Moneycontrol
Last Updated : Jul 06, 2018 03:43 PM IST | Source: Moneycontrol.com

6 drawbacks of following investment strategies of celebrity equity investors

VK Vijayakumar at Geojit Financial Services said, “Celebrity investors have deep pockets and information that may not be available in public domain. They know when to enter and exit from a stock. But, retail investors are not so fleet-footed.”

Hiral Thanawala @thanawala_hiral

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 February, when Fortis Healthcare was in the news for its merger deal with Manipal Hospitals, celebrity D-Street investors Radhakishan Damani bought 26.59 lakh shares. Ace investor Porinju Veliyath too bought shares. Following these celebrity names, several retail investors started lapping up the stock of this troubled company.

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
- Price risk

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

Nandwana explained, “Since companies report shareholding pattern on a quarterly basis, there could be a scenario where a celebrity investor pulls the plug and retail investors get to know about it only after three months.” The celebrity investor might be selling off his position in bits and pieces, which retail investors were not aware.

-Investors are unaware of entry and exit strategies

Khoday said, “These celebrity investors do reveal some of their investment rationale in media, but they don't disclose their entry and exit strategies which make a huge difference.” Generally, investors who watch these interviews get excited and dive into those stocks without knowing if the celebrity investor is going to exit or hold if the stock price goes up another 10 percent from here. Often the high profile rise of a stock can be an opportunity to exit the stock, especially after there has been a multi-fold rise in prices from their entry levels.

- Blind faith

Blindly investing in stock ideas of celebrity investors is not recommended by experts. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, “Celebrity investors have deep pockets and information that may not be available in public domain. They know when to enter and exit from a stock. But, retail investors are not so fleet-footed. Therefore, it can be a risky game.”

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

Investing in a stock because a celebrity investor has invested in it is akin to timing the market, which is something that regular long-term investors should not do. Anugrah Shrivastava, CIO and Co-founder, smallcase Technologies, a SEBI-registered Research Analyst, said investments should be made systematically. "It could happen that if you come to know about the celebrity investor’s investment a little late, then the stock might have lost its investment worthiness by then.”

- Percentage allocation

Imagine a celebrity investor investing Rs 100 crore in a single stock. Following them, retail investors get excited and end up investing Rs 10 lakh in the same company. Now, it is highly possible that your new investment forms 50 percent of your portfolio while the celebrity investor’s portfolio allocation could be just a percent.

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.”

Conclusion

To 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."

First Published on Jul 6, 2018 12:29 pm
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