Life is all about heroes and icons. You have heroes whom you love to imitate. You love cricketing icon Sachin Tendulkar or Indian batting great Virat Kohli. You just want to bat like Virat. If you are into films then perhaps Salman Khan or Amir Khan is your hero. You do in real life, what they do in films. You're a copycat. You love imitating your heroes.
But what about investing? You love Warren Buffett and want to be a great investor like him. You are not alone. If you are a fan of Warren Buffett, you can bid to have lunch with him at Smith & Wollensky in Manhattan, as part of an annual auction to benefit a charity that helps the homeless. In 2017, the winner offered nearly $2.7 million to dine with Buffett.
Back home you have ace investor Rakesh Jhunjhunwala. Rakesh Jhunjhunwala holds more than 1% stake in over 30 stocks. His portfolio is more than Rs 13,000 crores. Perhaps you want to be a copycat investor. You want to copy the successful portfolio of Rakesh Jhunjhunwala.
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Let's first understand what is copycat investing. Copycat investing also known as side-car investing is a very popular form of investing. You simply track the investment moves of a famous investor and faithfully replicate his/her buys and sells. It is compulsory for Companies to disclose the names of all investors who hold more than 1% shares.
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You love to imitate the portfolio of a successful investor like Rakesh Jhunjhunwala and track his investments. You keep a close eye on any news/information coming from the stock markets on a buy/sell order placed by this expert investor. You then place the same order, hoping to make a profit from the same set of stocks which this investment guru has invested.
This looks like an easy way to invest. You don't have to pay advisory fees or even do research to identify multibagger stocks.
But is copycat investing safe?
You may find copycat investing an easy way to make money. But...you must be careful. An expert like Rakesh Jhunjhunwala, Dolly Khanna or Mohnish Pabrai may have invested in a diversified portfolio. This is a collection of stocks invested across different sectors. This portfolio keeps him safe from any shocks in the market. This means you have to check the investment gurus entire portfolio.
Unfortunately, you have no idea of this diversified portfolio and this could put your hard earned money at serious risk.
An investment guru has different reasons for buying a stock. He invests based on his financial goals. He might want to hold this stock for a long time and he has the capability to do so. Besides, you don't know at what price this investment guru has made his first purchases. If you want to make quick money in the stock market, copycat investing is a bad idea.
Do you have the capability of staying invested in this stock for the long term?
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If you think investment gurus don't make mistakes, you're wrong. The famous Rakesh Jhunjhunwala took a bet on the 2010 IPO of A2Z Infra Engineers. This was a serious mistake, as the stock lost over 75%, just 2 years after the IPO.
What successful investment gurus do have, is the ability to learn from their mistakes. Their portfolio has more winners than losers. They are able to stick with their portfolio for the long term.
Do you have the ability to correct mistakes and learn from them when making investments?
Before you try copycat investing, know this. If you depend on public sources or social media for tips from investment gurus, you get delayed information. Why will the investment guru tip off the market, before he buys or sells a stock? Won't this push the prices up or down? Always do your homework before copycat investing. Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.