Many Investment Managers (professionals included) generate ideas by closely tracking the holdings of well- known investment managers with above- average track records. There always seems to be a hot group of investors that others follow, although most aren’t followed for long. These are usually investors who have had recent success, so the media constantly reports their new holdings.
The Problem Of Following Other Investment Managers
The problem with following others is that most of these great records were generated by past investments, and investors wrongly conclude that existing and future investments will have similar results.
There are several disadvantages to following other investment
Most great investment track records come from a limited number of investments. For every 10 investments a successful investment manager makes, only one will appreciate substantially, contributing outsize returns to the investment record, while the others will either mildly perform or underperforms.
You typically will not know the reason why a certain investment manager is buying or selling a stock. Perhaps the investment manager is suffering from investment redemptions and he or she needs to sell stocks.
No matter how good they are, all investment managers will make mistakes, and you may be following them into such a mistake.
Investment managers change their strategies. Recognize that the strategies the investment manager followed in the past to generate the superior investment record is not necessarily the strategy the investment manager is following today.
Therefore, in the end, be careful about following the ideas of other investors.