felixfallax @felixfallax: "Common Copy Trading Misconceptions Over the..."

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Common Copy Trading Misconceptions Over the past few years, I have not seen anyone (including myself) who has managed to generate consistent, risk adjusted, market beating returns via copy trading. Instead of blaming the person being copied, let’s look at our own psychology and biases. 1 – Copying at All Time Highs (and being surprised when it drops) I often see people saying “I copied you because you were one of the top performers over the last few years but I am now X% down”. This is a prime example of “reversion to the mean”. In Jack Bogle’s book on common sense investing, he tracks around 600 mutual funds over a 5 year period and ranks them from best to worst. He then tracks the same funds over the next 5 years and finds that many of the top performing funds in the first 5 year period are actually amongst the worst performers in the next 5 years. I witnessed this myself with several of my copies such as Jaynemesis, Wesl3y and rubymza who were exceptional pre-2021 but since then have each made under 10% total profit in 5 years (previously were making 15-50% PER YEAR on average). On a larger scale $BRK.B (Berkshire Hathaway Inc) has been the best performing company historically but hasn’t beaten the market for the past 20 years. As such, people should not be surprised if the top PIs they copy such as thomaspj or TriangulaCapital do not replicate their 2020-2025 performance from 2026 onwards. So far this year, that’s been exactly what’s happened. 2 – Obsession with Trading Most copiers seem to write comments like “I copied you because you are able to time the market and predict trends.” If only investing was this simple. In reality, 90% of US professional fund managers underperform the $SPX500 or ETF $SPY (State Street SPDR S&P 500 ETF) over a 15 year period according to SPIVA data and I believe this rises to 95% over 20 years. Why should your PI be any different? www.spglobal.com/spdji/en/research-insights/spiva/ 3 – Drawdown and Stop Losses I will frequently see people kicking off because they are copying someone who is 100% allocated to equities, in some cases all US tech, and the copy draws down by let’s say 10%. If you look at $NSDQ100 or ETF $QQQ (Invesco QQQ) there have been frequent drops of 30% and even one 82% drop so if you are copying someone investing in semiconductors and setting your stop loss at 10-15% you will almost certainly trigger it and lose money. That’s on you. As per above, don’t even think about the person having some sort of all seeing eye and predicting these drops in advance and hedging/shorting. See JORDENBOER for a cautionary tale on shorting (has now returned less than half the S&P since joining eToro despite comprehensively beating it in 2022). 4 – Break Even Then Stop Copy This is one of the most flawed pieces of investment psychology and works as follows: “I think you are a bad investor and really regret copying you and being 20% down. You seem to have completely lost your discipline, in fact, I doubt you are even managing the account anymore and have been replaced by a (Nier) replicant/eToro AI subroutine. However, I am going to wait until you recover 25% and my copy breaks even, then I will stop it”. Can you see the problem there? If you think the person is a bad investor and has lost the plot, why on earth would you copy them for one minute longer and risk them losing more of your money? Surely the optimal play is stop copy, take the 20% loss and make the required 25% to break even somewhere else? Loss aversion and anchoring bias at play. 5 – It Can’t Just Be Luck I will frequently see people saying “I copied you because you made profit 6 years out of 7 [or in some cases even 7 out of 7]. This can’t be luck”. It only takes a cursory glance at the overall market to see that it increased in value by a LOT for 6 out of the past 7 years therefore picking stocks at random would give you 6 out of 7 positive years. Having 7 winning years only requires getting lucky in one year (2022) which is hardly a reliable data set. 6 – Grass is Always Greener Last but not least, recency bias frequently kicks in and the following happens. “I copied you as you made 200% in the past 5 years but you are doing terribly this year so I am going to quit the copy and instead copy someone who joined eToro last year and is 50% up YTD after betting on AI stocks.” I don’t need to tell you how that will probably end but the previous 5 points should give you a clue. 7 – Conclusion Copy trading is a difficult business but it’s made twice as difficult when the copier comes in with irrational biases and a poor understanding of how investing works. Unfortunately, this is the type of person who will usually gravitate towards copying (as the same biases mean they cannot invest well themselves) so I cannot see the situation changing any time soon. FF

Not investment advice. The author may have financial interests in the mentioned instruments.