The following feature is by investment expert Rufus Mwanyasi.
When billionaire investor Chris Kirubi was reported to have bought Sh2 million worth of Kenya Airways shares, I could not help but wonder whether retail investors would copy his moves despite the fact that the airline is still in financial doldrums.
As I pondered over the issue, I began to question whether copycat investing as a business strategy, pays off.
Parody investing, as the name implies, refers to the strategy of replicating the investment ideas of the successful or super investors. The strategy, also known as coattail investing, involves riding on the coattails of those who presumably have much more investment prowess.
The practice of copying successful investors has long been in existence. Investors such as Warren Buffett have over the years attracted a host of copycats and it is easy to understand why.
From 1965-2005, the famous investor produced an annual average return of 21.5 per cent, which is double the return of the S&P 500 – including dividends – over the same period.
Locally, investors who replicated Mr Kirubi’s move into KCB in the month of July (2013) would have at least gained seven per cent through the end of that year and a further 23.5 per cent in the following year.
Similarly, investors who exited Britam soon after it was reported that billionaire businessman Jimnah Mbaru, had offloaded half a billion shillings worth of stock in the insurance giant last February, avoided steep losses in the stock.
Britam has lost over 40 per cent of its value year to date. So, is copying successful investors a viable strategy?
The answer really depends on a range of factors. First, copycat investors ought to be prepared to stick with a strategy for many years if they happen to mimic an investor with a long-term perspective.
This means losing patience and abandoning the strategy prematurely may result in substantial losses. In addition, most copycat investors do not share the high level of risk tolerance often associated with successful investors. Think Kenya Airways.
Secondly, a stock may have moved significantly between the time it was acquired (or disposed of) by the super investor and the time this news is made public. This has an adverse effect on the stocks’ risk-reward profile for the copycat investor.
Lastly, the copycat often does not have the funds to fully copy the super investors’ full portfolio. Some investments usually mirror a small portion of the super investors’ portfolio; for example they heavily invest in some holdings and ignore others entirely.
Unfortunately, that is where trouble occurs – especially if one or more of those core holdings head south and or because the portfolio is not adequately diversified.
These factors show that there is no sure-shot strategy of investing and therefore before any investor rushes off to mimic any super investors’ portfolio moves, they should consider the other side of the coin.
However, if this is a strategy one chooses to pursue, they should ensure following common-sense measures such as patience, diversifying with different sectors and conducting their own due diligence.