An acquaintance of mine recently expressed his regret in selling out his Idenix Pharmaceuticals Inc position before it got bought out by Merck. He was frustrated by having missed out on big profits. I asked him whether he understands complicated bio-pharm. He said no, bio-pharm is out his circle of competency. Then I asked him how much research he had done, he said the minimum. In the end, I asked him why he bought the stock without doing much research. His answer was “because Klarman bought it.”
This is not an isolated instance in the investment world. I’ve seen a few other folks blindly following gurus, be it Seth Klarman (Trades, Portfolio) or David Einhorn (Trades, Portfolio), without proper due diligent on their own.
Charlie Munger (Trades, Portfolio) has once said – the best way to get what you want is to deserve what you want. This is true in life and especially true in investing.
I don’t have a problem with being a copycat in investing. In fact, I’d argue that a great many of the superinvestors get a good amount of ideas from their circle of friends. Therefore, there is nothing wrong being a copycat. However, there is a huge difference between being a great copycat and being an undeserving copycat. This difference lies not only in the amount of due diligence that is required, but also in the mentality behind one’s investment decision making process. Do you like the process of solving a puzzle or do you just like the feel of making money, or do you enjoy both?
In order to be a great copycat, you have to control your greed and say no to the “action man” inside your brain. You also have to remember that borrowed convictions are often the most dangerous ones. Great copycats have a system that enables them to filter out the ideas that are out of their circle of competency and at the same, keep their greed in control by implementing a checklist approach. Mohnish Pabrai (Trades, Portfolio) is a prime example. Although he calls himself a shameless copycat, his success is much deserved in my opinion because the amount of time and effort he spend in filtering out ideas and doing research is probably pretty damn impressive. Just look at his portfolio. How many of the copycats out there have a portfolio as concentrated as Mohnish? How many copycats have the discipline to act only on a few big compelling ideas? And how many copycats have the conviction Mohnish has about his positions?
Most of the copycats are not like Mohnish. They forget that finding the ideas is only the first step. What is more important is the filtering process the subsequent research process. The peril of being a copycat comes from the mental attitude of taking shortcuts in investing. You may have made money out of luck by copying other great investor’s ideas.That makes you feel good but that doesn’t make you a good investor.You may be tempted to jumping out of your circle of competency due to greed. You may be tempted to blindly follow a superinvestor because you don’t have the time to research the idea. Whatever the reason is, you should not copy an idea without proper research on your own. If you don’t have enough time, remember Buffett’s advice – you don’t have to swing at every pitch.
Of course the most dangerous part about being a sloth copycat is the real possibility of losing money. If you have followed Bill Ackam’s JC Penney or Prem Watsa (Trades, Portfolio)’s Blackberry investments, chances are you are still underwater. I’m not saying they are necessarily bad investments. It just seems to me that it is very easy to form an opinion on these two names without much research and with big names behind them, it is easy to act on them. In fact, I’d argue that both JC Penney and Blackberry should fall into the too hard category for most investors. A too hard-situation combined with not enough proper due diligence can be one of the most dangerous situations in investing.
I may have sounded a little harsh in the above discussion but let’s not forget what Munger has wisely warned us: It's not crazy enough so that the world is looking for a lot of undeserving people to reward. My intention is not to inform the readers what is the proper attitudes toward borrowing other’s ideas, but to remind us that the best way to achieve superior investment result is by deserving it.
