Coattail investing from multiple independent guru investors

Effectiveness explained through Monte Carlo simulation

Coattail investing (aka “copycat” investing) means following the ideas of reputed guru investors. These guru investors could range from successful asset management companies to internet celebrities on stock investment. In this article, I will demonstrate through Monte Carlo simulation why coattail investing from multiple independent guru investors could be an effective strategy.

Worth noting, before following ideas from these gurus, one needs to run due diligence on their unique investment principles (which distinguish them from copycats) and also make sure there is little time lag in their ideas (rapid changes in the stock market could outdate ideas).

I will jump to the conclusions but in case you are interested, I also explained the simulation environment at the end.

Coattailing from a single guru: higher return

We observe a higher average return rate from a single guru investor (who gives more accurate prediction of individual stocks going up or down).

Figure 1: a more-guru investor (orange over blue) with better prediction achieves a higher average return in a simplified neutral market (50% of stocks move up and 50% move down).

Coattailing from multiple independent gurus: much higher return than from a single guru

How about we introduce more independent sources? Here are two takeaways:

1. Following more inexperienced investors does NOT lead to a higher average return (refer to Figure 2 and 3: blue vs orange).
2. Following more independent gurus and majority-vote their investment decisions lead to a much higher average return, especially in a bear market (refer to Figure 2 and 3: green vs red vs purple).

Figure 2: return rates in a simplified neutral market. Blue vs orange: following more inexperienced investors does not change the average return rate. Green vs red vs purple: majority voting on more independent gurus gives even higher success rates.

Figure 3: return rates in a simplified bear market. Green vs red vs purple: majority voting on more independent gurus still gives higher success rates. Blue and orange: inexperienced investors without following a guru could suffer from a negative return.

Disclaimer:

The above is not investment or financial advice. It is educational content that is based on personal research and experience. It is shared for informational purposes only.

Reference: simulation environment

We simulate n stocks which all start at the price of 1. As simplified modeling of the stock market trend, we also specify bull_stock_rate in [0, 1] which determines the ratio of stocks that will move up by 50% (the rest of stocks will move down by 50%). The higher bull_stock_rate, the more bullish the market.

We model investors based on their successful prediction rate of whether a stock will move up or down. Investors will buy all the stocks that they predict to move up. Each individual investor predicts independently based on unique principles.

The simulation is written in Python in an IPython notebook here.