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Is Copying Legendary Investors’ Trade a Cheat Sheet to Investing?

P.s. Not a legendary investor but my recent trades have been shared in my Telegram & Facebook page (links below).


This article will touch on why I prefer not to “copy trade” from notable investors, large shareholders or even the legendary investor Warren Buffett.


I understand that there are a lot of apps out there to track a guru’s portfolio, recent buy and sells etc. They are very useful and I am not against all these apps. Rather than to “copy trade”, I use these apps to hunt for great companies to further research on.


Warren Buffett has one of the best investment strategies I’ve seen. As much as I modelled my investment philosophy towards him or the “Oracle of Omaha,” I don’t buy what he buys and sell what he sells. I would also not try to “predict” his next move to decide on what to invest. There are many reasons when he buys or sells which is unknown to retail investors such as political, structural constraints (too much $$), regulatory compliance (10% holding) etc. His purchase could also include “perks” that are out of a retail investor’s reach such as attractive preferred stocks with 10% annual dividend [1]. It might be a great deal for Warren Buffett but not relatively as good for retail investors that can only purchase ordinary stocks.


While these perks are elusive to retail investors, we do have our advantages. I touched on this in my article “10% Dividend Small Cap Stock & a Potential Multibagger”. As a recap and to add on, in 1999, Warren Buffett said "It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that." Size can be a problem for mega fund houses as they have to invest hundreds of millions into a position to make it worthwhile and smaller funds or even retail investors like us do not have this constraint. For example, the market capitalization for small caps could be too low for them to consider. If Warren Buffett were to buy over a $200 million market cap company, even if it’s a 10 bagger (his investment is now worth $2 billion!), it’s still less than 1% of his entire portfolio. Why then are we copying their trades to limit ourselves?


Furthermore, his asset size might make it hard for us to “copy trade”. For instance, it may sound a lot when Buffett purchased $45.3 million worth of Delta Airlines shares earlier this year [2] but this transaction is not even 1% of his entire portfolio. Imagine for Tom, a small-time investor who just started out with say $10k, to use $2k to follow Buffett’s trade would already be 20% of Tom’s portfolio!! However, to put too little into one stock, much of the profits would be eroded by transaction fees. Moreover, every investor’s asset allocation is different.


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I suggest not to “copy trade”, even for the stocks that I mentioned in my articles. Sound investment knowledge and due diligence is necessary.


You may hold a different opinion and you may turn out to be right. For example, I shared that I took profit for CICC (3908.HK) at HKD$15.26 in my recent article. This week, it jumped to more than HKD$17.


Similar to Schrödinger's cat, nobody knows the outcome until it actually happens. There may be new information or reports made available that could cause outcomes to differ.


On a side note, just to share Yuexiu Transport Infrastructure Ltd (1052.HK) that we’ve written on earlier this year shot up 8% on 30th Jun 2020. In “Stocks That Did Not Fall in the Last Trade War & What I Will Do Next”, we explained the reasons behind the purchase (with proof of buy receipt). At that time, our purchase price was HKD$4.78 and with an 8% dividend. As of today, it has already passed EX-D.


[3]


Two other stocks that we shared on our Telegram and Facebook page on 30th Jun 2020, also jumped 5% and 6% on 2nd July 2020.


Received a couple of emails and messages on topic suggestions for new articles. I will be doing a “Kopi C Poll” in my Telegram for you to choose which topic you would like to read next. Do join my Telegram to participate! While my articles are released fortnightly typically, I will share more frequent updates in my Telegram and Facebook Page such as the one below.

[4]


Just to give a few examples.


Warren Buffett on Airlines (Timeline):


Year 2013, Warning against investing into airlines:

In 2013, Warren Buffett describes investing into airlines as a death trap for investors [5].


Year 2016, Bought shares of airlines:

Berkshire Hathaway disclosed its quarterly regulatory statement of positions in three US airlines [5].


