I wanted to answer above simple question on basis of data, hence started working on it. Tried collecting past 2 years’ public data of listed companies(market cap below 5000cr.) and noted if renowned investor(like Mr. Ashish Kacholia, Mr.Vijay kedia etc.) bought considerable stake into the company. I am not aware about data science much, but have simply plotted returns(same day, next day, next 2,3,4 days, week, month etc.) and expectancy of data points to get a sense of what maybe the best time period if one wishes to piggyback off of such investors. Please check right side columns for the distribution plot. Sheet link below:
Appreciate if someone with data science experience analyse and provide their feedback on it, members opinion on it.
PS: It is not an investment/trading recommendation and I have done it just as learning experience. Thank you.
Yes true about biases. I tried to be neutral and collect names of popular investors from internet (vs the ones I have seen causing price spikes), also tried to run it through various names under market cap 5000cr. Please let me know if you still see any bias, improvement, conclusion etc. Regarding data collection, I just checked public data and superstar portfolio section of Trendlyne:
Just put it in Google sheet and fetched historical prices through Googlefinance api.
I am not a data scientist and can’t find any particular result for the data presented, but here are some of my observations regarding the approach in general about coattail investing.
Percentage of portfolio
Many investors put a small amount of portfolio into a company just to get a jist of it. It is insignificant to them but we take that as a faith of confidence and put a significant part of our portfolio in these smallcaps thereby taking a higher risk.
Only companies where an investor has more than 1% of the company shares have to be disclosed to the exchanges. Even if the investor has a very large position in a large cap company but it falls below 1% of the total shares, they don’t have to disclose and we don’t know the investors full portfolio.
Big investor buying gives a false sense of security regarding the company and we tend to break our own rules when investing in them. Most of the time they are right about a turnaround and company financials change for the better in a few quarters. But sometimes they are wrong or just want an exit.
Value versus growth investor
It’s better to follow a growth investor than a value investor as the value investor will sell and exit when enough retail interest is generated as they require liquidity for exit, specially in small caps.
They can accumulate a significant number of shares in bulk or through company allocation in one go. This is how they acquire illiquid stocks after special situations. Retail investors can only come in when a significant player decides to create liquidity.
1.Percentage of portfolio: The strategy is more like coattail trading the momentum generated in particular stock when such investor name is disclosed in filing. The holding period will be just few days, if we see the distribution plotted at right in the sheet, my assumption is 3 day period maybe having best expectancy of 1.44% for 3 days
2.Disclosure rules: That is why I tried to take typical small/mid caps with market cap <5000 crores.
3.Very good point. That is why the aim is to trade the initial excitement/momentum caused when such investors invest in the companies. I do not intend to “invest” based on their investments.
4.I feel we do not need to worry about it as we are purely trading it and not investing.
5.True. Here strict loss controls are necessary to follow this strategy with position sizing.
This is a weird target for trading. For a 1:2 risk return the stop loss will have to be put at -0.72%. The volatility will ensure that you hit stop loss every time. I maybe wrong here, don’t have much experience in trading over such short period.
yes great point, could you please suggest if one wants to test this strategy, how shall I proceed? first modification I can think of is capping the loss at some x% and then see the return expectancy as we generally wont hold onto losers indefinitely right? also can you please explain how did you arrive at -0.72% stop? wouldnt this param depend also upon the hit rate/% of profitable trades? Also there are some methods one can try, like buy immediately after such disclosure/on open(if disclosure is after hours/before open) and consider that price as a drawdown reference point vs what I considered is closing price of day.
There are many ways to go about it like buy when they buy and sell when they sell. This will give returns as close to investor returns as possible. Trailing stop loss can be used with no target in mind. Moving average crossover can also be used. Chose whatever you are comfortable with. Fixed percent of target and stop loss is generally not advised for small caps due to volatility.
The stop loss I mentioned was based on half of your target value of 1.44%.
If you use this strategy, please provide feedback.
By investors I mean superinvestors or money managers. And, Mungerism is just a way coined by many managers. It refers to holding company for prolonged period of time, the only selling point was change in competitive landscape or egregious valuations or better opportunity. As you said, value investors tend to buy 50 cents dollar bills and sells when it reaches 90 cents. Now, philosophy has been shifted, they even pay more than 100 cents and wont even sell it at 200 or 300 cents.
Plus, as we know, Munger is the best philosopher of 20th century. His mental models are not only for investing, but they are for life outside investing.
So people started to coin the term, Mungerism for dear life and investing!