Coattail Investing Strategies: How to Follow the Best Investors

One of my favorite secrets about investing is how to find great companies that are on sale. It’s so simple and it’s amazing that more people don’t do it, but they don’t. The secret is that we are going to coattail or copy the best investors in the world.

Coattail Investing: What We Look For and How We Find Great Companies on Sale

When we use coattail investing strategies on the best investors, we want to look and copy the people who we know have made enormous rates of return over 20 and 30 year periods of time.

Some examples of these types of investors are, Warren Buffett, David Einhorn, and Bruce Berkowitz to name a few.

If you had invested $1000 dollars in Berkshire Hathaway, in the year 1970 you would now have $4.86 million dollars in 2014. So following what Buffet is doing works pretty good.

How to Coattail Investors to Help Find the Best Stocks to Buy

How do you do it? How do we coattail the best investors? What is pretty cool is that investors who manage more than $100 million dollars have to file what they bought and what they sold every quarter with the SEC. All you have to do is look it up. It’s free information.

Find out what investors you want to copy and then go to the SEC website and look at what they are buying and selling every quarter.

They have to file every 90 days, so check to make sure the price of the stock is still around what they paid for it. If you like the company, which is very important, apply the 4Ms and make sure it’s on sale and then get in there and buy it.

Related: Learn how to invest and apply the 4Ms here.

Warren Buffett’s Stocks Over 30 Years

There was a study done at the University of Nevada that started in 1976 for 30 years. They found that If you had bought what Warren Buffett was buying, the month he said he was buying it, on the last day of the month, at the worst price of that day and you sold it the month it became public he said that he was selling, you would have compounded money on that 30 year period at 24% per year. That’s pretty stunning.

Learn more about how to invest like Warren Buffett during my Transformational Investing Webinar.

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About Phil Town – Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • Jennifer

    Hi!

    Rulers,

    While waiting for Rule #1 and Payback Time to arrive in the mail, I’ve started absorbing all of Phil’s videos, articles, and tutorials. I’ve done the full research exercise on three companies so far and I think I have a pretty good handle on the concepts he teaches.

    BUT…

    When I go to http://www.gurufocus.com and look up Warren Buffett and Bruce Berkowitz to see what stocks they bought, well, the companies aren’t even close to being “green”. A couple companies are even nearly solidly red. What am I missing?

  • Erick

    I have a question on going to the sec site to find the gurus trades? How do you do that. I’ve tried multiple ways but can’t seem to type the exact words or phrase the website wants. Can anybody point me in the right direction. Thanks as always :)

    • Keith

      Erick,
      Go to GuruFocus.com for seeing what the big guys are buying. Then, if you see a “big guy” buying something and it interests you, go to the SEC site for 10K annual reports on that particular business so you can do your own homework on it.

      • Erick Lindley

        ty Keith.. appreciate your help.. I am a member of gurufocus but was trying to save some $ if I could find it somewhere else for free :)

  • Garrett

    Rulers,

    What’s a busted MOAT look like? Well, several months ago we had some discussion on the blog about SodaStream.

    In those posts, I very quickly summed up my thoughts on SodaStream and my belief was that it could never compete with Coke or Pepsi should they decide to compete against them.

    Since then, Coke has prepared to launch its carbonated drinks on a countertop machine being developed by Keurig Green Mountain Inc.

    What’s happened to SodaStream? Look up the stock price and you’ll see SodaStream shares fell 22% on Tuesday.

    That’s a busted MOAT. CEO Daniel Birnbaum said, “lower than expected demand for our soda makers and flavors in the U.S.”…and…weak results are a “clear indication that we must alter our course and improve our execution.”

    That’s also translated in Ruler language as “We don’t know what we’re doing or how we’re going to survive.”

    Phil says that some of the best decisions you’ll make as an investor are the investments you don’t make.

    Stick to MEANING, MOAT, MANAGEMENT and buy with a big MARGIN of SAFETY.
    Do that and everything else will work out over time.

    To Your Wealth!

    Garrett

    • Alon

      I completely agree.
      In the discussion we had several months on the blog I pointed to several key problems in SodaStream model and it is not a surprise at all that their moat can’t be kept.

      I can only hope that the rulers who are following the blog haven’t issued a position in this stock. Since SodaStream moat is based on a short term hype, I don’t think that the stock has a much brighter future.

      • Doug

        Here’s another way to look at it: the Moat for SODA wasn’t busted….because maybe SODA doesn’t have a Moat. In the 4 M analysis Phil identifies specific types of Moats (brand, etc). To me this company is a good reminder: if I can’t identify the Moat, I can’t value the company. No value, no MOS. No MOS, no deal.
        My 2 cents anyway-

  • Garrett

    Rulers,

    Today I was reading an Op-ed in the Wall Street Journal in response to another writer’s article regarding capitalism in the West.

