To gain high profits, stock purchases by celebrity investors are closely watched by market participants. However, one should not get carried away and buy those very stocks without doing their own due diligence. Failing to do so can lead to erosion of capital.
Jotak Nandwana, Equity Analyst, Marketsmith India, said, “It is common to see stocks flying as soon as market participants become aware of a celebrity investor entering a stock. Coattail investing is a common strategy used by many retail investors, wherein they invest in a stock following the purchase of the same stock by one of their favourite investors.”
Instances wherein celebrity investors lapped up particular stocks and investors suffered
In March, 3 crore shares of Jaiprakash Associates were purchased by Rakesh Jhunjhunwala at Rs 18.35 levels. As news spread of this block deal, the stock price rose 14 percent due to demand from retail investors. However, the stock has been languishing since at Rs 15.8.
Another example is of marquee investor, Chennai-based Dolly Khanna who is known for spotting smallcap gems on Dalal Street. Khanna had invested in Rain Industries at Rs 50 and again raised her stake in March when the price was around Rs 350 per share. Several investors followed her investing pattern. Now the stock is down to Rs 196 per share. In this scenario, Khanna may still be in profit considering her initial entry price but investors following her would have registered heavy losses.Drawbacks of following celebrity investors
The biggest risk of following celebrity investors is that stocks tend to be at elevated levels and is almost always much higher than the price at which they entered. Tejas Khoday, CEO and Co-Founder, FYERS, explained, “There is a price risk involved in making such a decision. Also, when such announcements are made and the volume of the stock increases, it gives large investors an opportunity to exit.”- Too little too late
Jimeet Modi, CEO and Founder at Samco Securities & StockNote discussed an instance when Rakesh Jhunjhunwala sold his stake in Intellect Design around Rs 120 per share in February last year. After that, the stock price rose to Rs 186 per stock on July 4. He may have sold to invest in other more lucrative opportunities which retail investors are not even aware of and incurred losses by exiting from the stock. Looking at celebrity activities can be a good way to start. However, their action should not be followed blindly, which most often is done.- Timing and investing
Nandwana said, “For the celebrity investor it would not matter much even if he ends up losing his a percent of his portfolio if the stock price falls. However, retail investors will certainly end up losing more relatively if the pick goes wrong.”ConclusionTo regular investors Shrivastava recommends investing in a diverse portfolio rather than buying individual stocks by following tips and advices from celebrity investors. "Investing in individual stocks is risky and there is no diversification benefit. A portfolio that is aligned to a specific idea or theme will allow the investor to diversify and mitigate risks."Follow @thanawala_hiral