At the risk of stating the obvious, there are three factors that drive return on your portfolio: 1) Entry Price 2) Exit Price 3) Allocation.
These three are also the reasons why a retail investor shouldn’t clone a star investor’s portfolio.
To elaborate a little further:
1- Entry price- Star Investors (SI) barring a very few exceptions invest in small/microcaps stocks where tradable float/liquidity/both can be very low. This means by the time SI’s holding is published stock has mostly run 2-3 x due to insiders buying the stocks. So if retail enters a stock copying an SI, they are buying at a much higher price, than an SI, capping the upside.
2- Exit price- For same reason as above, when SIs decide to exit a stock, for any reasons say better opportunities elsewhere or something wrong they discovered in the company, retail investors are usually the last to know about it. By the time the latter follows an SI the stock has fallen quite a lot eroding their profit.
In some cases a stock may still continue to go up after an SI’s exit and since retail investor really has no conviction in the stock they will book their profit at lower price, incurring even higher opportunity cost.
3- Allocation- Most SIs generate superior returns from 10-20% of their holdings that do really well while some giving average returns and remaining turning out to be duds. Also not all SIs portfolio returns track each given their individual preferences for sectors. Which means an SI, a retail is copying, may see mediocre results on their holdings for 1-2 years before striking it rich when their sector hits a bullish patch. Not every retail investor has that much patience, especially with stocks, they purchased on someone else’s conviction. And if one decided to copy several SIs to hedge their risk they will end up owning large number of stocks with too little allocation to generate any meaningful return, even if some of their stocks actually became multibaggers.
From my experience (I used to copy star investors at the start of my investing journey before stopping it, thankfully) I have learnt that there is no way I can make same returns as an SI due to differences in entry and exit prices, and allocation. I have also discovered that I can still make good returns, by investing in any 20-30 decent stocks selected with my own conviction, and I have been able to do that.
One star investor recently said (in not exact words): don’t chase money in the stock market… chase the story (to build conviction) and you will build a lot of wealth. Trying to clone a star investor is similar to chasing money without knowing the real story as to why an SI is in a stock in the first place.
One needs to do their own research to build conviction in a stock so that they can hold it in meaningful quantity for a longer period of time to build wealth. If a “credible” star investor happens to be share holder in that stock it’s just cherry on the cake. It can give you that extra validation needed to keep going.
We also need to keep in mind that even SIs are not right all the time (enough data points to prove that) and their entry and exit don’t necessarily mean that a stock or a company is good or bad.
Your own conviction in the story will ensure that you will keep holding the stock even after an SI has exited it.
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