The Problem of Following the Whales

Use Your Advantage to Achieve Higher Returns

May 24, 2023

A growing phenomenon is the god-worshipping and copying of different investors. Such as Warren Buffett, Charlie Munger, Peter Lynch, Li Lu, Monish Pabrai, Stanley Drucken Miller, Micheal Burry, Terry Smith, and so on… There are a bunch to follow and to copy. Of course, looking at the people who have done what you want to achieve is good. However it is good to study their journey, but it is stupid to copy them.

Let's consider the case of Warren Buffett, who is widely regarded as one of the most successful investors. According to recent reports, he holds a substantial portfolio with approximately 48 positions, including a significant stake of around 46.5% in Apple and approximately 90% of his investments in the top 10 holdings.

While it might be tempting to buy Apple stock simply because Warren Buffett owns it, it's essential to approach investing with a more discerning perspective. Owning shares in companies should be based on their alignment with your individual investment strategy and goals.

Interestingly, even Warren Buffett suggested that a smaller portfolio could generate higher returns than his current approach. This insight presents an opportunity for investors with smaller portfolios to leverage their nimbleness and potentially outperform the market.

For instance, instead of focusing solely on specific companies like Apple, consider regularly investing in an S&P 500 index fund. This approach provides a hassle-free investment strategy with the assurance that you won't significantly underperform the majority of the market.

However, if you're investing in individual stocks and seeking additional returns beyond those offered by the S&P 500 index, it's clear that you desire more from your investment approach. This signifies a willingness to take on more risk and potentially earn higher rewards.

In conclusion, while Warren Buffett's holdings and investment decisions can be intriguing, it's crucial to remember that your own portfolio should be tailored to suit your specific investment strategy and objectives. By leveraging your smaller portfolio effectively and considering various investment options, you can potentially achieve favorable risk-adjusted returns that align with your personal goals.

Here are 7 reasons to convince you more that you shouldn’t look at what big investors invest in.

The Size Factor
Due to the substantial size of these investors' portfolios, their investment options become limited, and their choices are dictated more by what they can invest in rather than what would offer the best opportunities for returns. This can hinder their ability to explore the full range of potential investments and find the most promising ones.
Restrictive Rules
Many big investors, such as fund managers, must adhere to various investment rules relating to diversification, liquidity, currency risk, ESG considerations, and more. These rules can create obstacles that prevent them from pursuing optimal investment strategies and achieving the best possible results.
Transparency and Scrutiny
These investors are publicly traded and registered financial institutions. Consequently, they are required to disclose their holdings, making their investments subject to scrutiny. The fear of potential reputational risks may lead them to be more inclined to sell a stock than buy, even if it presents a good risk/reward opportunity, to avoid any negative perception associated with their holdings.
A Shift in Investing Focus
As investors accumulate significant capital, their focus often shifts from maximizing capital gains to preserving capital. The priority becomes avoiding losses rather than chasing high returns. This change in mindset can impact their investment decisions and strategies, which may not align with the goals of individual retail investors.
Herd Mentality
When a big investor's ownership of a particular stock becomes widely known, it often leads to a surge in other investors acquiring the same stock, driving up its price. This herd mentality can inflate the value of the stock, making it more expensive for latecomers. Peter Lynch, a renowned investor, emphasized the value of seeking opportunities that institutions and analysts have yet to discover, as following the crowd may not always be advantageous.
Information Gap
A significant challenge of following big investors is the information gap. By the time the general public becomes aware of the investments made by famous investors, it is often too late to replicate their success. These investors have access to extensive resources, advanced tools, and insider knowledge that individual investors lack. Attempting to mimic their investments without understanding the underlying rationale can lead to unfavorable outcomes and potential losses.
Delayed Awareness
When a big investor decides to sell a particular stock, individual investors often become aware of it much later. As a result, they may find themselves among the last to know and end up selling alongside others, causing an unnecessary and potentially significant sell-off. This delayed information can result in increased losses for those following the big investors' actions.

Considering all these factors, you have an advantage in identifying better investment opportunities than these giants currently hold. By studying their history, you will realize that they didn't begin by investing in the largest companies in the world. Instead of replicating their current investments, learning from their early strategies and applying them to the present circumstances is more beneficial. It's important to recognize that a lot has changed since their early days, and what worked for them in the past may not be as effective now.

However, it is worth noting that the fundamental principles of successful investing still hold true and will continue to do so for a long time. Companies that exhibit strong growth, high-profit margins, efficient cash flow management, and sound capital allocation practices are likely to generate favorable returns for your portfolio.

Therefore, rather than relying solely on the investments of the giants, focus on understanding and implementing these timeless principles. By identifying companies with robust fundamentals and strategic financial management, you can uncover promising opportunities that align with your investment goals and potentially outperform the giants in the long run.

Conclusion

Don't blindly follow the whales! They didn't achieve their status overnight; they started small, just like you should. The stock market is highly competitive, so why invest in the same popular stocks everyone else is pursuing? Instead, explore the less competitive areas and identify your unique niche. Invest based on what aligns with your own strategy and individual preferences.

If not, I would recommend considering an investment in established giant funds or companies. Another option is to purchase an index fund and make regular monthly contributions. Doing so allows you to take advantage of diversification and steadily grow your investment portfolio.

Remember, success in investing comes from making informed decisions that suit your own circumstances and objectives. Rather than simply following the crowd, carve out your own path to achieve financial prosperity.

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