place. A bulk deal occurs when the total amount of shares traded exceeds 0.5% of the equity shares of the listed company. A block deal is a trade of more than 5 lakh shares of a listed company or a minimum amount of Rs 5 crore.
Benefits of copycat investing
Many copycat investors made significant fortunes simply by copying the portfolios of successful investors or institutional investors. But many investors also suffered huge losses due to copying the portfolio of big investors.
The advantages of copycat investing are:
Easy to earn money:
Copycat investing is one of the easiest ways to make money. All you need to do is pick a well-known investor and follow his buying and selling moves.
Copycat Investing saves you from in-depth analysis and a lot of research. Successful investors add stocks to their portfolios after a lot of research and analysis. You don’t need to do this kind of research and you get good quality stocks.
Successful investors and institutional investors spend a lot of money developing a team to find the right stocks. You can get the benefits at no cost by copying their buying and selling activities.
The success rate is high:
The chances of success in this method are very high. Big investors are already familiar with the stock market and are more experienced. Hence following these investors increases the chances of success in the stock market.
Disadvantages of Copycat Investing
Copycat investing has its disadvantages. Before blindly following any investor you need to understand the dangers.
Different financial interests:
Everyone has a different financial goal. There is a high chance that your financial goals do not match with the investors you follow. In this case, you may have to suffer loss.
There is a possibility that big investors invest in any stock for a long period but you do not have that much patience and your financial situation does not allow you to invest large amounts in the long run. In this case, you will have to liquidate your investment much earlier, and you may incur losses due to selling your stocks earlier.
Many retail investors want quick money in the stock market and some investors want good returns in the next 1-2 years. In this case, you may not follow the strategy of long-term investors like Warren Buffett, who believes in staying invested for a lifetime.
Mistakes by Experts:
Experts are humans too, they can make mistakes too. Blindly following experts can have disastrous consequences for copycat investors. Experts have the resources, knowledge, and experience and can easily tolerate and recover from losses, but retail investors who blindly follow them can lose all their investments.
No exit information:
Investment gurus never mentioned when they were going to sell their shares. Sometimes they sell their shares but retail investors continue their investments without knowing about it. In such a situation, retail investors suffer huge losses.
Many people are following investment gurus:
Successful investors are followed by millions. His followers keep a close watch on every move made by successful investors. In this technologically advanced world information is transferred in less than seconds, resulting in stock price fluctuations. So any kind of delay, even for a short period of time, can cause a huge loss.
Suppose you get information that Rakesh Jhunjhunwala has bought shares of a company, but after his purchase, the price immediately starts rising and now you have to buy that share at a higher price. Since you have bought the stock at a high price, you may incur a loss.
Should you try Copycat Investing?
Many investors made millions by copying their favourite investors, but there is no shortage of investors who lost all their investments.
Before you start copying someone, there are some important points that you should keep in mind to protect your investment from potential losses.
Do not copy blindly:
The purpose of investing in the stock market is different for different people. Some want quick money; others want long term wealth creation. Some people are interested in capital gains while others are interested in dividend income.
Therefore blindly copying someone else can be dangerous for you. This will not serve your purpose of investing leaving you dissatisfied and disappointed. So, make sure that any investment you make should be in line with your investment goals.
Do your analysis:
Instead of blindly following someone, you should do your analysis before investing. There is no doubt that successful investors and institutional investors have more resources and experience than any individual retail investor.
But if you analyse the stock before investing, you will get to learn a lot. After careful analysis of the stock, you will know about the business, management, financial performance of the company. Additionally, you’ll feel more confident about your investments because you did your research.
If we leave aside a few investors, most of the copycat investors have never made big money in the stock market. One cannot become successful in the stock market just by blindly following his ideal investor, reacting to various news and investing without doing any fundamental research and analysis.
Copycat investing seems good in theory but the reality is totally different. Making money by copycat investing is not easy, if not impossible. Copying stocks of successful investors also have their own risks that most people never understand.
If you have the time, skill and dedication to do a detailed fundamental analysis of the stock market, it is better to do it yourself. Or it is better that you seek advice from competent research advisors who are experienced and are using smart and well-proven research strategies to locate the right stock for you.
If you do not have time to do fundamental research, you can also invest in any mutual fund as per your needs and financial goals. Experienced fund managers in mutual funds will manage your portfolio. You don’t have to worry about day to day market fluctuations.
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