    I’d contend that we no longer have Capitalism. When you hear or read the media and politicians start crying for “fairness” and “social justice” run! Run for the hills! Run for the mountains!

    In this article, Ellen Sandles writes, “I can name several central bankers from developed countries who have supported the endless growth of government by buying government debt directly or printing money to keep the interest rate on the government debt low, or both – all to the benefit of governments while punishing their citizens. And here in the U.S., I can even name a few policians who, instead of sitting down and undertaking the necessary task of reforming an uncompetitive U.S. tax code, prefer to publicly demonize corporations for doing what’s in the interests of their businesses.”

    She confronts another contributor who wrote an article who opined that “business leaders need to show how they use their positions of power to contribute to the common good.”

    Run Rulers from any CEO that believes that!

    In her article, Ellen Sandles says, “On the contrary, the primary purpose of business leaders is to make a profit. Out of profits, come jobs. Out of good jobs come happy citizens who can raise their families and undertake charitable activities of their choosing. What’s sorely missing in the West is an understanding that what we have today isn’t capitalism.”

    I wholeheartedly agree.

    To Your Wealth!

    Garrett

    • Moncho

      Garrett,

      The last paragraph sums it up nice and sweet. When I hear the phrase, “common good” when applied to business, I get scared as heck!

      Hey, you have some big muscles, why don’t you lend Atlas an extra hand? He could certainly use it. :-)

      Great Days!
      Moncho

  • SK

    Completely unrelated to this blog post (my apologies) – did you folks notice that MSN Finance has changed? Can’t find the research data now, that used to easily available. :(

    • Peter

      Hi SK,
      Yeah, we’ve noticed that too. I even went ahead and created a new MSN email account thinking that some of the features were hidden unless you were logged in but I didn’t see any difference. The new format was obviously designed for phones, as so many sites that were once good have been changed in a similar manner. It’s a crap site now; I’m looking for something better.

    • Sue L.H.

      Try Morningstar.com. The new MSN money is useless

      • SK

        Thanks for Morningstar.com it is even better than the old MSN Money!!

  • Garrett

    Rulers,

    It appears to me at least, that the Central Bankers of the world are stuck between a rock and a hard place. The following is my paraphrase from a WSJ article I was reading today.

    The debate is “when will interest rates rise?”

    Central bankers are facing some serious, serious monetary problems. And it’s not just the United States. They’ve medled in the affairs of free markets – well, we wish we had true free markets – and now they’ve distored reality so much they aren’t sure how to get it back to normal.

    If Central Bankers DON’T increase rates they are afraid that that might set off adverse and unpredicatable reactions in the economy – distorting financial markets (Haven’t they already done this??!!)

    Here’s where we are at according to the Central Bankers and why they are screwed…they are officially in the “hope and pray” mode that it all kinda-sorta-works out.

    1) Global growth has slowed from pre-crisis levels ( the pre-crisis stuff was created by Central Bankers in the first place, wasn’t it?)
    2) Emerging Markets aren’t showing up with the growth they thought they would. Hmm…
    3) Inflationary pressures are weak (not on the stuff that is inflating – like food, fuel and education…the Central Bankers don’t include those things in calculating inflation – duh!
    4) Demographic shifts (like Phil highlighted in his headline and the books he mentioned) are changing economic forces
    5) Geo-political risks have risen
    6) Euro-Zone’s recovery has NOT recovered.
    7) Wage Inflation has been weak/Labor force participation rates are horrible
    8) Extremely high debt levels in developed markets according to the Geneva Report on the World Economy
    9) Banking system is still a mess

    Good luck. My back-up plan is for us to live in Montana, own a F-250 and pull a 5th Wheel trailer with all our backpacking gear.

    To Your Wealth!

    Garrett

  • Itch

    I am quite new to the Rule Number 1# but I have read and reread the book a number of times already. I have composed a list of a whole bunch of stocks that interest me and I have started researching them. The best website that had most of the information needed for free was MSN Money, the problem is that on the 1st of this month they have changed the website completely and now I have no clue where to find anything.
    Can anyone help?
    Thanks in advance

  • AngelaW

    Rulers,
    Am reading Stan Weinstein’s book that was recommended by the group some time ago, re technical analysis. He emphasizes the importance of checking sector strength and trending. How do we do that? Do you pick a sector ETF, just like we pick SPX or DTI for overall market condition? Thanks in advance.

