Why not Copy Famous Investors’ Holdings?

  • Reading time:8 mins read

“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.”

Peter Lynch

I remember asking myself early on when learning investing, “Why not just copy Buffett?”. And I think a lot of other people ask themselves that too. I don’t believe it’s a bad question to ask. But going only by going deeper on the question will you figure out why copycat investing is not such a great idea.

Let me enlighten you.

They can access deals you can’t

So you want to be like Buffett? You won’t be able to invest like Buffett. People go to him with deals that others only dream about.

Back in 2011, Buffett was able to purchase $5 billion worth of Bank of America’s preferred stock that came with a 6% dividend.

But he wasn’t satisfied with just that. He also negotiated the right to buy 700 million shares at any time before September 2021 for only $7.14 per share! 

Currently, they’re trading at just over $23 at time of writing. Just a casual deal that tripled his investment in under 10 years. No biggie.

As an individual retail investor, these types of deal will never come up. You won’t have an option to buy such cheap shares with great options. Your access to preference shares would be a pipe dream. You can’t provide stability and prestige to a stock so why would they come to you?

You can do a lot of investments like the bigwigs. You can do a lot of things they can’t. But they can also do some things that you can’t either.

You don’t know why they bought

Say for example your mission is to copy Bill Ackman’s portfolio. The latest update has come out and there’s a new investment on the list. So you go out and buy it immediately. But you don’t know exactly why he bought it. You may think you have an inkling of an idea why. But you can’t really know for sure.

So that’s an extra risk you’re taking there.

Here’s Morgan Housel’s experience following Buffett during 2007:

“The housing market was crumbling, and a smart value investor I idolized began purchasing shares in a small, battered specialty lender.

I didn’t know anything about the company, but I followed him anyway, buying shares myself. It became my largest holding — which was unfortunate when the company went bankrupt less than a year later.

Only later did I learn the full story.

As part of his investment, the guru I followed also controlled a large portion of the company’s debt and preferred stock, purchased at special terms that effectively gave him control over its assets when it went out of business. The company’s stock also made up one-fifth the weighting in his portfolio as it did in mine.

I lost everything. He made a decent investment.

The silver lining is that I learned my lesson. I will never make this mistake again. Experiencing it made me a better investor.

But so many other investors made this mistake before I did. There is a graveyard of investors like me who got burned by blindly following legendary investors without knowing why those legends invested in the first place. Wouldn’t it have been great if I learned from their errors, rather than experiencing the loss myself?

I made this mistake in my early 20s. Every dollar I lost is a dollar that won’t compound for the rest of my life. By the time I retire, this blunder may easily cost me $1 million.”

Why buy something you have no underlying knowledge about? Especially when you’re putting thousands of hard-earned dollars to work.

You don’t know when (or why) they’ll sell

Following on from the last point too. So somehow you have inside information on why they’ve bought. You feel comfortable in their analysis. But what if they change their minds? You’re going to have to wait until the next report before you find out they’ve reduced their holding to zero.

Information Expiration 

If you are basing investment decisions off what they report, those reports only represent a snapshot in time. They could be gradually selling down those holdings. They could be rapidly increasing their position.

If they don’t mention what they’re doing, how the hell are you to know? And if they do mention what they’re doing, should you believe them?

They don’t have to sell

Buffet has permanent capital. He has no short term goals to meet. No one to report too. If you’re a small fund manager and a majority investor plus their investment, you’re shit outta luck. You have to sell your positions. An individual investor? They always advise to only invest money that you can afford to lock away for 10 years at least. But life gets in the way. Unexpected medical bills or a number of reasons may force you to sell your positions. 

Capital base as large as Buffett’s doesn’t involve these problems. Meaning he can be a true buy and hold investor.

They can influence companies

Buffett, Ackman and friends when investing a sizable chunk of money, usually wield some influence. 

Ajit Jain said in 2002 about Buffett:

“’Warren and I might have had a 30-second conversation or a 30-minute one, but he has been involved in every piece of business I have done.”

And if Buffett is giving advice, you listen.

Even if it’s *only* a board seat, it’s a helluva lot more than you can do.

Looking towards great investors for advice and wisdom is good. Copying their investments? Not so much. There’s an element of individuality that you need to have I think.

Step over this line and say that! I’ll kick your butt… at Nintendo.

I believe good investing is simple.

But not easy.