Imitation is the sincerest form of flattery.
-- Charles Caleb Colton
I am blessed to have a wife who is a great cook. I can’t count the number of times we have hosted guests and then they call asking for a particular recipe of a dish that she served. While I may be married to the best cook (as my growing stomach can attest) swapping recipes is common place. Why not? Everyone wins. The hostess feels good that her food was a hit, and the recipe recipient is now making a dish that will earn her high marks and greatly satisfy her guests. In fact copying someone successful is something that is not just food related. After all some children may cheat on a test by copying from the class genius (note to my children: serious consequences if you try this!), companies produce knock-off goods of popular products, sports teams will copy strategies of championship teams etc. the list is endless.
So if imitation is so common place in society, why is it passed over when it comes to investing? Investors love to try and discover undervalued stocks that no one has ever heard of. In fact as a financial advisor, clients often call me up asking for investment ideas and when I give them a Johnson & Johnson (JNJ) or Merck (MRK) as an example, and explain that they have solid and growing businesses along with a near 4% dividend yield, which keeps getting increased, they are not enthused. “We know those companies,” they say, “we want something smaller, something that can produce huge returns in a relatively short amount of time.” It’s like some investors actually expect an advisor to provide them with some kind of esoteric, never heard of internet company that operates out of Bosnia that’s going to quadruple over the next year.
Investors want to think that they are getting original, one of a kind investment ideas but in reality they tend to ‘imitate’ investments all the time. Whether it’s reading about an analyst recommendation on a certain stock or hearing a hot pick on Bloomberg or even around the water cooler, very few investors actually come up with their own ideas. Rather, they hear or read something and they use that as a source of idea generation and proceed to do research on the stock and then decide whether to pull the trigger or not.
Invest like Ackman and Buffett
While the last few years have been kind to investors, it seems that we are back to a round of intense volatility which is sure to make investors uneasy. Having suffered through 3 stock market routs in the last 13 years, investors are getting nervous about their retirement portfolios. It has become a "fait accompli" in the financial media that investors can’t outperform the stock market, and as such there is nothing to be done about dwindling retirement savings. The dirty little secret is that there are some well known investment managers who have continued to outperform the broad market for more than 20 years. Bill Ackman, Warren Buffett, and Joel Greenblatt, are examples of investors that have posted staggering investment returns. Thanks to the internet and companies like AlphaClone or Covestor, investors are able to own the very same investments as these pros own.
Buy stock like the insiders
While mirroring Warren Buffett is one approach of imitating, there are also exchange traded funds (ETFs) that mimic corporate insiders and company share buybacks as well as hedge fund buying. Studies show that insider actions are a good indication of how a certain stock will trade in the future. And this makes sense. After all a CEO or a CFO know their company situation better than anyone else, so if they choose to buy or sell their own stock, that’s a big hint as to future prospects. Again, thanks to the internet, this information has become available to the general public. While it may be tedious for the average investor to sort through corporate filings, a few exchange traded funds (ETFs) now exist that allow investors exposure to these trends.
Guggenheim Insider Sentiment ETF (NFO):
Linked to an index that shows corporate insider buying trends and earnings estimates increases by Wall Street analysts.
PowerShares Buyback Achievers Portfolio (PKW):
Linked to an index that consists of U.S.-listed companies that have repurchased at least 5% of outstanding shares during the past 12 months.
Global X Funds Guru Portfolio (GURU):
Linked to an index of top holdings of hedge funds based on their recent public filings.
I am not saying to run out and buy these funds but you should speak with an investment professional to learn how you can incorporate copycat strategies to help get your retirement portfolio back on track.
Disclaimer: The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.