Retirement investing: Imitate, imitate

Your Investments: If imitation is so commonplace in society, why is it passed over when it comes to investing?

By AARON KATSMAN
Dollar bills 370 (photo credit: Steve Marcus / Reuters)
Dollar bills 370
(photo credit: Steve Marcus / Reuters)
Imitation is the sincerest form of flattery.– Charles Caleb Colton Iam blessed to have a wife who is a great cook.
I can't count the number of times we have hosted guests and then they called asking for a particular recipe of a dish that she served. While I may be married to the best cook (as my growing stomach can attest), swapping recipes is commonplace.
Why not? Everyone wins. The hostess feels good that her food was a hit, and the recipe recipient is now making a dish that will earn her high marks and greatly satisfy her guests.
In fact, copying someone successful is something that is not just food related. After all, some children may cheat on a test by copying from the class genius, companies produce knock-off goods of popular products, sports teams will copy strategies of championship teams, and the list is endless.
So if imitation is so commonplace in society, why is it passed over when it comes to investing? Investors love to try and discover undervalued stocks that no one has ever heard of. In fact, as a financial adviser, clients often call me up asking for investment ideas, and when I give them a Johnson & Johnson or Merck as an example, and explain that they have solid and growing businesses along with a near 4 percent dividend yield, which keeps getting increased, they are not enthused.
“We know those companies,” they say. “We want something smaller, something that can produce huge returns in a relatively short amount of time.” It’s like some investors actually expect an adviser to provide them with some kind of esoteric, never-heard-of Internet company that operates out of Bosnia that’s going to quadruple over the next year.
Investors want to think that they are getting original, one-of-a-kind investment ideas, but in reality they tend to “imitate” investments all the time. Whether it’s reading about an analyst recommendation on a certain stock or hearing a hot pick on Bloomberg or even around the water cooler, very few investors actually come up with their own ideas. Rather, they hear or read something, and they use that as a source of idea generation and proceed to do research on the stock and then decide whether to pull the trigger.
Copy While the last few years have been kind to investors, it seems that we are back to a round of intense volatility that is sure to make them uneasy. Having suffered through three stockmarket routs in the last 13 years, investors are getting nervous about their retirement portfolios.
It has become a fait accompli in the financial media that investors can’t outperform the stock market, and as such there is nothing to be done about dwindling retirement savings.
The dirty little secret is that there are some well-known investment managers who have continued to outperform the broad market for more than 20 years. Bill Ackman, Warren Buffett and Joel Greenblatt are examples of investors who have posted staggering investment returns. Thanks to the Internet and companies like AlphaClone or Covestor, investors are able to own the very same investments as these pros own.
Be a pro While mirroring Warren Buffett is one approach of imitating, there are also exchange traded funds (ETFs) that mimic corporate insiders and company share buybacks as well as hedge-fund buying. Studies show that insider actions are a good indication of how a certain stock will trade in the future. And this makes sense. After all, a CEO or a CFO know their company’s situation better than anyone else, so if they choose to buy or sell their own stock, that’s a big hint as to future prospects.
Again, thanks to the Internet, this information has become available to the general public.
While it may be tedious for the average investor to sort through corporate filings, a few ETFs now exist that allow investors exposure to these trends:
• Guggenheim Insider Sentiment ETF: Linked to an index that shows corporate insider-buying trends and earnings-estimates increases by Wall Street analysts.
• PowerShares Buyback Achievers Portfolio: Linked to an index that consists of US-listed companies that have repurchased at least 5% of outstanding shares during the past 12 months.
• Global X Funds Guru Portfolio: Linked to an index of top holdings of hedge funds based on their recent public filings.
Cash in I am not saying to run out and buy these funds, but you should speak with an investment professional to learn how you can incorporate copycat strategies to help get your retirement portfolio back on track.
aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States