Shamelessly cloning another investor’s ideas is a great way to build an investment portfolio, according to value investor Mohnish Pabrai (Trades, Portfolio).
Last week, I discussed Pabrai’s “10 Commandments of Investing,” the rules of investing that he believes every investor should follow throughout their careers.
Pabrai has spent years compiling this list of rules based on the work of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). He’s constructed these rules after studying the way the two billionaires approach investing. He's drawn from their experience and lessons, as well as his own education, to compile this short checklist for investing success.
Cloning investments
Pabrai’s commandment number 10 is: “Thou shall be a shameless cloner,” which is a topic I wanted to explore a bit further because it could be both helpful and misleading.
Copying other investors portfolios isn’t generally a good idea. Buying a stock just because someone else likes it, without understanding the reasons behind their purchase, is dangerous.
What Pabrai is advising here, however, is using the actions of highly successful investors as a sort of investment screen, and then doing your own research on top of that. Speaking as part of a webcast question-and-answer session with students at London Business School back in June, Pabrai said just that. He told the students that other investors portfolios should be “just a starting point for further research” because these ideas have “already been through a screen,” which means they’re likely to be safer than other holdings you might have picked yourself. Pabrai didn't add much detail in the Q&A session, but this topic is something he's talked about many times before. In a 2012 lecture, he gave a bit more detail:
“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 10 – trust me – your error rate will be off the charts. But if you pick 10 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. ”
And when the ideas have been through this first screen, you can take each one and put it through your own screen, discarding the ones you don’t understand and sticking with the ones you’re most comfortable with:
“[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, the structure, the setup of Pabrai Funds – completely clone the model – and then on top of it when I’m actually buying stocks, very few of the ideas – and remember this is just between us girls here – very few of the ideas are actually things that I have generated on my own.”
The beauty of this process is there’s no limit to how many ideas you can look at and chuck out.
GuruFocus tracks nearly 100 different guru investors, some of which have more than 100 stocks in their portfolios. There are 100s of different stock ideas to choose from, which should give most investors more than enough choices to find at least one company they’re comfortable buying on their own.
That’s the real benefit of using this strategy, and it’s why I think it is worth considering taking part in some shameless cloning if you’re looking for stock ideas.
Read more here:
- David Einhorn Is Still Betting on Brighthouse
- Warren Buffett Takes His Bank of America Stake Over 10%
- Warren Buffett: The Only Reason to Sell a Stock
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