A lot of us have heard of the proverb or phrase: “One man’s food is another man’s poison?” This proverb means that one’s happiness is unhappiness to others.
For example, When a student in the class gains the first rank he may be happy but to somebody who failed in a subject, it is much more painful. Likewise, when someone in an office gets a promotion that person may be happy but other persons are unhappy or feel betrayed.
This phrase perfectly sums up the impact of copying another person’s investment decisions in the stock market. Everyone invests in the stock market to make money. And while the end goal is the same, the paths to reach that goal can be different.
Why you should avoid copying others’ investment strategies and decisions.
Take Dimple’s example. She works in an IT firm. Dimple and her manager Vatsal both invest in the stock market. Since dimple does not have the time to conduct her own research, Dimple decides to copy Vatsal’s investment style to keep it simple and easy for herself. However, Vatsal’s investment goals are completely different from Dimple’s. As Vatsal is nearing retirement, Vatsal wants to shift his investments from equities to debt assets. Even in the equity market, he slowly shifted his funds to blue chips to earn stable returns. This is to avoid any risks to his retirement fund.
On the other hand, Dimple has two little daughters. She needs to build up a sufficient corpus to finance their college education 10 years down the line. But if she were to follow Vatsal’s financial plan and avoid equities, she may not be able to reach her goal*
So Honestly, Why should you avoid even portfolio cloning for trading or Investment in general?
A lot of investors and traders try and copy the portfolio of big-ticket institutional investors in order to gain similar results. This might sound like a good plan on paper but in reality, it can be quite dangerous if done wrong.
Think about it!
An institutional investor has enough financial resources to diversify amongst thousands of stocks. A small investor or trader may not have a large number of funds. As a result, the individual trader or investor may copy only a small segment of the portfolio holdings and may not be able to take advantage of the averaging or SIP method.
Let’s understand with a live example / Case Study.
– Mr. X has bought 100 shares of Reliance (NS:) @ 2605 (on 29th August 2022 during the AGM meeting of reliance) with SL of 2550-2560
– Mr. C has copied the trades but due to limited funds buys only 10 shares of reliance @ 2605.
Now as the Reliance AGM was live during the market hours
– Mr. X has done an average of another 100 shares @ 2595…therefore his average price for 200 qty is 2600
– Since Mr. C has limited funds he decided to wait for the outcome of the reliance AGM and then copy Mr. X.
Now on 30th August after the outcome of the Reliance AGM
– we noticed the stock price opening was negative and now Mr. C was worried as he had invested at a higher price and observed Mr. X.
– Mr. X on the other hand has bought another 200 shares of reliance @ 2580 in the morning as part of intraday trades.
– Mr. C wanted to buy reliance but lack of funds and insights of AGM he was unable to average.
– Reliance makes a new low of 2376 and Mr. C gets panicked as the SL was 2550
– Remember, Mr. X has 400 qty of Reliance (200 yesterday and 200 intraday today) and Mr. C has only 10 qty due to limited funds in nature.
Now after a couple of hours we noticed that the share price of Reliance managed to cross 2640 levels.
– hence Mr. X booked profit on the 200 qty bought in the morning to pocket the intraday profit and continue with the holding of 200 qty bought yesterday
– Mr. C was unable to average for intraday and hence missed out on the profits.
If for some reason the stock price would close @ 2600 levels Mr. X would still make a profit on his overall Investment as compared to Mr. C who would end up with losses for the same trade.
So the critical lesson from the above example is to Adopt investment or trading philosophy, not the decisions themselves.
There’s a difference between copying a decision and adopting a philosophy. It is always a good idea to adopt the investment philosophies of great investment gurus. You can always pick up the pearls of wisdom laid out by these investment gurus and use them in your investment decisions. Investment decision-making is a very important aspect of wealth creation. After all, you are putting your hard-earned money on the line. By making the right investment decisions, you can generate wealth for yourself and your family over time.
For example, Benjamin Graham, the father of value investing, has always insisted that each stock has an intrinsic value. The price of a stock may change but its intrinsic value remains the same.
Conclusion:
So, in order to truly benefit from buying a particular stock, you should buy it at a price lower than the stock’s intrinsic value. By doing your own analysis and research, you can pick up stocks at bargain prices while other investors are oblivious of their worth. But in order to do that, you must avoid copying the investment decisions of others. In short, Follow the masters but in the end, you must find your own path since everyone has a different journey.
Disclaimer: The above article is for self-educational purposes. The research was conducted by the following students: Dimple plus Vatasal and J2k for learning purposes.
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