DEFINITION of 'Coattail Investing'

Coattail investing is an investment strategy of mimicking the trades of well-known and historically successful investors. By placing these trades, investors "ride the coattails" of respected investors in hopes of making money in their own accounts. Today, through public filings, media coverage and shareholder letters and reports written by fund managers, the average investor can quickly learn where these big investors are placing their money.

BREAKING DOWN 'Coattail Investing'

If coattail investing is used, it potentially works the best when the money manager or institution being mimicked buys companies with a buy-and-hold mentality. The reason is that if the manager is investing for only a short period of time, the delay between the disposition and the release of the information to the public may render the particular trade an ill-timed one. For example, suppose an investor finds out by reading Fortune magazine that a big fish made an investment in shares of Company Z. The investor then goes long Company Z shares in his own account. The stock, though, begins to drift downward. Several weeks after the end of the year, the manager's fund holdings report is made public. Company Z stock is not on the list because the fund manager sold her entire position with an explanation that she thought it was no longer a good investment due to deteriorating fundamentals of the company.

Coattails Turn to Dog Tails

Aside from the timing risk described above, an investor may pick the wrong coattail to ride. Many high-profile investors lionized in the press for their investment savvy and previous winning trades can, and often have, demonstrated that they do not consistently make profitable investments. In fact, some of their subsequent trades turn out to be very unprofitable. John Paulson and Bill Ackman, hedge fund billionaires, have had spectacular trading success and also investment picks that have flamed out. Investors riding their coattails on some of these unprofitable trades have learned new meanings of regret.

  1. Regulation Z

    Regulation Z is a specific Federal Reserve Board regulation that ...
  2. Smart Money

    Smart money is the capital that is being invested or withdrawn ...
  3. Synthetic Futures Contract

    A position created by combining call and put options for the ...
  4. Z Tranche

    Z tranche is a portion of a structured financial product that ...
  5. Management Risk

    Management risk is the risk associated with ineffective, destructive ...
  6. Active Investing

    Active investing refers to an investment strategy that involves ...
Related Articles
  1. Investing

    Invest Like Buffett: Building A Baby Berkshire

    Get a piece of Warren Buffett's profit by building a portfolio that mimics Berkshire Hathaway's investments using SEC Form 13F to coattail his picks.
  2. Investing

    A Brief Guide To Institutional Investing

    Institutional investors are organizations that manage assets on others' behalf. They include pension funds, investment companies, insurance firms, endowments and private foundations.
  3. Insights

    Microsoft Vs. Apple

    Microsoft may be riding Apple's coattails, but that doesn't mean they won't eat Apple's lunch.
  4. Managing Wealth

    Billionaire Portfolios: What Are They Holding?

    Becoming a billionaire through investing is no easy feat. Find out what the richest investors are buying now.
  5. Tech

    Mimicking Robo-Advisor Trades: Pros & Cons

    Here's a breakdown of the pros and cons of mimicking robo-advisors.
  6. Small Business

    3 secrets of successful companies

    Make smart investments by using these three secrets to spot up-and-coming companies to invest in before they become household names.
  7. Trading

    Would You Profit As A Day Trader?

    Market timing is surrounded by controversy, but does it work?
  8. Investing

    Is It Wise to Copy George Soros's Investment Strategy?

    One of the most successful investors ever is George Soros. Does that means you should follow his investing strategy?
  1. What Does Buy and Hold Mean?

    Buy and hold is an investing strategy focused on growing money in the long term while ignoring day-to-day fluctuations in ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center