Why You Can’t Copy the Pro Investors

A common perception in the game of investing is that ‘if you can’t beat them, join them’. This refers to the fact that if you can’t beat the pro investors such as Warren Buffett or George Soros using your own investment capabilities, why not just buy what they buy and sell what they sell?

Let me make this clear and simple. You can’t copy them. It’s not that you’re not allowed to invest in whatever the Oracle of Omaha is investing in. Sure you can look Berkshire Hathaway’s balance sheet and place a buy order into the stock market for everything that Warren’s holding. But by duplicating the investments of those world class investors, you’re guaranteed to lose money.

Try copying Warren Buffett? Fat chance.

Warren Buffett on his company’s quarterly report states clearly what investments and stocks his company is holding. So let’s make a scenario where mom and pop see Berkshire’s balance sheet,  and buy everything that was printed on the balance sheet. So now, you have mom and pop who may have bought, oh, I don’t know, say Disney stock for $50 a share, because they noticed that Warren Buffett bought it. But what they don’t know is that Warren Buffett bought into Disney stock at $30 a share! Now he’s trying to sell his entire position in Disney stock!

My point is, timing in investing is everything. The price that Warren Buffett invested in certainly won’t be the price Buffett-copycats will invest in. And price you paid for your investment will determine how profitable your investment will turn out to be.

Also, who’s to say that Warren Buffett never lost money? What if in the the future he stumbles big, and buys a stock that goes bankrupt? Are you going to follow him over the cliff?

Try copying hedge fund managers? May God help you.

Most hedge funds don’t publicly disclose what positions they have in the financial markets. So for a lot of the small guys out there, it’s impossible to copy the hedge funds. Many hedge funds only send their portfolio balance sheets to their investors, hence the public does not know what stocks they’re buying or selling. However, a lot of fund managers like to leak their positions, such as Barry Ritholtz. Barry often comes out and says “I’m 30% cash!”

Now here’s the trick. When Barry says he’s got 30% of his portfolio in cash people misinterpret his statement to “he’s 70% long and 30% cash.” That’s not true. This statement means that he’s got 30% cash, and the other 70% is divided into short positions and long positions. So next time your favourite fund manager says that he’s 10% cash, don’t rush to call your broker and buy SPDR. For all you know, he could be short 90% of his portfolio!

So even if George Soros decides to hand you a golden tip, how do you know he’s not wrong? Great investors have made big (and sometimes fatal) mistakes before! So don’t copy those famous investors and hedge fund managers. Always do your own homework.

11 thoughts on “Why You Can’t Copy the Pro Investors”

  1. As rightly pointed out investment strategy depends on risk profile which varies from persons to person.We need to identify this risk appetite before going ahead.

    Nice article and thank you.

  2. Never copy blindly. I would study in detail what Buffett buys. If i like it, then i put it in my watchlist and wait for the prices to come down below his buy price. I’d also look at the terms that Buffett got in with. If he gets special dividend or dome goodies, then i’d insist on bigger margin of safety.

    You’d be surprised, those stocks that warren buys more often than not will fall below his buy price and offer good entry point. Again that’s if you have done you due diligence.

  3. Very true. Plus, it’s not as though the pro investors announce their every move the moment they make them. By the time mom & pops hear about what’s happened, things are different.

  4. This is such a good point. Rather than being late to the party trying to copy the big boys, our time would be better spent learning how they go about conducting research! Trying to buy what they buy, even in the same proportions, won’t work because of timing, and our different risk aversions!

  5. Very good advice. Timing is so important when deciding what to invest in. If you want to invest in what pros have already purchased, you have likely already missed the boat!

  6. Very solid advice. There can be quite a time lag before positions are disclosed by some of the big funds or investors. Plus there may be some exceptions that allow them not to disclose.

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