Coattail investing is a process that occurs when an investor attempts to release a return by duplicating the strategies that have proven successful for another investor. In order to accomplish this process of imitating success, the investor will initiate the copycat trades as soon as the trading performance is made public. When the trading is accomplished in close proximity to the original activity, the expectation is that the coattail investor will be able to at least make a modest profit before the market changes and the trade loses upward momentum.
True coattail investing involves overlooking a number of factors that are considered very important with other investment strategies. The coattail approach often means giving no particular attention to the overall considerations of the investment portfolio, or even taking a moment to evaluate the amount of risk associated with the stock. Essentially, if the investment was good enough the first time, it is expected to work just as well for the copycat investor.
As a learning tool, the concept of coattail investing is not a bad approach for a new investor. The action of choosing to model an investment strategy after the trades conducted by a successful investor can help the investor to further his or her education about market conditions. This is because both success and failure use coattail investing will make the investor more familiar with what is going on in the market and which strategies are currently working well.
At the same time, relying solely on coattail investing carries an element of risk. First, timing can be everything in any type of investment market. A seasoned investor may execute a trade and already be making a change by the time the first transaction is made public. Coattail investors may or may not be aware of this second component until the stock or option has peaked and begun to decline.
However, investors who know how to evaluate a trend and determine there is still time to get in and make a profit are often able to avoid losing money on coattail investing. That is because the copycat investor may choose to deviate from the strict formula and take time to project the anticipated movement of the stock before executing the duplicate order.