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Coattail Investing Basics

December 22, 2020 · 5 minute read

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Coattail Investing Basics

Coattail investing, also known as copycat investing, is one of many popular investment strategies. With copycat investing, newer investors try to replicate the results of investors that already have a proven track record of success.

For the most part, coattail investing requires a buy and hold strategy, where an investor buys stocks and holds them for the long term—a period of several years or several decades. Publicly available information from the financial press and the Securities Exchange Commission (SEC) website can give copycat investors information on where investors (those managing more than $100 million) have put their money.

How To Be a Coattail Investor

Coattail investing begins with choosing what person or group to watch. Then, based on their investment choices, a copycat investor can choose to replicate those strategies either in whole or in part.

In most cases, the average investor probably doesn’t have enough capital to keep up with big money managers and institutions in an exact 1:1 ratio. But watching what they buy and sell (and when), and acting accordingly to some degree, is the heart of coattail investing.

While investors used to have to manually follow their favorite investors by searching the SEC website or elsewhere, today certain online services exist that help to automate the process.

GuruFocus, for example, is an investment research company that provides easy access to the current holdings of many top money managers and activist investors.

Some brokerages even offer “mirror investing” services that allow investors to set their own portfolios to make the same exact trades that their favorite investors make, with customized allocations.

Who Do Coattail Investors Follow?

When attempting coattail investing, following those who adopt a “buy and hold” strategy could prove beneficial. Because markets move fast, by the time a trade gets reported, the most profitable opportunity may have already passed. Buying and holding takes a long-term perspective, meaning it could take some of the timing and guesswork out of the equation, making it easier to realize profits.

A copycat investor could choose to copy just about anyone. That said, there are a few choices most commonly used by those who are successful at copycat investing. These include professional money managers and other investors who can influence markets simply by announcing their positions.

Activist Investors

Activist investors are known for causing stocks to rise when they reveal their own investments. These influencers may be ahead of the curve on investment trends, and financial news media reports on the actions of these investors regularly. Activist investors also often publicize their own moves through blog posts or press releases as well.This tends to make it easy for coattail investors to keep up and act accordingly.

Money Managers

People and institutions that manage over $100 million are required to report their holdings to the SEC. The SEC then publishes this information, making it public. Rather than hire a money manager, some copycat investors simply search for investments that large money managers have made and then choose those they think would be best for their own portfolios.

Large Corporations and CEOs

Successful companies that have accumulated cash reserves are challenged with figuring out where to put that money—and coattail investors sometimes follow suit.

For many years, holding cash and bonds was the safest option. But in today’s economic environment of ultra-low interest rates (even negative interest rates in some parts of the world, e.g. Europe and Japan), bonds don’t yield much of anything, and cash can lose value quickly due to inflation.

This has led some companies to seek out alternative investments.

Michael Saylor, CEO of MicroStrategy, a tech company that invested in bitcoin, said that holding onto $400 million in cash felt like “sitting on a melting ice cube,” referring to the effects of inflation decreasing the purchasing power of government currencies issued by central banks.

Unlikely Visionaries

Following more nontraditional investors—people outside the financial world who have made successful investments—might not be as profitable as activist investors or proven money managers, but there can still be insight to be gained.

For example, the famous basketball player Lebron James had a big win investing in Blaze Pizza long before anyone knew about it. Blaze has since become the most popular pizza place in America, according to some sources. James reportedly made about $35 million off of a $1 million investment in about five years.

Social media influencer and CEO of VaynerMedia, Gary Vaynerchuck (also known as Gary Vee), appears to have a knack for knowing what social media and tech trends will play out in the near future. He had the foresight to be an early investor in companies like Twitter, Uber, Facebook, and other tech startups that wound up making investors a lot of money. Even with these success stories, however, past performance doesn’t guarantee results.

While watching athletes or celebrities for investment advice might not be something anyone would recommend, it can bring a unique perspective from outside the “echo chamber” and herd mentality of those within the financial world. People who come from outside that world tend to have a different outlook and could see something that others miss.

That said, an investor who looks to popular culture icons for investment advice does run the risk of racking up significant losses. It might not be realistic to establish an entire portfolio around this idea. It’s widely believed that in coattail investing, investors should follow only the most esteemed professional money managers.

What Are the Risks of Coattail Investing?

The main risk of copycat investing is that one might end up following an investor who loses, rather than gains.

There could also be psychological risks, such as thinking that because one is copying a successful investor’s moves, all personal responsibility has been taken out of the equation.

In reality, investing always comes with risk and always requires investors to conduct their own due diligence. Unless a copycat investor is using an automated program that buys and sells as soon as a big investor announces their trade, they will still have to stay on top of their own investments, even if the decisions of what/when to buy/sell are all recommended by someone else.

The Takeaway

Copycat investing could be pursued in almost any fashion imaginable. It’s possible to follow anyone for investment advice, using their trades as a game plan.

Most of the time, this strategy is used by following professionals in the finance space —such as established money managers, billionaire investors, and activist investors. Investors with an interest in pursuing coattail investing would do well to consider sticking to tracking these types of people and their portfolios.

Copycat investing doesn’t have to involve picking a single person or entity and mimicking their every move 100% of the time. There’s no set standard for this type of strategy, either.

But watching others with more experience and preferring to match their actions more often than not can bring a sense of security to some investors. It can also reduce some of the personal responsibility involved in researching investments and trying to decide when to buy or sell.

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