Most people who trade relatively frequently don’t realize huge profits. Their losses typically match their gains, cancelling out much of their activity and racking up transaction costs.
Others, particularly whom I like to refer to as guru investors, just print money.
Expert communities are powerful but only show part of the story
While this year’s market has been tough on pretty much anyone, it’s important to keep some perspective. Investors like Eddie Lampert, George Soros, Ken Griffen — these guys have posted huge results for years. We’ve spent a lot of time focused on expert investment communities made up of smart people like you and me. Combining both financial pros and amateurs, sites like Covestor provide a framework for community validation, participation, peering.
- Validation: good expert investment communities require hooks into real trading accounts so that all trades are logged and verified. This means that participants back their picks up with their own money and that stats and performance are objective and not the “I-caught-a-fish-this-big”-type of comments most traders use in their discussions with their peers.
- Participation: While some expert investment community sites limit participation in the community to vetted professionals, others have pretty open standards for participation. These sites are part Yahoo Finance, part E*Trade, and part Facebook.
- Peering: Most general social networking/community sites are structured as inverted pyramids. Only a small percentage of users actually generate content while the vast majority likes to watch what’s going on. This spectating doesn’t necessarily mean that these users are passive — statistics I’ve received from sites like Vestopia show that these passive users actually are compelled to take action offsite with increased trading activity.
The point here is that the cream rises to the top. Your neighbor with an internet hookup and a subscription to TheStreet.com can have an amazing trading record vis-a-vis his peers. But, he’s managing money in the thousands of dollars. What about the big boy hedge fund/mutual investors managing millions or billions? They’re not participating in these expert communities (at least not yet).
Piggyback the big boys to profit
While many investment managers ultimately fail to beat the averages over the long term, some consistently do, while others have periods of strong outperformance only to lose their hot hand at some point.
With a combination of technology, regulation, and new business models, investors can follow almost every move of these large players and invest alongside them along the way. In fact, investors can access all of this information for free.
The result? An investor can mimic the performance of some of the best money managers out there or decide to put together an all-star portfolio that combines specific stock picks from a number of these guru investors.
Our next post will discuss Rule #2 of our New Rules of Investing and how to put together a portfolio by piggybacking world-renowned investors like Warren Buffett, Carl Icahn and Mohnish Pabrai.
Make sure you check out the second part of this series, How to piggyback guru investors, which explains in easy steps how to monitor professional investors’ portfolios.
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