Following Success: A Deep Dive into Coattail Investing

Keeping up with the latest investment strategies is no easy task for a retail investor today. With fast-moving trends, changing market conditions and various industries to choose from, emerging investors have a lot to consider when building their investment portfolio.

But our hyper-connected digital world means you have access to more data and insights than ever before. This abundance of information has led to the rise of a new type of investment strategy: coattail investing.

Coattail investing, or copycat investing, provides all types of investors with deep insights into the same strategies used by iconic investors like Warren Buffett, Bill Ackman, Nelson Peltz, Eric Sprott and many other recognizable names. This article will outline the ins and outs of coattail investing, providing you with a strong foundation for this popular strategy.

What is coattail investing?

Let’s start with the basics. Coattail investing is the investment strategy of replicating the investment style or ideas of well-known and successful investors or investment managers. Individual investors use the information published on the Securities Exchange Commission (SEC) website to identify what companies a specific investor invested in.

While the term is a cheeky play on the idea of riding on the coattails of those who presumably have much more investment expertise and skill, there is legitimacy to this strategy.

In recent years, this strategy has picked up stride amongst emerging investors who want to mimic the exceptional success of top international money managers, buy-and-hold managers and activist investors. Exploring potential risks and real benefits can shine a light on what you seek to gain from this investment strategy.

Cons of coattail investing

Coattail investing, like all investment strategies, doesn’t provide guaranteed results. Understanding the risks associated with coattail investing is an important step in making informed decisions as an individual investor.

Success is not guaranteed

No investment strategy has a 100 percent certainty of success. When considering coat-tailing, individuals must consider the investment style of who they seek to mimic or follow and decide whether that strategy aligns with their objectives. For example, abandoning value stocks, which sometimes take years to turn around can lead to significant losses.

Plus, it’s still recommended that you perform a suitable level of due diligence before investing in anything. After all, you may not always be able to determine the reason why a notable investor or investment fund made an investment, their timeline for the investment and other critical factors.

Off-timed stock movement

From the time the well-known investor or investment manager has acquired or disposed of a specific stock and the news of the activity has been made public, the stock may have already moved. Despite best efforts, sometimes the timing or delay in the news can have an adverse effect on the prospective investor.

Saturation of coattail investors

Considering the success of the top investors in the world, it is no surprise that many retail and institutional investors alike are watching what these skilled money makers are doing.

However, given the speed of information dissemination and trading in today’s markets, those late to the party can be at a substantial disadvantage.

Pros of coattail investing

In 2012, analysts pinned “copy trading” as one of the top ten wealth management trends in that year. As more individual investors enter into this competitive space, coattail investing poses an attractive investment strategy and potential economic upside.

Successful and credible professionals

Following investors and money managers with track records of investment success can be a great strategy for those being introduced to this fast-paced space. Luckily, investors who manage more than US$100 million have to file what they bought or sold every quarter with the SEC. Looking to others with more investment prowess can be a useful source for coattail investors and those with limited experience.

Buy-and-hold management

Coattail investing offers a look into the minds of top investors and their strategies in money management. With time lag between actual trades and reporting, investors can learn about the benefits of long-term holding and how notable names like Berkshire Hathaway’s Warren Buffett, an advocate for the concept that, “our favorite holding period is forever.”

Activist investors

With so many eyes on the world’s best investors, the influence they possess is enormous. They hold the potential to shift the appreciation of certain stocks just by releasing news of their investment activities and involvement in certain companies. For coattail investors following closely to these plans or activities, they can get a head start in acting on similar investing moves rather than waiting for regulatory filings.

Diversified portfolios

Replicating investment ideas from top managers and investors in different sectors can expand and diversify your investment portfolio. This wider exposure minimizes risks associated with focusing solely on the success of one or two sectors and can leverage positive trends in multiple industries or investment ideas across different holdings.

Top investors to watch out for

The rise in popularity of coattail investing is no fluke. Replicating the investment ideas of the world’s most successful and well-known investors and money managers is an exceptional strategy. While no investment strategy is a sure-fire win, following top investing legends is a great start.

Here are five of the best investors coattail investors should be watching out for:

Warren Buffett

No coattail investing list would be complete without one of the most notable and successful investors of all time. Buffett is one, if not the foremost proponent of the buy-and-hold strategy and has seen extreme success in this method of investment throughout the years. Although its investment returns over the years have been staggering, Berkshire Hathaway’s (NYSE:BRK.A,NYSE:BRK.B) massive monetary gains cannot be ignored as a prospective coattail investor.

Eric Sprott

Eric Sprott is an early champion of precious metals investing, building his Sprott (TSX:SII,NYSE:SIII) into the major holding company it is today. Over four decades, Sprott has invested in some of the most successful and significant precious metals and mining companies and initiatives with its unique access to highly differentiated precious metals and real assets investment strategies.

Sprott has invested between C$200 and $300 million into the junior mining space, with notable mentions including Silver Grail Resources, Canstar Resources (TSXV:ROX,OTCQB:CSRNF), Benton Resources (TSXV:BEX) and more. Opawica Explorations (TSXV:OPW), one of Sprott’s most recent investments, possesses exceptional mineral exploration potential across top mining districts in Quebec and Newfoundland and support from a results-driven management team with decades of experience in the mining industry.

Nelson Peltz

Despite not being a household name amongst retail investors, companies and institutional investors most likely recognize the name. Peltz is known as an activist investor and buys large stakes in companies, which garners significant influence in enacting changes to increase the profitability of these assets. For coattail investors, Peltz public holdings data and company, Trian Investment Partners, provides a great source for investment ideas built off his world-class investment expertise.

Bill Ackman

Bill Ackman stands as one of the star investors of 2020. He is a legendary hedge fund investor that was previously known for his Herbalife (NYSE:HLF) feud with billionaire Carl Ichan. Since then, his timely hedges at the start of the pandemic generated over US$3.6 billion in profits. As a very public figure about his investments across multiple media appearances, he offers brilliant investment ideas and philosophies to those looking to enter the investment space.

David Tepper

Some know David Tepper as the owner of the Carolina Panthers, but he is most notable for creating wealth with his hedge fund Appaloosa Capital Management and being regarded as one of the best market timers ever. He was one of the first large fund investors to realize the disruptive impact of COVID-19 and presumably took steps to limit the damage of the pandemic before the market tanked. Despite being less public than other investors, the advice Tepper offers is often rich with real directional market insight.

Takeaway

Coattail investing is a popular investment strategy where investors replicate the investment style and ideas of well-known and successful investors. Despite some drawbacks, this strategy offers individual investors a look into premium tactics in navigating the various markets and exposing emerging investment portfolios to highly prospective companies, initiatives and industries like precious metal mining, technology, and more.

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