3 Reasons Why Being a Copy-Cat Investor Could Cost You Deeply

Human are social creatures. We prefer to live in a community rather than being isolated. This is true regardless of whether you are an introvert or an extrovert. In fact, social isolation can lead to mental health issues.

However, when it comes to investing, making investment decisions based on the actions of your peers could be very costly for you. Warren Buffett famously stated that his “idea of a group discussion is to look in the mirror.”

Often, when we invest, we try to look for confirmation on what is a good stock to buy. That is why we gather tips from friends and/or brokerage reports. And, we may even feel more comfortable buying into shares that people we know are also invested in. But, that does not mean we can remove the responsibility of making our own investment decisions. Investing by simply copying what others are doing can be very dangerous.

Here’re three reasons why:

1. Different risk profiles

The risk profile is different for each individual. A company that I’m invested in might be suitable for my circumstances, but it might be too risky for you.

2. Different confidence levels

If you are merely copying how someone invests without understanding the underlying reasoning, you would very likely not be confident in your investments. When there is a crisis, you could be the first to panic and sell – thereby losing the chance of enjoying any potential rebound from the crisis.

3. Different spheres of knowledge

Simply copying someone else’s investments would also mean you would not have good knowledge of the companies you are invested in. This means that you would not know what are the key things to monitor.

The world and the business environment is constantly changing. If the fundamentals of a company have changed over time, it could make sense to sell the company’s stock. If you do not have deep knowledge about a company, you might not know when is the time to sell.

Buffett once gave a speech titled the Superinvestors of Graham-and-Doddsville. In the speech, Buffett shared about great investors he admires who have learned the investing craft from Benjamin Graham and David Dodd, the intellectual fathers of value investing.

The interesting thing about the superinvestors that Buffett noted was that they all generated great returns even though they did not invest in the same companies. This shows that the key to investing is having the right mindset and investment process, rather than what stock you end up buying. This is also the reason why copy-cat investing hardly works well in the long-term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.