1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
The Science of Hitting
The Science of Hitting
Articles (675) 

Avoid Piggybacking

The pitfalls of piggybacking fellow investors on investment ideas

April 04, 2016 | About:

I don

About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 4.6/5 (17 votes)

Voters:

Comments

OPM Insights
OPM Insights premium member - 4 years ago

Good points, Science, especially on Cramer.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Thanks for the kind words Nelson!

Thomas Macpherson
Thomas Macpherson premium member - 4 years ago

Great article Science: We found out after a while that there really weren't many Value Gurus who invest like our style at Nintai. (I should note though we were recently shocked to see Brown Advisory Small-Cap Fundamental Value Inv ((BIAUX)) overlap our stocks and watch list by something like 50%!). We never piggy backed with another investor on an individual stock simply because we've never really played anyone elses's game. Thanks again - Tom

Doug Taylor
Doug Taylor premium member - 4 years ago

Thanks for a very good article SoH, while I learn a lot researching how the gurus manage their portfolios and make their stock picks often I see them going in to companies that do not make sense to me on the balance sheet or operations side. One should only invest in something when they understand why they are investing in it and not because someone else has invested in it. Great message for alll.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Tom - Thanks for the kind words!

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Doug - Spot on. It's easy to think "I might not understand it, but I respect this guy; if it's his largest position it might be worth a small gamble..." As you note, the right answer is "I should only invest in something I understand, not because someone else invested in it." Thanks for the comment!

snowballbuilder
Snowballbuilder - 4 years ago    Report SPAM

Hi science , interesting and well written article (as usual)

Agree you should not follow blindly a guru in a trade ( if you want to do so is safer to buy directly is fund or his company , at least you will participate at all his investments ) agree you should always do your homework that help to know what to do ( increase , cut or doing nothing) when the thing go bad.

As for "you are likely to have unfavorable result is you try to segregate action in your accounts betwen investments and speculation" I understand your position but personally I don't agree

I ve 7 core long term holdings (2 since 2009, 1 since 2010, 1 since 2011, 2 since 2012 ..) that are super strong great companies buyed at favorable price ( usually during market crash) that I plan to holding and let compound for the really long term.

With the spare cash available I have also make some (few) short term speculation only if and when I see something strange(my view) worth doing. I have made a speculation long periferical Europe after the Greece debt crisis, a long on Volkswagen after the diesel gate , a short on the S&P US at the beginning of the year , a long on etc crude in February and now I ve a small and speculative long position in VRX.

I consider myself a long term focused investor and I ve the vast majority of my net worth in my 7 long term holding ..... But I ve also made some small short term speculation and I think there is nothing wrong with that.

Just some thoughts . Best snow.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Snow - Fair points. I would be interested to hear how your short-term speculative positions have performed relative to the core long-term holdings. It would also be intereresting to see the performance of the speculative positions relative to what would've happened if you just put the funds in your best "core" idea at the idea. For most people, I'd bet the speculative book performs relatively poorly over an investment lifetime (after taxes, trading costs, etc). Thanks for the comment!

snowballbuilder
Snowballbuilder - 4 years ago    Report SPAM

Hi science , thanks for the reply , i ve not precise numbers ( maybe I could do it at the end of the year)

I ve made around ~20% - 25% on the Greece rebound , 20 - 25% on vow , ~ 20% on long crude and ~20% on short SP . I ve ~ - 25% in loss as today on Vrx. ( both the long on periferical Europe, the short on SP and the long crude were leverage etf / etc) .

I have not made the simulation as for adding my best idea (that cumulative are performing well with 3 multibagger) , I ve ~80% / 85% of my net worth on that 7 so I don't have any urge of add. Also I m not a dividend growth investor neither a monthly allocator ; I built a position aggressively when the price are cheap , increase that if became cheaper and than simply do nothing and let run and compound .

As always your comment and replay are astute and interesting and make me thoughts.

