Copycat Portfolios Are Dangerous

September 24th, 2008  |  Published in Investing  |  4 Comments

A recent Yahoo Finance article about copycat investing discusses the dangers of copycat investing, that is, copying the investment portfolios of some successful investors like Warren Buffett. It lists asset diversity, investment horizons, institutional knowledge/research, and cost as the main reasons why copy someone else may be a bad idea.

I personally think that asset diversity and investment horizons, the first two dangers they list, are the most important reasons why you shouldn’t simply copy someone else’s, especially someone as big of an institution as Berkshire Hathaway. Since you probably won’t have Buffett’s deep pockets, you won’t be able to buy enough of each of his assets to overcome the transaction costs. If you can’t buy the whole portfolio, you’re really just gambling with a little added information because Buffett is counting on the entire portfolio increasing, not each and every individual investment.

Secondly, investment horizons for a large firm like Berkshire is different than your horizon. It’s funny, despite what people say, most want to see a stock appreciate within the first 12-24 months. This is backed by a 2001 study: “In fact, according to an often-cited November 2001 study by Gavin Quill (a senior vice president and director of research studies at Financial Research Corporation, a financial services research and consulting firm), mutual fund holding periods in 2000 were only about three years! That is well shy of the more than 30 years that Berkshire Hathaway has owned shares of Washington Post Company. In other words, on average, institutions seem to have much more patience than their individual-investor counterparts do.”

So, read his books and learn how he picks his choices, but don’t try to copy each and every one.

  

Responses

  1. Dodgeblogium » Malta BOMS says:

    September 29th, 2008 at 4:35 am (#)

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    September 29th, 2008 at 5:50 am (#)

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    October 1st, 2008 at 6:02 am (#)

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  4. Patrick says:

    October 13th, 2008 at 2:19 pm (#)

    I’ll also add that by the time you get the information, the buying opportunity may not be the same. Many of the major deals pulled off by BRK and other large funds aren’t announced until months later.