Coattail Investing

What Is Coattail Investing?

Coattail investing is an investment strategy 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 reports written by fund managers, the average investor can quickly learn where these big investors are placing their money.

Key Takeaways

  • Coattail investing is an investment strategy mimicking the trades of well-known and historically successful investors.
  • It is made possible by the fact that managers with over $100 million in assets must disclose their positions once per quarter to the SEC.
  • These disclosures are made through SEC Form 13F and are publicly searchable online.
  • Investors who wish to implement a coattail investing strategy should also be careful when deciding which model investor to choose.
  • Coattail investing is arguably more suitable for "buy-and-hold" investors with long time horizons because such strategies are less affected by the delay in publishing 13F filings.

How Coattail Investing Works

The Securities and Exchange Commission (SEC) requires investors who manage more than $100 million to disclose their holdings once every 90 days. This information is contained in SEC Form 13F, which can be freely accessed online by the public.

By browsing these filings, investors can keep track of the investment decisions of historically successful investors such as Warren Buffett or Carl Icahn. In doing so, however, investors should be aware that because there can be up to a 90-day delay in obtaining new information (due to deadlines and grace periods), they may be acting "out of sync" with the investor they wish to mimic.

Investors who wish to implement a coattail investing strategy should also be careful when deciding which model investor to choose. For instance, long-term investors who wish to minimize frequent changes to their portfolio may be better suited to follow Warren Buffett as compared to an activist investor such as Carl Icahn. On the other hand, investors with short time horizons may not be well suited to following Buffett’s characteristically patient style of investing.

Because timing is arguably more important for activist investors, coattail investing may be more appropriate for ‘buy-and-hold’ investors that have long time horizons.

Example of Coattail Investing

To illustrate the process of coattail investing, consider a hypothetical 13F filing made on August 14, by XYZ Investments, Inc. From this filing, it is disclosed that for the quarter ending June 30, XYZ had increased its positions in Amazon (AMZN), Bank of America (BAC), U.S. Bancorp (USB), and Red Hat (RHT) by approximately 11%, 3.5%, 2.5%, and 1.2%, respectively. At the same time, it reduced its position in Charter Communications (CHTR) by just under 5%. All other positions in the XYZ portfolio were unchanged, reflecting a generally stable investment style.

Investors wishing to copy XYZ's approach and "ride their coattails" could routinely review this company’s 13F filings and adjust their portfolios accordingly.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Frequently Asked Questions About Form 13F."

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