Have you heard of the phrase: One man’s meat is another man’s poison?
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.
Investment Strategies & Decision are Purely Individualistic
Take Kiran’s example. She works in an IT firm. Kiran and her manager Mitali invest in the stock market. Since she does not have the time to conduct her own research, Kiran decides to copy Mitali’s investment style.
However, Mitali’s investment goals are completely different from Kiran’s. As she is nearing retirement, Mitali wants to shift her investments from equities to debt assets. Even in the equity market, she slowly shifted her funds to blue-chips to earn stable returns. This is to avoid any risks to her retirement fund.
On the other hand, Kiran 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 Mitali’s financial plan and avoid equities, she may not be able to reach her goal.
Why to keep away from portfolio cloning?
A lot of investors 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 may not have a large amount of funds. As a result, the individual investor may copy only a small segment of the portfolio holdings.
Such a focused portfolio should bring about disastrous effects in case the market (in particular the shares you own) plays poorly.
Adopt Investment Philosophy, not the Decisions
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.
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.
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.
This, though, is widely different from copying investment decisions. Avoid such blind oversight. Instead follow the below nuggets of wisdom offered by some of the most famous investors in history.
Similarly, you might want to check out the investment philosophies of other gurus and incorporate their ideas in your investment decisions. But remember, even while doing so, ensure it suits your investment profile.
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 you and your family over time.
But in order to do that, you must avoid copying the investment decisions of others.
Follow the masters but in the end, you must find your own path since everyone has a different journey.
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