We all have our personal favourite personalities who we look up to, try and learn from and want to be like. Having a role model and wanting to be like them is great and I am all for it. After all, having a role model helps to create a personal benchmark against which one can test and evaluate oneself, but it becomes dangerous when we overdo it. In fact people sometimes say that they want to be the next someone and a better version of their role model. Simple question. If you want to be the next someone and a better version of someone, what about being the first you and the best possible version of your own self?
The same thing applies to us as investors. We all have our personal favourite investors too, some of us like Buffett, some Munger, and others someone else. And we sometimes get so lost and caught up trying to be like them that we copy their every move, which sees us make simple but near fatal mistakes. Today I’m going to throw light on the most common mistakes people make while copying their favourite investors, and hopefully this helps you steer clear of making them.
The first mistake that people make when copying marquee investors is to choose the wrong kind of investor to emulate and copy. Picture this. An investor who likes to frequently churn his portfolio by buying and selling periodically tries to copy Warren Buffett who believes in buying a few select stocks and holding on to them for years on end. There is a clear clash of philosophies here. This would be like a glutton trying to copy the eating habits of a fitness freak or the other way round. The Ultimate result is almost sure to be that the one who copies neither does a good job of being like the role model being copied, nor a good job of being themselves. And because of this, the one copying ends up going nowhere instead of improving as an investor It is of essence to copy someone who is similar to us in terms of personality and investing philosophy.
We sometimes go out and buy truckloads of a stock in one go if that is what our favourite marquee investor does. We think that the marquee investor has done all our work for us by cherry picking the stock and bringing it to us. But what we fail to consider is that most of our favourite marquee investors are already HNIs or High Net Worth Individuals which means that they automatically have a higher margin for error when they enter a stock. Look at it this way. When a marquee investor identifies a stock, he or she is probably identifying it pretty early which allows them to bet big on the stock because it is so cheap. By the time the stock comes to the public eye, it would have already run up a bit because of all the smart buying that has happened beforehand, effectively reducing our margin for error.
Moreover, when the marquee investors buy big they are probably putting just a fraction of their wealth into the stock because they are already HNIs. So it won’t make that much of a difference to them even if they end up losing on the stock. But for everyday people like you and me, betting big on a stock in one go probably means putting more money than we can afford to lose into the stock, which could be disastrous if things don’t end up going our way, and when troubled times for the stock inevitably come along, we may not be capable of displaying the kind of temperamental fortitude that they do for long periods of time. And in the event that they book out of the stock while we still hold it, it leaves you and me to bear the huge losses and the brunt of the negative sentiment around the stock as a result of the marquee investor selling. It is always better as a regular retail investor to properly research the stocks that pique one’s interest and build positions in a stock slowly and steadily in a phased manner over a period of time. It is both easy on finances and makes damage control easier if things don’t go our way.
This works the other way round too. As in we may not buy certain stocks just because our favourite marquee investors don’t buy them. This is just as detrimental as buying stocks endorsed by marquee investors, in huge quantities. Warren Buffett for example has always said that he would never buy into technology stocks, because technology falls outside his circle of competence, and invests heavily in insurance stocks because it falls squarely within his circle.
Of course Warren has recently bought into Apple, but that is because Apple is now more of a consumer company because almost every American household has at least one Apple product, therefore bringing Apple back within Warren’s circle. Now, lets say a software engineer who is Warren’s fan may also buy into insurance companies and not into technology stocks just because that’s what Warren does. This is the most hare brained thing that the software engineer can ever do, because for him, technology stocks would fall squarely within his circle of competence and insurance stocks, well outside it. Maybe he just forgot that the circle of competence was a concept popularised by his idol, Warren Buffett himself.
That brings me nicely on to my next point. Though I have rambled on until now about why you shouldn’t blindly follow your favourite marquee investors, there are also a lot of things that are worth copying from them. Once you find a marquee investor who has a mentality and investing philosophy that is similar to yours, try and learn what kind of groundwork your favourite investor does when checking into a stock, because you can then do the same kind of groundwork the next time you’re looking at a stock. Try and learn about the measures he or she employs to keep calm during tough times for a stock, you can then use some of those techniques the next time some of your stocks go through a tough time. Try and look at the strategies they employ for selling or exiting a stock, so you have a better idea when to sell your next stock, and last but not least, any life lessons you can pick up and copy from them may prove invaluable over the course of your lifetime, and thus make you the best possible version of the first you and not the next someone.
So to put it all together, just try and be yourself as an investor and learn as much as you can from like minded marquee investors, but never blindly copy them. To use a simple analogy, just because you may be a mouse compared to a lion of a marquee investor, and you want to be like the lion, don’t start trying to learn how to roar and grow claws. Remember it was the mouse that rescued the lion and earned its respect in the children’s story we all love. In the same way, who knows? Once you trump the markets and make a name for yourself, a day may even come when you earn the respect of your favourite marquee investors, and if you’re lucky, they might end up wanting to copy you.