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.