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Sunday, August 10, 2014

Why copying Institutional/Big investors is dangerous for Retail investors

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Many newbies of stock market often find that the easiest way of entering the domain of stock market investing is by copying the investing techniques/portfolios of seasoned investors or institutional investors, but remember

There are many reasons for the questions: Why is copycat stock investing dangerous?. I am covering some of the aspects regarding the same in this post. READ CAREFULLY

1. Holding diversification becomes too difficult to achieve: Institutional Investors or Big investors hold different stocks from almost every domain in their portfolio, they have lot of money for ensuring that their risk is mitigated by a diversified portfolio. Such a diverse portfolio is too hard to match for a retail investor because of money crunch, hence they are not able to diversify and hence face a greater risk of a loss from their investment portfolio. The main reason of big investors making profits from their investments over time is 'Diversified stock portfolio'

2. Holding stocks during crucial times: I know majority of stock investors pretend to be a long term investors but their long term is generally 12-14 months at max. If a retail investor somehow matches the diversification of a Institutional Investor, they cannot afford to hold their investments for 5-10 years. This limitation affects their portfolio performance and can never match with the mutual funds or institutional investors.

3. Volatile markets are difficult to handle: Some of the institutional investor's trade volume is too high per quarter that it becomes very difficult for a retail investor to keep a track of the Mutual fund/Investor, This becomes even difficult in volatile markets such as the Indian stock market.

4. Retail investor doesnot get Preferential Treatment : Since Mutual funds have too much money to invest (even on a daily basis), that they are bound to receive preferential treatment and sometimes doesnot pay any transaction fees, which a retail investor has to pay per share of purchase/selling. Thus net performance of Institutional investors can never be matched by a retail investor.

5. Limited Research/knowledge capabilities: Retail investors have a limited market knowledge/understanding, tools to match Institutional investors. These Institutional investors often have contacts in the companies (In order to get first hand information about policies/decisions), which are never available to retail investors, using these connections in companies many institutional investors take out their money before any bad decision is taken by the company. This gives the institutional analysts a far better idea of what is going on at a company or within a given industry. It is almost impossible for the individual to ever gain the upper hand when it comes to such knowledge.

Hence the best approach for Retail investor while investing is to pick up 1 stock analyse it's performance from last 2-3 years, understand the capability of the board members and then analyse the sector's performance. If all the pointers are favorable then he/she can invest in that particular stock.


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