What Is Coat Tailing in Investing, and How Does It Work?
Coat tailing is when you replicate the investing strategy of a successful investor and implement the same in your investing portfolio.
Just like you can replicate a tasty recipe from a cookbook and make delicious food at home. Similarly, what if you can replicate an investing strategy of a successful stock market investor and benefit from it?
What is Coat Tailing?
Well, you can replicate a successful investor's strategy, and it’s called Coat Tailing. It is an investment strategy where investors replicate the trades of successful investors or hedge funds. It involves analysing the trades made by successful investors and similarly copying their investment decisions. This strategy is often employed by retail investors who may not have the time, expertise, or resources to conduct their own research and analysis. Coat tailing allows you to benefit from the expertise and research of experienced and successful traders.
Coat tailing is also proven to be an effective investment strategy as it allows retail investors to replicate the investment decisions of successful investors. By following the trades made by successful investors, retail investors can benefit from the research, analysis, and expertise of experienced traders.
Successful investors like Warren Buffet, Rakesh Jhunjhunwala, and Radhakishan Damani have built their wealth by investing in companies with a proven track record of generating consistent returns. By investing in the same companies, retail investors can replicate the same success as these successful investors.
For instance, in 2011, Warren Buffet's Berkshire Hathaway disclosed that it had invested $10.7 billion in IBM. Following this disclosure, many retail investors started investing in IBM, and the stock price surged by over 20%. This shows that coat tailing can be an effective investment strategy.
Who Is It For?
Coat tailing is suitable for investors who do not have the time, expertise, or resources to conduct their own research and analysis. It is also an effective strategy for investors who are new to investing and looking to learn from successful investors.
However, it is important to note that coat tailing should not be the sole investment strategy, and you should conduct your own research and analysis before investing in any stock.
What Are the Advantages of Coat Tailing?
- Expertise of Successful Investors
One of the primary advantages of coat tailing is that it allows you to benefit from the expertise and research of successful investors. By following the trades of successful investors, you can make informed investment decisions.
- Time-Saving
Research and analysis can be time-consuming, especially for retail investors with limited time and resources. By following the trades of successful investors, you can save time and effort and still benefit from the same returns.
- Low Investment Costs
Coat tailing is a low-cost investment strategy as it replicates successful investors' trades. This eliminates the need for expensive research and analysis and can be an effective investment method for those with limited funds.
Disadvantages of Coat Tailing
- Lack of Control
Coat tailing involves replicating the trades of successful investors, which means that investors have little control over their investments. This can be a disadvantage for investors who want to have complete control over their investments.
- Limited Growth Potential
While coat tailing can provide consistent returns, it may not generate the same high returns as active investment strategies. This can limit the growth potential of investors looking for higher returns.
- Risk of Losses
Following the trades of successful investors does not guarantee success, and there is always a risk of losses. However, you'll need to conduct your own research and analysis before investing in any stock.
How to Start Coat Tailing Effectively?
To effectively coat successful tail investors, you can follow a few steps:
- Firstly, research and analyse the investor's past performance and investment style. This can be done by reading their books, analysing their investment philosophy and strategy, and observing their portfolio changes.
- Secondly, it is important to identify the current holdings of a successful investor and determine their allocation to each stock or asset class. This can be done by monitoring the investor's filings, tracking the quarterly or annual reports of companies they invest in, and subscribing to their newsletters.
- Thirdly, you should also analyse the market conditions and economic trends affecting the investor's portfolio. This can be done by following market news and updates, analysing the global economic climate, and monitoring political events that may affect the markets.
- Finally, it is important to regularly review and update your own portfolio based on the coat-tailing strategy. It is also important to remember that coat-tailing is not a foolproof strategy and that one should diversify their portfolio to mitigate risks.
Mutual fund portfolio changes can be tracked through fund manager reports and websites such as Morningstar and Yahoo Finance. Additionally, financial news outlets such as CNBC, Bloomberg, and Reuters often provide updates on the portfolio changes of successful investors.
Summary
- Coat tailing is an investment strategy where investors replicate the trades of successful investors or hedge funds.
- It allows retail investors to benefit from the expertise, research, and analysis of experienced traders.
- Coat tailing is suitable for investors lacking time, expertise, or resources for their research and analysis.
- Advantages include accessing the expertise of successful investors, saving time and effort, and low investment costs.
- Disadvantages include limited control over investments, potentially lower growth potential, and the risk of losses. Conducting personal research is still important.
Checkout more interesting reads on our blog
Team Investmint
