Whale watching (the investing kind)

Gathering information is good. Mechanically mimicking other traders may not be.

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Key takeaways

  • Monitoring the behaviors of influential investors is nothing new.
  • Heightened media attention, the evolution of trading technology, and social investing appears to have put a magnifying glass on whale watching.
  • Avoid mechanically following the investing actions of others.

Whale watching (the investing variety and not the out-on-the-water kind) is nothing new. For decades, investors have been monitoring the actions of large and/or influential investors (commonly referred to as "whales") who can have the ability to move markets simply by their buying and selling activity. Warren Buffett, for example, has been one of the most watched investors for most of his career.

Lately, trading based on the activity of some so-called whales has extended to other notable public figures. Should you follow this trend?

While there is nothing wrong with gathering information of all kinds to inform your investing strategy, trading based solely on the activities of someone else, regardless of who they are, can be a mistake. Even if you see anecdotal evidence of short-term profits being made, there are myriad reasons why sticking to your investing plan and doing your own research (particularly if you manage your own investments) may serve you best over the long run.

What's different now?

Financial news media, message boards, and other sources have dedicated copious amounts of time to dissecting the decisions made by well-known investors for decades. Yet increasing access to information, availability of social media websites, and the widespread use of apps have made monitoring the behavior of whales easier than ever.

Moreover, social investing—where groups of investors band together to make similar trades—appears to have amplified the visibility of whale watching.

This combination, plus the heightened media attention because of who these groups of investors are mimicking, has made it seem like whale watching has been taken to a new level.

Here's why you should avoid this strategy

It's easy to potentially see profits being made by those following the behavior of others that are deemed in-the-know and think this is a foolproof plan. It's also understandable to think that powerful people and investors have advantages that regular investors do not.

However, there is no way to ensure that the decisions being made by others are sound if you aren't looking into them on your own or with the help of an investment professional. Indeed, a guiding principle of investment professionals is to ensure having a reasonable basis for making an investing recommendation. Moreover, without knowing exactly when the influential investor you are watching changes their mind or exits their position, you wouldn't be able to replicate the trade exactly.

Most importantly, the investment decisions made by others, in all likelihood, may not align with your specific goals, risk tolerances, and unique situation.

Kicking the tires on an idea

Of course, there's nothing wrong with gathering information—including that gained from watching the habits of experienced and/or influential investors. If you come across an idea this way, it's critically important that you thoroughly investigate it on your own.

First and foremost, ensure that the investing idea aligns with your investing objectives and risk tolerance. In particular, any strategy or idea that exposes you to more risk than what you are comfortable with may not be something you'll want to consider.

You can research stocks and other investments in a number of ways, such as looking into the economic factors that influence the investment, sector and industry trends, impactful news, research reports, and fundamentals and technicals of the investment.

Here's a list of resources you might consider to really kick the tires on any investing idea that you come across:

Next steps to consider

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