Coattail Investing Basics
Coattail investing, also known as copycat investing, is an investment strategy where investors try to replicate the results of others who already have a proven track record of success. In effect, investors look at what other successful investors are doing and try to follow suit.
For newer investors, this method has some obvious advantages, and can help ease the learning curve a bit. But, of course, there are both benefits and drawbacks, and it’s helpful to know who you’re able or should perhaps try to replicate, as well as the risks involved, rather than choosing some coattails to ride at random.
Key Points
• Coattail investing involves mirroring the strategies of successful investors.
• Activist investors, money managers, and large corporations are common targets.
• Information for coattail investing can be sourced from SEC filings and financial news.
• Risks include losing money as a result of following less experienced investors or those with different objectives or risk profiles.
• Personal due diligence and a long-term perspective are essential.
How to Be a Coattail Investor
For the most part, coattail investing incorporates a buy-and-hold strategy, where an investor buys stocks and holds them for the long term, such as 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 how investors (those managing more than $100 million) have invested their money.
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 investing 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.
Some brokerages may 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 asset 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 is executed, the most profitable opportunity may have already passed. Buying and holding takes a long-term time horizon or 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 financial professionals 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 probably the least risky option for investors. But bonds and cash have their risks, too, such as interest rate fluctuations and inflation. This has led some companies to look elsewhere for returns, often in the form of alternative investments.
Unlikely Visionaries
Following more nontraditional investors — people outside the financial world who have made successful investments — could entail more risk than following activist investors or proven money managers, but there can still be insight to be gained.
That may include professional athletes or social media influencers. There are numerous examples of both who have made what turned out to be successful investments of various types. Of course, even if you start to mirror an athlete’s or influencer’s portfolio activity, there’s no guarantee that they’ll continue to make wise choices.
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. Or an investor may follow someone who has a different risk profile than they do. 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, like a robo-advisor of one type or another, 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
Coattail or copycat investing is a strategy that involves mirroring another investor’s market moves. Copycat investing could be pursued in almost any fashion imaginable. It’s possible to follow anyone for investment insights, using their trades as a game plan.
Investors with an interest in pursuing coattail investing, however, would do well to consider sticking to tracking these types of people and their portfolios. While it can be useful to watch and try to learn from others with more experience, matching their actions exactly could bring a false sense of security to some investors, reducing their sense of the personal responsibility involved in researching investments and deciding when to buy or sell.
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