    • Garrett

      Angela,
      Phil has a chart on his subscription based services called “Market Watch” that shows what sectors the big guys are dumping money.

      Honestly, I nor Phil have really found the need to use it.

      What I think we’ve all found more useful is just sticking to what we know – our area of competance…Panera, John Deere, etc.

      I thought Weinstein’s book was a good complement to Rule #1 Fundamentals. Weinstein is a pure technical trader. We Rulers are both as we like to use technicals and fundamentals. Some investors are 100% one way or the other. We kind of think both schools of thought have some merit, so we take what’s good and apply it to our own investing.

      I thought reading Weinstein’s book was helpful in training your eye to see Floors and Ceilings with all the examples he gave. But hindsight makes us all rich and buying based on pure technicals is difficult in real life.

      To Your Wealth!

      Garrett

  • Keith

    Yes. Definitely got to do the four Ms. The big guys’ buying in can give a lead or “tip”, or even confidence and validation for our own decisions. However, musn’t we do our own homework because some of these big guys may be buying on the hopes that the price will go DOWN? They are HEDGE-ing funds after all. I may be mistaken, though. I’m a beginner at this. But while coat-tailing for leads and/or confirmation seems to me that it may lend moral support, could their purchases be a derivative play (where they are covered and hoping to buy high/sell low and collect the difference-plus from the options)?

    • Garrett

      Yes Keith – you’re on the right track with your thinking. The bottom line is unless the hedgefund manager writes publically in a newsletter to his investors, you may not know why he’s buying/selling or shorting, etc.

      Here’s a real world example of some “coatailing” I did based on Monish Pabrai.

      Pabrai was big-time buying ZINC. So we did homework and understood the “Event” and catalyst why ZINC would go up in value. I started buying around $13.00 per share or so.

      I had every intention to hold on to this for a long time. But with MACRO View getting ugly and wanting to have cash to load up the truck if in a year or two some bargains became available, I sold out just under $19.00 when the short-term tools showed some unusual volume and downward pressure.

      Better lucky than good sometimes – because it crashed hard after I got out.

      Maybe Pabrai is getting out…I don’t know. I just know that I got lucky and didn’t get killed in the big sell off.

      You gotta be careful out there! Especially if you’re coattailing and not sure WHY something is dropping!

      A few lessons – yeah, it’s a bummer when something goes up, up, up after you’ve sold, but it’s a LOT easier to recover from that and find another Rule #1 Company than letting something drop below your basis and stuck in “investor hell” where you’re stuck for years with a losing position.

      To Your Wealth!

      Garrett

  • Garrett

    Good morning fellow Rulers!
    Phil’s lesson above about “coat-tailing” some of the best investors gives me an additional Margin of Safety and certainly helps lower my risk.

    Let’s take a look at IBM as an example. If you pull up the chart on IBM, where do you notice a floor? If you said right about at $170 you’re right.

    Do you know why that may be a pretty good floor? It’s because Warren Buffett bought IBM and his basis is $170.00. Now, if I know that and I’m not a Harvard Grad MBA/Goldman Sachs genius don’t you think everyone else must know that? Absolutely. And when one of the world’s most rational investors has IBM as one of his top holdings – who has certainly done more in depth research than I’ll ever be able to do – then that creates a significant Margin of Safety for me having Buffett as one of my investing partners.

    One thing about “coat-tailing” that’s VERY important. Make sure the business has MEANING to you. If you can’t understand the business then don’t just “do it because so and so is doing it.” Most of the time when you’re reading that a prominent hedge fund manager bought X million shares, if you don’t know how much their portfolio is worth then you may be taking on too much risk. Often if I were to invest the same percentage based on the hedge fund managers portfolio, it would be like making a $100 investment. Be careful!

    To Your Wealth!

    Garrett

    • Erick Lindley

      well said Garrett.. When I see the hedge fund guys buy millions and millions of shares its only barely 1% of there portfolio… They don’t risk nearly as much as you think they do ..

      • Donovan

        Coat-tailing is a great technique to use to trigger research on a particular stock. Mohnish Pabrai bought a very large position in Posco last quarter and I’m shoveling hard in an attempt to find out the possible reasons. Anyone seen an article on Pabrai’s reasoning?

        • Mike Mac

          per Barrons at the end of August…. it’s a turnaround story that appears to finally be playing out. Buffet has been in it for a while. It’s trading at about 0.6 times book value and has a nice dividend of around 2.5%. Overcapacity in the steel industry is being reduced, margins are increasing, the company is focused on profitability instead of just growing for the sake of growing. sounds like good things to me. And having Buffett and Pabrai showing confidence in the stock helps a lot.