Author: Admin

Self-Directed Investors Get Unexpected Benefit from Lockdown

The advantages of virtual roadshows and other virtual investor relations events are greater than anyone would have guessed prior to Covid-19. These events offer a high degree of flexibility, lower costs for all involved, allows for increased frequency of meetings, and much broader inclusion. With all the benefits, these virtual events should remain a staple of the business world long after the virus risk has passed.

Broader Inclusion

Up until earlier this year, executives regularly made the rounds traveling to major financial centers telling their corporations’ stories to potential investors. In order to get the most from their valuable time and travel costs, the number of cities visited was necessarily limited.  The typical roadshow stops may have included New York and Boston on the East Coast, Chicago in the Midwest, and Los Angeles and San Francisco on the West Coast.  The stops would never include small towns inside or outside the U.S. Now they present everyplace there is an internet connection, including your living room or mine, regardless of where we live. They can be attended by investors of any level that are interested. This is clearly positive for the presenting executive, but it is also a big win for the out-of-the-way professional asset manager – and also the self-directed investors who never would have been able to listen and ask questions of management before.

Saves Resources

Management can now be far more productive under the new process, where they’re no longer balancing travel and logistical issues. They can focus more on virtual meetings and interacting with investors from around the world. And since time is conserved by reporting from their home or office rather than catching planes from one meeting to the next, far more interactions can be had in fewer days. What’s more, the Interactions are often with people they would never have benefitted from meeting with in the past. 

Lower cost

Two executives traveling from the East Coast to the West Coast for a week of meetings could cost $10,000 or more. This takes into account flights, hotels, car rides, and restaurants. For the management of firms who regularly meet with investors, the cost adds up over the year. Under the new virtual roadshow model, the dollars that were wasted can now be more productive by going toward company-sponsored research or other priorities in the IR budget.

The cost of time out of the office is less of an exact measure, but could even be higher than what is spent on travel. Additionally, the time an executive is not away from home and family is also an intangible benefit. Time in transit can now be used toward more productive purposes at the company, with customers, or simply to rest and recharge.

Increased Flexibility

The pandemic has proven the importance for public companies to have a disaster recovery plan-B for investor communications.  Companies that had existing virtual capabilities in place or those that pivoted to them quickly have benefited from maintaining “face-to-face” contact during a period of heightened investor uncertainty.

Virtual roadshows are likely to remain the dominant means of meeting investors in-person, while traditional meetings are likely to be left for special circumstances. Both investors and executives understand the benefits of engaging in this way.

Take-Away

The need for management to maintain uninterrupted communications with investors has never been stronger as we manage through unprecedented disruption of businesses. The advantages to open communication is obvious. Executives can meet with more investors while their resources, including time and money, can be redeployed for greater gain. Companies waiting for conditions to change rather than adopting this technology or partnering with a firm that offers it are falling behind.

Investors, particularly those outside of the normal roadshow or conference centers, and self-directed investors that never received attention from management are the big winners. Virtual financial events place them on a more level playing field. This creates a situation where investors, companies, and the overall market is benefitting.

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Copycat Investing, Bright Idea or Dud?

“Risk comes from not knowing what you’re doing.” – Warren Buffett

There’s a scene in the 1992 movie “My Cousin Vinny,” which, unlike the rest of the classic, is not quotable. There are no spoken words, just actions that let the viewer know exactly what is going on. Many of us can relate.  The scene takes place the first day of an arraignment on murder charges. In the movie, Vinny is defending his nephew Bill and his friend Stan. The challenge is, Vinny just passed his bar exam and has never been a trial attorney. He figures out quickly, along with the audience, that he does not have enough experience to know even the basics to steer clear of the dangers of courtroom proceedings. He finds himself in a situation where the outcome is critical, yet he is very out of place.  To raise the stakes even more, he is surrounded by and competing with veterans of courtroom proceedings. Everyone else knows what they are supposed to do. In the scene I’m referring to, he tries to avoid trouble by mimicking the prosecutor — when the prosecutor sits, he sits, when the prosecutor places his briefcase by his chair, Vinny places his briefcase down, and so on. There are no words spoken to tell the viewer what’s going on. Still, it’s clear that Vince Gambini is determined to be successful, and the method he chooses is to become a copycat of the opposing attorney who is already a proven success.

