Does Mohnish Pabrai’s Cloning Theory Deserve Such Contempt?

Mohnish Pabrai, at every speaking opportunity, extols the virtue of “cloning” the stock picks or the stock picking process adopted by accomplished investors like Warren Buffett.

In a talk that he delivered together with Guy Spiers, Mohnish Pabrai explained the entire process in great detail by giving several practical examples. He also candidly admitted that he was a “shameless copycat” of Warren Buffet’s stock picking process.

Mohnish also expressed surprise on why the cloning process was not widely adopted by other investors though it is the easiest thing to do.

In a recent talk that Mohnish Pabrai delivered at a talk organized by Prof. Sanjay Bakshi at MDI, one could see the same theme being played out again as Mohnish extolled the virtues of cloning.

A woman participant asked Mohnish Pabrai (@44.27) how one should start the screening process, given that there were thousands of companies to look at.

Mohnish replied, only half in jest, that the way that he would go about it is to become a “shameless clone” and look at what other accomplished investors like Prof. Sanjay Bakshi, Amitabh Singhi and others were buying. He said that this would give him a workable list of 20 companies or so and that he would then short-list the selection to make his stock picks.

The participant appeared to be disappointed with Mohnish’s response and she retorted “So, basically, sum and substance, again the cloning approach. Not a raw screening as such”.

Mohnish was stung by the response. “You know, like I said, I am low life” he drawled. “Aap ne pedestal pe lagaya hai (you have put me on a pedestal). I am so sorry to destroy your pedestal and for suggesting that you stoop low”.

To me, this interaction brought home the point how passionate Mohnish Pabrai is about the cloning process and how, equally reluctant, amateur investors are, to adopt it in their own investment process. Somehow, cloning is seen to be an undignified way of picking stocks.

Speaking for myself, I have also been reluctant to adopt the cloning process primarily in the (mis)belief that once the news becomes public and the stock has already run up there is no merit in buying the stock. Also, there is the underlying fear that the great investor has bought the stock on some insider info and that he may dump the shares later, leaving you high and dry.

So, even though I knew that Prem Watsa and Prof. Sanjay Bakshi were bullish on Thomas Cook and there were a number of articles about how Prem Watsa was going to transform Thomas Cook into a powerhouse, I did not buy the stock. There are several other such examples where you see accomplished investors buying the stock but you give it a pass only on the basis that it is “too late”.

Here again, if you listen carefully, the answer is provided by Mohnish Pabrai. Though he uses the word “shameless clone”, Mohnish is not suggesting that one should blindly copy anyone’s moves. Instead, what he is suggesting is that we use the stock picks of others as a basis for making our own evaluation as to whether the stock is investment-worthy. So, if you find the stock is good on the usual parameters of high ROE, low debt, competent management, etc, etc, you can buy the stock. However, the important point here is that you are not a “shameless clone” but you are buying the stock on your own conviction.