Have a good day. With friendship . Snow

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Snow - Appreciated; will be interested to see how this develops over the years. Have a great day as well Snow! As always, thanks for the thoughtful discussion.

haoafu
Haoafu - 4 years ago    Report SPAM

This is the kind of mistake I make less often now than before, and some of my mistakes are from piggybacking Buffet:(

I never bet big on these ideas, but my experience in this area is not rewarding to say the least.

Stock_Picky
Stock_Picky - 4 years ago    Report SPAM

Great article.

Not in terms of money, but in terms of emotional flipping-flopping, some of my biggest investing mistakes have been due to buying stock when the circumstances have been similar to that of Valeant and the Gurus and the Hype. In such settings, my thinking has been the equivalent of this: – Well, Ackman knows what he’s doing. Surely he did his homework. I don’t fully understand his position, but it’s Ackman, so I must be missing something.

Today, I believe that the key is to simply think. If you have a punch card of 20 punches, would you punch out a hole for Valeant because Ackman did?

I believe that I became a “true investor” when I could confidently, under immense self-generated mental pressure, say no to that type of question.

Thanks for the article. It was a good self-reflection piece for me.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Haoafu - I've been in the same boat, but am also moving in the right direction ("less often now than before"). Thanks for the comment!

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Stock_Picky - Exactly! Great comment and thanks for the kind words.

DLV
DLV - 4 years ago    Report SPAM

My view on piggybacking is that it isn't worth the investment. Might I miss out on a great idea by not piggybacking on some brilliant other investor? Of course. But who cares. There are always other great ideas out there. The worst thing that can happen is following someone else when it doesn't seem right to you and then losing money. If I sit on the sideline and miss a great idea, oh well, other fish in the sea and I didn't lose any money by not making the investment.

I respect the ideas of gurus and will investigate them for myself, but if it doesn't make sense to me I won't pull the trigger.

johnnyazores
Johnnyazores - 4 years ago    Report SPAM
To sum up my comment below: No matter where you get an idea, it's best to invest in the companies you firmly believe in after your own analysys.

My originial theory was to piggyback on investors that were spending a lot more (time/money) on research than I was or looking at the smart guys invesment newsletters. I followed Tilson on CALL and SODA and wish I hadn't. I didn't follow Einhorn on SUNE, and glad I didn't (I didnt understand it) . I WISH I could understand what Klarman is buying/owning...but I can't. Thank goodness I avoided Horsehead Holdings even though I respect Pabrai. I know I'm not adding anything new to this conversation and the previous comments have been great. But I'm looking at my portfolio, and my best holdings are companies that for whatever reason resonated with me, and the fundamental analysis backed up the idea (with the help of GuruFocus). Though I did follow Buffet into Verisign (around $56), but sold out in the $80's because I realized I couldn't understand it enough. Blindly followed my idol Howard Marks (Trades, Portfolio) into SBLK and that didn't go well.

Thanks for writing this article and thanks for the comments. I think I just had an "aha!" moment.

johnnyazores
Johnnyazores - 4 years ago    Report SPAM

Very enlightening article and conversation! Thank you author and commentors!

jbm93
Jbm93 - 4 years ago    Report SPAM

this is a good article, but somehow the craziest place to publish it (the site is called GURUFOCUS people)!

jakeg
Jakeg premium member - 4 years ago

Any GOOD investor, or investment professional, will take note of what accomplished investors are doing. However, that has to be the point of departure.....

Then one must do their own analysis to see if the the investment makes sense to their own developed criteria. If not, take a pass.

Remember, ANYONE can make a mistake - as this example demonstrates, in spades.

Also, the investors you are following, may actually be selling part of their stake to you, now they know the "public" has discovered the idea and there is likely incresed demand for it - so they can reduce their own position size without having the price drop much. I never quickly act on (for example) Barron's recommendations, just for that reason: Frequently they are up briefly, and down considerably the following week, all esle equal.

