Shadow Investing is one of the most prominent investing styles employed by retail investors. During the good times, it reaps good rewards, but what about the bad times? Every time shadow investing goes wrong, the only remains are regrets and a broken will. We’ll cover in this article the various pitfalls in shadow investing.
In the past few years, retail participation in the securities market has skyrocketed. With the help of low-cost brokerages, mobile platforms to invest, and easier availability of data, retail investors have taken a shine to investing. Retail participation accentuated in the 2016-18 period, when every second company was creating unprecedented alpha. And a good chunk of retail participation was courtesy shadow investing.
So, What Is Shadow Investing?
In plain and simple terms, shadow investing is blindly cloning the portfolio of marquee investors or renowned fund houses. With SEBI’s norms of disclosure , it’s easy to obtain information regarding most of the bulk deals. And every time anyone holds more than 1% of a company, it shows up in the quarterly shareholding pattern. Any significant change in shareholding pattern or significant bulk deal would be bandied by the media as some revolutionary investment event. Is it any surprise that retail try their hands at shadow investing?
Promoters increasing their stake is also something that piques retail interest in a stock. Owing to SEBI’s Insider Trading disclosure norms, it’s necessary for promoters to disclose every time they increase their stake. This is irrespective of the size of the position. It becomes enticing for retail to take entry to these companies when the news get out.
The impact of shadow investing, especially in smallcaps, is often very visible. Once the news of a block deal is out, the stock will be locked in upper circuit for the next couple of days. It doesn’t matter if the circuit is 20% or 10%, retail investors take a shine into the stock. As recently as a few months ago, Simplex Infra was on 3 successive upper circuits because of a marquee investor making an entry. The volumes in the stock also saw an exponential increase during the time.
Shadow Investing: What Retail Should Know
Portfolio Size: This aspect is often not mentioned in the media nor does retail have any idea about it. If RK Damani buys a stake in Delta Corp, retail will latch onto it. But Damani’s major chunk of investments are in Avenue Supermarts. The entire market capitalization of Delta Corp is only near 1.5% of Avenue’s market capitalization. RK Damani would have very limited exposure here. It’s a classic case of “Heads, I win. Tails, I don’t lose much”. What percentage of portfolio of the marquee investor is going into the bulk deal needs to be assessed. What’s 0.01% of their portfolio can very well be life-time savings for the retail investor.
The Risk Profile: This is probably the most important aspect. The risk profile of marque investors would be vastly different from that of retail. Their gestation period would also be much higher than that of retail investors. They’ll easily be able to digest a 50% nominal loss in select investments for more than half a decade. Will retail investors be able to digest a similar drawdown?
Borrowed Intelligence: Shadow investing is a variation of borrowed intelligence. There’s only so far it will take investors. We had previously discussed about how to go about investing. Shadow investing is against all those parameters. Retail losses have to be suffered by retail, no marquee investor is going to lend you a hand.
Risks In Shadow Investing
The Information Gap: The marquee investors are almost always privy to some information which might not be available to retail. Companies, at least the smaller ones, would be more than willing to entertain the marquee investors, as compared to the indifference they show to retail.
The Information Lag: According to SEBI’s disclosure norms, the name of the marquee investors would appear in the shareholding pattern for the stock, only if their holding is over 1%. More importantly, there could be a 3 month lag between their exit and when retail gets the information. Remember the time when Rakesh Jhunjhunwala bought JP Associates? Subsequently, he had an exit from this company, and retail was none the wiser till the next shareholding pattern was published. Needless to say, shadow investing failed miserably.
Is It All That Bad?
Definitely not. Anyone who has dabbled in investing would know about the difficulty in finding new opportunities. If we track marquee investors, we’ll know what are they looking at. However, the analysis part should be entirely with the investor. We have to keep in mind that the marquee investors don’t owe retail anything. They are not investing to create wealth for retail, instead they do so for securing their own future.
We need to find our own path, our own destiny, and within that our own comfort. Trying to imitate someone who is different on all these fronts would be disastrous. But the marquee investors are full of lessons. If we try to tailor a philosophy for us using their stories, it might just work. Their investment philosophy should be learned and cherished, but not copied !