When searching for good companies to invest in, it can be difficult to put together a satisfactory portfolio of stocks that meet your well-defined criteria. It’s tempting to copy a famous investor like Warren Buffett and invest in whatever they own. In theory, this would give you the same return as whatever they’re getting, as you’re effectively betting on their portfolio. In practice, however, the ‘copycat strategy’ breaks down. Not all the information is given to the investor, and this makes it difficult to execute the copycat strategy effectively.
Challenges for the Copy Cat
A major issue is that the copycat would not have knowledge of when to buy and when to sell their stocks, they would know much later, after the portfolio’s original constructor decides. This lag obviously leaves the copycat vulnerable to quick price changes and guarantees that their returns will be different to some degree.
An even bigger problem arises when trying to copy a portfolio that uses more complicated management techniques. A stock position may offset the risk of another stock position. They may have ample diversification that needs to be maintained in order to meet their goals. If a copycat doesn’t completely have these exact positions in the right amounts, they are exposed to risks that do not worry the original constructor and manager of the portfolio.
The copycat might also find that there are simply just too many positions to copy! Ken Griffin’s hedge fund, Citadel Advisors, has over 5,000 holdings. The biggest individual holding barely makes up just 1% of the entire portfolio.
It also seems as though copying another portfolio is not such a great idea simply because you do not know what the original constructor is thinking. This might not matter much if you currently hold their exact portfolio, but the ambiguity of their future moves will leave the copycat in the dust.
Sometimes it May Prove Useful
Inspiration could still be gained from another investor’s portfolio. If you see something intriguing, it may be worth engaging with that particular stock, but only after knowing why you’re involving yourself with it. The times when it may pay to pay attention are cases in which the target portfolio is relatively simple, and easily copyable. Since each stock takes up a large percentage of the highly concentrated portfolio, you know that the portfolio manager is confident in their decision. Even with this scenario, however, you do not rid yourself of other risks that I previously mentioned. The prudent investor is careful not to copy recklessly.