Bottom fishing and the dangers of coattail investing

21Dec07

The Internet and the financial blogosphere have made tracking the moves of large, institutional investors increasingly accessible to individual investors. Indeed a whole range of sites has emerged to allow investors to track the moves of both institutional and individual investors alike.

We have written previously why investors should examine their own investment process before wholeheartedly embracing this approach of ‘piggyback’ or ‘coattail’ investing. A recent article in the Wall Street Journal by Dana Cimilluca illustrates how some large investors have been burned trying to bottom fish recently in the financial sector. The subprime mortgage fiasco and the subsequent credit crisis has made a number of supposedly smart investors look pretty dumb.

The danger for individual investors is evident. If you had blindly followed the so-called ‘smart money’ into any number of financial stocks in the past couple months you would in all likelihood be sitting on unrealized losses. There will be a bottom in financial stocks some time, there always is. Some of these bottom fishing candidates may turnaround, others might not make it. The question is whether you will have the patience, and capital, to withstand the volatility in the meantime.

That is not to say there is not something to be learned from the moves of prominent investors. The ongoing challenge for investors, large and small alike, always is to how to generate your own original investment ideas. Otherwise when difficult times occur, and they will, how else will you know how to react? If you are looking to the pages of the Wall Street Journal or your favorite blogs for stock picks, you will in all likelihood be disappointed.

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