How to Be the Perfect Copycat

Apr 7th, 2006 | By Penny Sleuth Contributor | Category: Investing Strategies

Have you ever considered buying a stock because your friend or relative said he just bought it? Have you ever thought about investing in a company after reading about it on an online message board? Have you ever met a wealthy person and wondered what he has in his 401(k)?

Let’s face it, we all want to know what stocks other people own, and it’s tempting to go out and buy a stock because somebody we know just did. It gives us reassurance in a frenzied, complicated investment world. It’s easier to think, “If the stock is good for my uncle/neighbor/friend, then its good for me too, right?”

There is nothing wrong in borrowing a good idea or two (as long as you do your due diligence before investing). Even renowned fund manager Peter Lynch borrowed ideas from unexpected avenues, like his wife and daughters’ shopping habits.

But if you want to draw inspiration from others’ investing ideas, don’t copy the ideas that come from message boards, friends or relatives. Aspire to be a classier copycat!

It’s not just about leaning over and taking a peek at the next guy’s investment account. Being a good copycat investor is quite a science! Let me show you two ways how you can do just that AND make a killing being the perfect copycat.

1. Emulate those who are more experienced. And I mean Warren Buffett. Last year, Buffett revealed that he bought shares in Anheuser-Busch (BUD:NYSE), the maker of Budweiser beer. The stock appears super cheap at 18.27 times earnings, and a 2.5% dividend yield doesn’t hurt.

If you read Buffett’s 2005 letter to shareholders, you will know that he bought Forest River, a recreational vehicle manufacturer with stellar management. Although Forest River isn’t public, Buffett’s purchase indicates that the RV business is worth looking into.

Some stocks that Buffett buys immediately embark on a sensational bull run. If you had bought shares of PetroChina (PTR:NYSE) when Buffett did in 2003, you would now be sitting on a dizzying 400% profit.

Reading his annual letter to shareholders is the easiest way to get a list of all of Warren Buffett’s holdings and new purchases. An archive of these letters can be found online at http://www.berkshirehathaway.com/letters/letters.html. If it’s good enough for Buffett, it is surely good enough for us.

2. Buy stocks that other companies are buying. Large companies can be their own equity funds. That means they have so much free cash that they go about buying entire companies. Many hold large portfolios. You can’t be a good copycat without looking at what these companies are buying.

Take BFC Financial Corp. (BFCF:NASDAQ), for example. This financial company owns significant portions of several other publicly traded and private companies. While BFC itself is worth investing in, a look at its portfolio is very insightful. One company in its portfolio stands out, time share and real estate developer Bluegreen Corp. (BXG:NYSE). BFC owns 31% of Bluegreen, and in the last three years alone, Bluegreen’s stock went from $3 to $13. BFC obviously sees value in Bluegreen’s shares. That’s not surprising, since Bluegreen trades for just 8 times earnings, has an ROE of 14.9% and saw net income grow an average of 67.72% over the last five years.

BFC also owns 10% of Japanese steakhouse Benihana. While the company isn’t public, perhaps there is an investment trend emerging here. If BFC spent $20 million to buy 10% of Benihana, surely Asian-themed restaurants are good businesses. You could then look into similar investments, like P.F. Chang’s China Bistro (PFCB:NASDAQ).

If you do some research, you can easily find other holding companies like BFC. Pick the ones you like and watch their activities closely. If any of your companies announce that they’ve acquired shares of another company, be sure to look into the acquired company for a potential copycat investment.

And the next time someone asks you what your investment technique is, go ahead and tell them proudly that you’re the perfect copycat investor.

Regards,

Sala Kannan

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

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