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Should you follow a celebrity investor into a stock?

Author: Kumar Shankar Roy/Wednesday, June 20, 2018/Categories: Stocks, Expert View

Should you follow a celebrity investor into a stock?

Retail investors often do not have enough time to study stocks. Even those with necessary skills, do not have adequate access to speak to company management. As a result, they follow the moves of stock market gurus. Investors often make a lot of hue and cry about these legends buying a stock. For instance, direct-to-home services provider Dish TV India share price rallied as much as 3.5 per cent in morning on June 14 after ace investor Rakesh Jhunjhunwala bought shareholding worth Rs 93 crore. Just a few months ago, when Dolly Khanna bought a stake in Associates Alcohols in Q4, the news led to more investors jumping towards the counter and pushing it up by 12 per cent. In January this year, when Porinju Veliyath bought 1.50 lakh shares in Som Distilleries, the announcement drove shares to its 52-week high as there was a sudden demand. There are others also like Anil Kumar Goel, Ashish Dhawan and Vijay Kedia who have emerged as celebrity investors. Retail investors get super excited when they see these names buy a stock. Is following these stock gurus' moves a good strategy? Let us look at the pros and cons of such an approach.

When somebody has already invented the wheel, there is no point is making it again --- this is the premise that many retail investors have when following a veteran investor into a stock. They believe that investors can make far fewer mistakes and also lose a lot less money, by choosing stocks that leading investors have already researched. From an investor point of view, there is nothing wrong in finding out what stock experts are doing. A study of their portfolios (only a limited portion can be accessed by the general public) tells you which stocks and sectors they are betting on. But studying does not mean blind devotion. 

Every investor has their set of unique goals in investing and a different risk appetite. When portfolio managers like Porinju Veliyath, Dolly Khanna or Rakesh Jhunjhunwala invest, they do on basis of their goals and risk appetite. Even though they are backed by solid research and years of experience dealing in the market, goals and risk appetite of a Jhunjhunwala may not be the same as yours. This is especially true when it comes small cap and mid-cap stocks. Many legends often hold debt in such small companies and hedging their bet with equity exposure is very normal. But for a retail investor, equity is the only investible asset class that is available when they copy a master's move.

You may say that the midas touch of stock gurus automatically leads to a gain. Yes, when the news is out that Jhunjhunwala or Veliyath has bought a stock, there is an instant gain. But if you look closely, that stock usually goes up in the very first trade. The stock opens high because of many retail investors punching their orders, as a result making the celebrity investor richer, but not necessarily the copycat investors! This is a big point to note for many investors who swear by the Indian stock market legends. The presence of a marquee investor may tell the world that he or she thinks the stock has a potential to go up, but the results will always differ for anyone copying their moves without knowing the fundamental reasons and thesis behind buying that stock.

With huge capital at their disposal and a long-term vision for stocks, the masters are very different from an average investor. Sometimes, they can buy a stock knowing the company will not recover for next 3-4 years. Also, often these 'masters' take short-term bets on a stock. Not every purchase they do is an investment. Sometimes, they are tactical trades. If you buy such a stock, you may be stuck with it even though the 'legend' may have quickly exited. When it comes to celebrity investors, the disclosures of both buying and selling come in three forms: bulk or block deal, trading room chatter or disclosure by the celebrity investor or their firm. While you may get the information, you are always lagging in terms of the timing of information.   

Do remember a good dose of stories pertaining to which stock Jhunjhunwala bought, Dolly Khanna sold or Kedia holds, to just cite some names, are extremely positive in nature. Journalists, experts, and other commentators especially focus on the calls that are right i.e. made money. The amount of information on how these stock legends lost money is few and far between. Investing is not a zero-error profession. Even, the storied fund managers get just 6 out 10 stock calls right all the time. This means there are 4 stock calls that go wrong, and could actually be quite loss-making. 

The author is a business journalist with over 13 years of experience

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Kumar Shankar Roy
Kumar Shankar  Roy

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