Coattail investing

The world has become a smaller place thanks to technology which these day enables everyone access to quality information nearly at real time, something which in the older days played a great part in returns generated by professional investors / fund managers. In other words, it has become a great equalizer of sorts.

Twitter / Facebook / Whatsapp / Slack among other tools have become tools of collaboration and discussion resulting in better disbursal of knowledge and ideas. But what is also brings to the table is blind belief’s in some one elses ideas / trades and trying to follow them in the hope of easy money (easy give the fact that one doesn’t need to spend a lot of time doing the leg work himself).

When markets are good, these trading strategies / ideas are lauded as the next best thing, but markets being cycles are prone to excesses on either side and when things go wrong, its amazing how fast everyone is quick to blame the one guy who propogated the idea and hence is the person to blame for all the misery.

Following big investors / traders seems a nice idea if your intention is to pick up on the thesis behind their picks, but if its just the picks you are more concerned about, its just a matter of time before you will be sorely disappointed and will have parted with more money than you bargained for.

2015 seemed one such year when a strongly recommended and fancied stock (which manufactures pressure cookers) took a severe beating. Every one, whether he had a position or not, decided that the blame was to be laid at the door of the guy who felt it was a good pick with even suggestions that he was actually selling himself quitely while suggesting that other stay on.

2016 has started with a fancied textile company which is facing a rout similar to one the previous company faced. Unless the company turns out to be a complete fraud, the stock will stop falling and normalcy will return. But those who picked up the stock at much higher levels may need to wait for months or even years before they can get back to their high water mark.

At the beginning of last year, a famous analyst came up with a prediction for Nifty that suggested that 2015 will be the big year (in terms of returns) and while that call came nowhere close to being true, the said Analyst is still very much renowned and continues to be one of the talking heads at business channel. So much for accuracy of forecasts.

Profits and Losses are part and parcel of trading / investing. But if you are investing based on some one’s (paid or free) view, the risk quotient goes up even higher since you have no clue regardless of what happens and taking action is tougher especially when its not going the way one would have wished it would.

I see advisers regularly advising investors to invest only what they are willing to lose while at the same time claiming that only investing in equity can provide one with above inflation returns and its not prudent to invest into other asset classes for history has shown (not in India) that Equities beat others by a long yard.

The very term of being willing to lose means that you cannot risk enough to make a difference to your lifestyle should your selections work great. But if you risk more than what you are willing and do end up on the losing side, you will be faulted for risking too much. Heads I win, Tail you lose.

Warren Buffett has in the past talked about distinguishing between temporary draw-down and permanent loss of capital. When you invest in a ETF / Mutual fund, the risk is generally of the temporary draw-down nature. No matter how worse it looks, the probability is that it shall eventually recover (unless the country goes to dogs, but if that happens, you will have a lot more to worry than the value of your investments) while investing in stocks can result in serious and permanent loss of capital if you aren’t able to exit even as the stock continues to slide down on the slope of hope.

When you follow other people’s trades, you are in affect hoping that the other guy (the guy you are following) is not actually lost but knows the way. But it still doesn’t allow you to risk the kind of capital that will make a big win, a win worthy enough to retire upon. In one of my past blogs, I have written about my 1000 bagger – a kind of return that is very rare and yet, the fact that I risked so little has meant that even that amount I stand to gain should I sell now is too negligible. Forget about retiring, I cannot even go on a dream holiday and yet I have a 1000 bagger.

This year is my 20th year in markets and yet as far as I can remember, I know more people in markets whose biggest wins have come from Business / Real Estate than their wins in market. In fact for many of whom I know, what they risk even today is a small percentage of their total net-worth and this alone ensures that even if everything they touch goes to dust, they can still lead a comfortable life.

Coattail-ing is a interesting strategy only if you have complete knowledge of the guy you are trying to copy. Else, where he will be risking 0.01% of his money, you could end up risking 25% or more of yours. A loss won’t affect him anyways while a loss for you will wipe out a significant amount of your capital.

Social Media provides a interesting platform to learn from but if you were to try and use it as a short cut, you run the risk of getting caught in the middle of a forest with no clue as to where to go next as the light dims away.