If you’re familiar with the movie, you know that Vince Gambini does learn and eventually builds on his knowledge and then merges his own strengths and style with what he has copied. He is successful in the end, presenting his essential case. Many investors who are new and learning, or just more comfortable copying or riding the coattails of top money managers do something similar. It is called “copycat” investing, or “coattail” investing. The method and practice is done in many different ways. It certainly has its merits and its limits.

Copycat Investing:

The concept of copycat investing is simple: by mimicking investment picks of consistently successful large investors, smaller investors can possess a well-researched and thought out portfolio with little analysis and minimal knowledge of investing.

There’s no shame in mimicking investors who have a track record you’d like to enjoy. Copycat investing is a selection method, like many other popular methods such as index investing, Dogs-of-the-Dow, or long/short. These can be just as mechanical as replicating the investment moves of well-known professional investors or fund managers.

But is copycat investing a viable investment strategy? While the evidence of its success is somewhat mixed, there are certain techniques you can use to get you closer to being the perfect copycat investor.

SEC Filings

The Securities and Exchange Commission (SEC) requires investors who manage more than $100 million to disclose their holdings once every 90 days. This information is available on the SEC website as Form 13F; a link is included below for your convenience. When you determine the fund manager you’d like to mimic (Buffett, Ackman, Icahn, etc.), this is the first site to be updated. A secondary site worth looking at is holdingschannel.com.

A search here presents visitors with the most recent filings and the investment decisions of historically successful investors such as Berkshire Hathaway or Carl Icahn. The risk that individual investors and those who manage money for others should be aware of, is that with up to a 90-day delay in posting new information, coattail investors may be too late to participate in any early benefits the professionals enjoyed. 

Investors who wish to direct their decisions by copying others should understand the objectives of those they follow and make sure it fits with their own objectives.  For example, Warren Buffett is a long-term investor. He’s been quoted as saying: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” A long-term investor who doesn’t expect to always be transacting may be better suited to ride Warren Buffett’s coattails. Alternatively, Carl Icahn has an enviable investment record, but his intent is often to seek board seats or control and effect change within the company. This is not very straightforward, so it may not suit most smaller players.

Problems With Approach

The successful investors already have a portfolio. Their entry point in their current holdings may have been years ago and for a very different price. An investor purchasing shares in those companies now may be placing themselves in a holding that has already experienced its growth spurt. Therefore, future results may be limited. Yet, to ignore these holdings is to ignore the idea that any new positions (that you plan to mimic) may have been added as a compliment, hedge, or diversifier to what is already held. If your own portfolio only accumulates new additions, you may have lopsided risk. An identically weighted portfolio has you mis-timing transactions.

Sales are another consideration. Even long-term investors would have a hard time tolerating finding out about divestiture of a position 90 days later. Large successful investors do sell; when they do, they often help set a downward trend in the market.  Investors sitting tight in down-trending positions, only to find out months later the position is no longer in their copied portfolio, are doomed for occasional large disappointments.

Take-Away

If you are going to practice copycat investing, the filings on the SEC website will become an important source of information. The best investors to copy are those that hold much longer than the 90-days. This may limit you to successful buy-and-hold managers, but only if you desire a buy and hold portfolio. If you prefer to be more proactive and less patient, the copycat strategy may be impossible to fully realize.

One large benefit to copycatting is that by mimicking those that are successful, you can get started investing quicker while you learn your own way around the market following the experienced money with a track record. This gives you a starting point to develop your own strategies and investment style.  Success does not always come from blazing your own trail; sometimes it comes from directly copying the greats, often a mix of both creates the perfectly tailored portfolio for the individual. 

Paul Hoffman

Managing Editor

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Sources:

SEC Company Filings

Activist
Investors

Holdings Channel