Mimicking is useful in social interactions, not in stock markets

31 Mar 2016

Everyone in the world are a mimicry artist by nature. Though this tendency may be helpful in the social interactions in our daily life, it can put you in to trouble if not handled carefully in the world of stock markets. One who starts reading this article may feel strange to notice how this is connected with stock market.


While we watch news, we tend to see famous names in the headlines and their recent investments. As the market have witnessed a strong rally in the past, several stocks also doubled or tripled. So retail investors who has participated very lately are anxious to take part in the game. So once the major players, who are successful in their previous investments, makes new investments in the markets, the tendency to imitate them by the retail investors are not uncommon. So many would be forced to mimicking the stocks investments of these big players in the markets. Imitating someone else investing philosophy is not regarded as a wrong thing, but blindly copying their stock picks are a different game. If you are not careful while doing the latter, you might drown in to trouble.

For example, we may hear news like legendary investor Warren Buffet bought shares of petro china, Indian Big Bull Rakesh Jhunjunwala bought shares of spicejet, , Sovereign wealth fund Norges Bank bought shares of granules India etc. These news might have prompted some investors to join in the game by buying shares of these companies. After all, these astute market players must have done thorough research and due diligence before making their investment decisions. So, a retail investor feels that it is right to follow the investment decisions of these popular investors. As we mentioned earlier, following the investment philosophy of successful investors are not a wrong thing, but before blindly mocking their investment decisions, you should keep some points in mind.

Take the aforesaid examples again. The investment made by the above players might consist only a mere percentage of their total investments in the market. For example, The Indian Big Bull Rakesh Jhunjhunwala’s investment in Spicejet may only consist a meagre percentage of his total investments in the market. Even if his investment decision goes wrong or he lose money in that investment, that lose would be nothing for him as it is a small tip of the iceberg for him. . So it would be dangerous if you take a sizeable position in such a stock and it fails to deliver

People always consider these World class investors as invincible. But they can also go wrong sometimes. Warren Buffet and Rakesh Jhunjhunwala have invested in many businesses, but not all of them has given positive returns for them. Moreover with the kind of investing stories we hear about these investors , we always have a perception that these ace investors makes all of their investment after careful and detailed research with a long term horizon in mind. This is not the case always. They also makes trades, sometimes makes speculations. So as we mentioned blindly following these speculative trades may end up losing money for the retail investors.

So ace investors might have fantastic investment philosophies, they might have made fantastic returns in their investments in stocks, but they also had lost money by making false investment decisions. So before making the investments, retail investors should always make their research and due diligence.

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