Clone Strategy

TURN PHONE HORIZONTALLY IF USING A MOBILE Listen to old men in a profession where men die young. Fish where the fish are. “When you only basically buy ideas that other great investors have already bought after studying them, the error rate you will have will be a small fraction of what you would have if you went out on the prairie on your own. If you go out on your own and look at 10,000 stocks and pick ten – trust me – your error rate will be off the charts. But if you pick ten out of the 40 that great investors have bought and you have looked into why they bought them, it’s like bowling with bumpers…Never bowl without bumpers when they offer you bowling with bumpers. ”— Mohnish Pabrai

Superinvestors are investors who have.

1. Beaten the market
2. By a wide margin
3. Through multiple market cycles

These traits give them a high probability that they are NOT the lucky coin-flipper from Buffetts famed “Graham and Doddsville”

After meeting this criteria this strategy requires them to have

1. Highly concentrated portfolios
2. Long time horizons.

Concentrated positions, because these are positions that they have researched thoroughly and have been processed through their filter and checklist. And long term horizons, because chasing investors who trade in and out is difficult and tax inefficient.

Superinvestors

1. Warren Buffett                   20% 50 years
2. Charlie Munger 20% 13 years
3. Mohnish Pabrai                 16% net 20 years
4. Seth Klarman                      17% 33 years no down years
5. Allan Mecham                    20% 16 years
6. Lou Simpson                       20% 24 years
7. Edgar Wachenheimm     19% gross 29 years
8. Gleen Greenberg               20% 25years
9. Jeffrey Ubben                      17% 15 years
10. Norbert Lou                         38.5%(’94-’03)  14.5%(’03-’11)
11. Tom Russo                           15% 30 years
12. David Abrams                     16% 15 years
13. Francois Rachon                15% 24years
14. Charles Akre                        13.5%-15% 20 years
15. David Tepper                      25% 20 years

Strategy:

• “[You can invest by] simply only taking ideas from great investors, studying them on your own … discarding the ones you don’t understand, take the ones that you really understand, take the ones that are absolutely no brainers, and buy those. And that will be enough to get you going for awhile. So I think the big message I wanted to just meet with you here is that cloning is extremely powerful. If you look at what I did with Pabrai Funds, …….when I’m actually buying stocks,……………………. very few of the ideas are actually things that I have generated on my own. ” -Mohnish Pabrai
• I reduce my error rate even further and limit my investing universe by trying to choose only businesses that multiple superinvestors have a high conviction bet in. This means it has gone through multiple filters and checklists.
• An ideal entrance into a position would be 10% of the portfolio at or below the price they paid. The ideal portfolio is 10 businesses in 10 different industries. However, I do not strive to be in 10 different industries, you should pick the absolute best businesses available.
• This is a starting point, and you’re already ahead. You haven’t done any research, given any time or effort, and have received all the benefits of their hard work. What a screen!
• Research: Next, do your research. Knowledge gives you a psychological advantage of comfort and strengthens your conviction. 99% of the time I will end up buying the business. Perhaps because my research confirms it is a great buy. Or perhaps it wouldn’t matter what I read as I was already biased by the superinvestors.

Sell:
1. If you are wrong, or even if you were right but an unpredictable event occurs.
2. The business reaches fair-over value
3. You find something cheaper/better
4. Or maybe if a superinvestor sells

Cons: Superinvestors could be wrong. Q1 2015. Valeant(position)(%)

1. Ubben(1)(22%)
2. Greenberg(1)(36%)
3. Simpson(1)(13%)

• Without knowing if they profited or loss from their Valeant position, the point is, their analysis’ was incorrect. Even if they made an enormous profit, we can not be “fooled by randomness.”
• Many times, the superinvestors 4th or 5th position outperforms their best idea. This strategy will miss those opportunities.
• Volatility: The high conviction businesses, owned by multiple investors don’t come along frequently. And if they do they may be out of a value price range by the time the 13f is released. This leads to infrequent buys and a highly concentrated portfolio, which leads to bouncy returns.
• Limits you to mostly mid-large caps. Not as many, or big of a discount available compared to micro-small caps.