March 2020 (COVID-19 crash), Bought more shares of airlines:

News headline showed Warren Buffett snapped up Delta Airline stocks saying that the billionaire investor showcased his signature move “be fearful when others are greedy, and be greedy when others are fearful” [6].


May 2020, Sold all airline shares:

Warren Buffett sharing on his mistake for investing in airlines and sold all of his American Airlines, Delta Airlines, Southwest Airlines and United Airlines stocks [7].


June 2020 till date, Airlines shares have rebounded more than 30% from March lows:


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Warren Buffett on JPMorgan (Timeline):


Jan 2020, High valuation for JPMorgan:

It was reported that “Buffett suggested that JPMorgan Chase (NYSE: JPM) ought to trade for three times tangible book value, which at the time of his comments would have implied a price of about $168.” This indicates a huge 60% upside on the market price at the time of his comment [9].


[13]


2nd May 2020, Positive outlook:

Warren Buffett commented “I think the banks have behaved very well and are in very good shape.” [10]


16th May 2020:

[11]


Contrary to Warren Buffett’s selling of bank stocks, I’ve actually bought bank stocks instead. I’ve shared my buy receipt in my April article “EngineerInvest.com’s go-to Charts to Determine Market Bottom”.


Verdict:

If even Warren Buffett makes mistakes, then every investor does. Even so, I still truly respect Warren Buffett as the greatest investor of all time.


Furthermore, there could be many reasons when he buys or sells that we may not know. For example, his selling of bank stocks could be partly due to a 10% regulatory rule highlighted in this source [12]. It might also be political reasons, personal reasons, favourable “perks” mentioned earlier on, etc. I’m not aware and I don’t try to predict what he buys and sells or try to outsmart. Moreover, news of his quarterly regulatory filing is usually lagged which again might be too late to follow his move.


What I’m interested in is more of the way he views and invests in companies which I’ve always modelled after. Usually, I will try to avoid high capex, high cost and low profit margin stocks. Hence, I gave airlines a miss. That being said, I will still consider them if they are selling at a relatively cheap price similar to my 10% allocation of small caps so as to not miss the boat. However, airlines will not be under my main core holding list. Just trying to highlight that there is no straight formula and the need to be flexible at times, i.e. learning every strategy and using it at the right scenario at the right time.


In stocks, it’s ok to "一腿踩两船" or multiple 船 but for real life, you only need one good wife 🙂.


Cheers & Great Weekend!!


Disclaimer: Just sharing from experience as I have put my own money into the stock market over the period of 17 years. I am not a Chartered Financial Analyst (CFA) Charterholder and do not have any finance-related qualifications. Please also check out our full disclaimer.


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Reference Links:


1. https://markets.businessinsider.com/news/stocks/warren-buffett-invested-3-billion-general-electric-ge-2008-crisis-2020-6-1029327040

2. https://www.fool.com/investing/2020/03/03/warren-buffetts-berkshire-hathaway-increases-delta.aspx

3. http://aastocks.com/en/stocks/quote/detailchart.aspx?symbol=01052

4. https://memecrunch.com/meme/L4SS/i-don-t-always-copy-in-exam

5. https://www.smartertravel.com/warren-buffett-buying-airline-stocks-thats-bad-news-travelers/

6. https://www.fool.com/investing/2020/03/03/warren-buffetts-berkshire-hathaway-increases-delta.aspx

7. https://www.fool.ca/2020/05/21/warren-buffett-i-made-a-mistake-about-airlines/

8. Google Finance

9. https://www.nasdaq.com/articles/why-warren-buffett-loves-jpmorgan-chase-stock-2020-01-03

10. https://www.fool.com/investing/2020/05/03/warren-buffett-is-not-worried-about-the-banks-in-t.aspx

11. https://www.bloomberg.com/news/articles/2020-05-15/buffett-s-berkshire-trims-jpmorgan-goldman-stakes

12. https://www.fool.com/investing/2020/05/18/why-is-buffett-selling-bank-stocks-if-he-loves-the.aspx

13. https://www.barrons.com/articles/why-warren-buffett-loves-jpmorgan-chase-stock-51578052809

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