Cloning, A Fine Art Or “Low Life Activity”?
Some novice investors are purists. They believe that the practice of peeping into the portfolios of eminent stock wizards is a dishonorable activity and should not be resorted. They are staunch believers in the theory that one should roll up one’s sleeves, pore over annual reports and pick stocks on their own merit.
However, other novice investors have no qualms in copying the stock picks of eminent stock wizards like Rakesh Jhunjhunwala, Radhakishan Damani, Ramesh Damani, Dolly Khanna, Vijay Kedia, Ashish Kacholia etc.
The underlying theory of cloning is that as all the hard work has been done by the wizards and they have shown conviction in the stock by investing their own hard-earned money in it, there is no harm in copying the stock pick.
Needless to say, both techniques have their respective merits and demerits.
(Novice investors piggybacking on ace investors)
Mohnish Pabrai, the “shameless cloner”
Mohnish Pabrai, an eminent stock wizard and investment philosopher in his own right, has given the practice of cloning a lot of respectability. He has no qualms in admitting that he is a “shameless cloner” and that he peeps into the portfolios of eminent gurus like Warren Buffett to see if there is anything in it worth copying.
“I have no original ideas. Almost everything in our portfolio is cloned from some other investor that I admire”. “The wonderful part of the business is that I still get paid”, Mohnish said in his characteristic Indo-American drawl.
Charlie Munger endorses the practice of cloning
One aspect that was hitherto unknown is that Billionaire Charlie Munger, one of the greatest investment philosophers of our time and a master stock picker, is a strong proponent of the practice of cloning other’s stock picks. This is made clear by his immortal quote:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting there and trying to dream it up all yourself. Nobody’s that smart.”
Meb Faber reveals top secrets of the art of cloning
Meb Faber, the founder of a hedge fund called ‘Cambria Investment Management’ and a well-known stock market expert, is also a strong believer in the merits of cloning. He has written a bestseller called “Invest with the House – Hacking the top hedge funds” which systematically explains how one can go about the process.
(i) Painstaking research + superior intellectual framework:
Faber explains that the eminent stock wizards pick stocks after doing painstaking research work. They have the intellectual and physical resources to research areas that novice investors have no access to.
(ii) Obsessive thirst for information:
“The best ones know everything there is to know about a company before they invest” he says and cites the example of Julian Robertson of Tiger Management. Julian Robertson had an obsessive compulsion to know everything is there to be known about his investee companies, including the school that their CEOs attended in their childhood.
(iii) Success begets success:
“Logic suggests that a manager who outperforms consistently must be pretty good at what he does,” Meb Faber says. He adds that while it cannot be predicted with certainty whether the manager will enjoy the same success in future, “logic suggests the odds are in your favor if you select and follow a manager who has a demonstrated record of success and then prudently add some of his stock picks to your own portfolio“.
(iv) Rigorous back-testing proves veracity of cloning:
No theory is good if it has not been tested in practice. Meb Faber has conducted a thorough back-testing analysis to determine what happens when novice investors clone the stock picks of the wizards, much after the news is made public.
The heartening news is that even investors who buy stocks much after the wizards have officially made the announcement of their own purchase have prospered significantly.
There are several case studies provided in the book to prove the merits of this theory.
(v) Avoid blind cloning, create an ‘idea farm’:
Though Mohnish Pabrai described himself as a “shameless cloner”, he made it clear that he is merely looking for ideas for further research and analysis. He does not buy a stock if he is unable to develop his own conviction in the stock.
Meb Faber has propagated the same concept. He has advised that novice investors should build a stable of successful managers and use them as an “idea farm” for stock ideas to research and possibly implement in their own portfolio.
Free download of “Invest with the House – Hacking the top hedge funds”
The best part is that Meb Faber has generously offered his best seller for free download for a limited period.
My latest book on hedge funds is free for two more days on Amazon. Don't miss out!https://t.co/YggH4qnZuq
— Meb Faber (@MebFaber) November 2, 2016
In honor of 10 year blogiversary and all my Amzon books being free, also giving away a free month to The Idea Farm:https://t.co/r2AZfSVpIT
— Meb Faber (@MebFaber) November 2, 2016
It is obvious that when anything is offered for free, we should grab it first and think later. On an earlier occasion, Steve Burns, an eminent trader in stocks had offered his bestseller titled “So You Want to be a Trader” Free for download. The book has proved very useful and reveled to us several hitherto unknown secrets of investing and trading. Meb Faber’s book is likely to prove as useful to us!