On coat-tailing

Despite some recent rumblings, markets are near all-time highs. Even so, quite a few popular picks have turned sour in the last few months. The latest ones for an international audience have been Altice USA (ATUS), Alibaba (BABA) and a Northern sawmill trade. For fellow Swedes, Kambi had a really rough day during the summer. I’m sure that there are a thousand more examples in the momentum retail space, but those are some that I have kept an eye on.

Now, I know most of you are big boys and have earned a lot of money elsewhere to make up for the inevitable drawdowns. These recent losers might also turn good going forward — I don’t have the answers on that one. Still, booking losses sucks. Hard. Losing money alone sucks even more, which is part of the reason why these situations may have been especially dangerous to the investing public. All of them were spearheaded by some smart people, either legendary gurus or maybe some of Fintwit’s hottest hands of the 2020 post-Covid bounce. You can certainly do worse for idea generation. Well… you can probably do better too.

First of all, even geniuses are sometimes wrong.

Secondly, the genius may be right, but you won’t still be so sure when the stock is down 40%. Or when it stays stagnant for six months in a rampant bull market. Yes, you may have even opened the latest quarterly presentation slides and memorized management’s 2022 EPS projections. Or you looked at some data-mining website to see if the bars go up and to the right in a symmetrically eye-pleasing fashion.

Unluckily for you, that’s not stock research. That’s at best a bare minimum for the first 20 minutes (in fact, I quite dislike screeners but that’s another discussion). Copying an idea and pairing it with a cursory “due diligence” is potentially even worse than just copying it knowing nothing. Because now you not only borrowed the entire thesis, you also fooled yourself into thinking you did your research, ensuring some extra mental rigidity when the facts change. And since you didn’t actually do real work thinking about the situation, you will be none the wiser when the stock crashes.

Thirdly, people who share cases in public always — no exceptions — have their own reasons to. They may of course just want to boost the stock price or bring attention to a situation in order to prevent someone from stealing the company from under them. They could also crave adulation, or do it for marketing reasons in order to sell their fund, newsletter or podcast. These are all perfectly fine reasons. It’s not bad to want any of those things, but it means the pitcher is not completely aligned with your interests.

Just so this doesn’t come off as throwing shade on others, I will use myself as an example. I know that there are 2 or 3 people out there who read what I write and even buy some of my picks.

In my case, there is a great skew in what I write about publicly. I tend not to write publicly about the more illiquid stocks that I own (which is the majority of my portfolio). Three of my four largest holdings, I have never discussed publicly, or at least not said outright that I own. In some cases no other person knows that I own the stock. In some others, one or two others do and I hope and trust that they don’t talk to third parties about my thesis. Some great investors never publicly discuss their holdings, a perfectly rational and understandable policy. It’s hard enough to keep your wits about you without pounding in your opinions by repeating them to an audience.

Even with the bias towards more liquid stocks, I only write about a situation when I actively want more eyes on it. Meaning, I’m perfectly OK if I move the market when I do (and in spite of my limited readership, I have provably done so on occasion). So by buying stocks that I have written about, on the off chance that you would like to copy my portfolio of crap, you won’t get anywhere close to resembling it in totality. I also might and will trade out of stocks without feeling the strict need to inform anyone either before or afterwards.

So by buying stuff that I have written about in the past, you might get my worst picks due to selection bias. You also might buy stuff that I have already sold. I don’t have any ill intent (although how would I prove that?). And still, this is what you get if you just go ahead and buy whatever I wrote about. Does this sound like a good deal? It’s not much different with anyone else out there pitching stocks. You have to do your own work. You need to know beforehand your own criteria for buying, holding and ultimately selling a stock.

As a side note here, there is just as much issue with trying to circumvent the entire investment process by searching for so-called “outsiders” or “intelligent fanatics” or whatever the current rebranding of the idea is. The Outsiders is a good book to be sure. But do you know who the author’s top name for a new outsider was after the release of that book? Mike Pearson. If you are too young to recognize that name, I suggest you peruse Wikipedia for 10 minutes and spend another moment thinking about why the author of the literal book about “outsiders” is completely dogshit at spotting “outsiders”.

All this said, I’m not above coat-tailing. I have done so in the past and will again in the future. In most cases, I coat-tail friends and colleagues. Under the best of circumstances, one person comes up with the idea but it gets either refined or rejected via a Socratic process.

My results with copying public figures have been mixed at best. I think it’s good to try and reverse engineer what the gurus are thinking and why, but overall bad to try and copy them - especially with a small, private account. I’d recommend trying to find something with a million fewer eyes looking. Or something with a less well-trodden thesis. For example, I would think twice if the main thrust of the idea is “heavy buybacks” or “compounder that looks too dear but will grow into it”.

Please, don’t ever buy something because you would be angry if everyone else earned a lot of money on the name and you missed out. And if you buy anyway, don’t average down on the losers. Especially not if they are levered or go from growing to not growing.

Alternatively, just buy an index fund, keep adding to it every month and don’t ever touch it. Not even when “things look very uncertain”, which coincidentally always happens when everyone else thinks that too.

Ah, who am I even kidding? Nobody in the history of the universe has ever indexed, stuck to it consistently and held through market bottoms without being shaken out.

Just buy random Chinese ADRs because that’s where all the fish are.