Koheleth
Koheleth - 4 years ago    Report SPAM

So are we repudiating the "shameless cloner" strategy promoted by Pabrai, who in turn credits it to Munger, who is the partner of Buffett, who rejected piggybacking as not a great strategy?

Many of these fund managers employ teams of stock-pickers, who in turn pick dozens of stocks, so I've long wondered how can we gauge the level of conviction when in the end they are simply investing OPM - Other a People's Money? They can survive a misfire - we (or I) the small investor can't.

I like best what Walter Schloss stressed: make up your own mind. You won't have true conviction any other way.

thank you for writing this article.

Koheleth
Koheleth - 4 years ago    Report SPAM

... by the way, I'd love to ask Buffett why he slams piggybacking of his trades. Pabrai in nearly every lecture cites an academic study which found if you followed Buffett's every buy, even a month after it was announced, and on the worst day you could've bought it - you STILL would have well-eclipsed the S&P.

i think Buffett just doesn't like coattailers, as he said on CNBC previously: "We're not in the stock advisory business."

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

DLV - "I respect the ideas of gurus and will investigate them for myself, but if it doesn't make sense to me I won't pull the trigger." Spot on, and the point of the article; thanks for the comment!

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Johnnyazores - Thanks for the thoughtful comment!

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Jbm93 - Haha that's funny :)

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Jakeg - Thanks for the comment! Glad to hear from some new readers!

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Koheleth - It's probably worth noting that Buffett made that comment in regards to some tough questioning on CNBC where he was essentially asked "If an investor solely bought IBM because you did and now they're facing a loss, what should they do?" The question tried to put the blame on Buffett's shoulders. His response, in a nutshell, is those investors should realize they should not blindly follow any other investor - and IBM over the past few years is a good example why. If those people truly trust WB's investment prowess, they can easily hand some, or all, of their portfolio to him by purchasing BRK.B. Otherwise, they should make their own decisions.

It's the same idea as the VRX investor who piggybacked Ackman / Sequoia / Ubben and is now in a pickle. If you want to do what Bill Ackman (Trades, Portfolio) does, why not just invest with Pershing Square? Better yet, if you think you have the ability to do so, why not go through his top five, research each of them in detail, and then buy the ones that make sense to you? That's really the point: learn from great investors, but make your own decisions - and only put your own capital at risk when you've done the work to justify doing so.

Thanks for the comment!

jtdaniel
Jtdaniel premium member - 4 years ago

Hi Science,

Congratulations on a fine article and so many good comments. Every time a stock on my watch list gets close to my target price I become anxious that a big fund or guru will jump in early and drive up the price. In reality it usually doesn't work that way, even with Dow 30 stocks. Last year I set a $70 target price on Exxon-Mobil, a real bargain by any reasonable calculation. Sure enough, I was able to purchase my shares in the $69s last August. No gurus were pumping Exxon and any GF comments seemed to have a negative slant, as if Exxon was too difficult for anyone to value. Nevertheless, the buyers soon arrived and drove the price up to near fair value. Best, dj.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Jtdaniel - Thanks for the kind words! And nice snag on XOM :)

Benice_always
Benice_always - 4 years ago    Report SPAM
Thank you The Science of Hitting for your teachings! =)

Humans being wired as a social animal, at times/certain conditions, makes it difficult to have independent train of thoughts. We've a tendency to be influenced by a leader/outspoken charismatic person when things are chaotic.

I'm currently reading Seeking Wisdom, from Darwin to Munger by Peter Bevelin. Good read and your article reminds me a lot of this book. Thanks TSOH! =)
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Benice - Haven't heard from you in a while! Thanks for the kind words :)

Dark Waters
Dark Waters - 4 years ago    Report SPAM

Well Put and a great timely reminder. Thank you.

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

No problem Dark Waters!

Please leave your comment:



Performances of the stocks mentioned by The Science of Hitting


User Generated Screeners


pjmason14Momentum
pascal.van.garsseHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)