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Cloning Investments

Why should we clone?

First let us answer the question: Why should we clone?


According to the paper, imitation is the sincerest form of flattery: Warren Buffett and Berkshire Hathaway, written by Gerald S. Martin, states, if an investor would have copied Warren Buffet’s investments even after they were publicly disclosed, i.e., after 1 month, they would have earned 14.36% annual returns per year, which is better than what the market earned in most of the years.


Mohnish Pabrai, manager of American based Hedge Fund Pabrai Investments Funds has cloned the majority of his purchases and has been quite successful in doing so. According to him, 


"Cloning is a very powerful notion. No good books have been written on cloning yet. If you take what Buffett did, then you are already beating the S&P by 11.5% per year.”


Mostly what Pabrai Funds did was to copy the other investors. Mohnish Pabrai said,


“I just give a slight tweak to it. I don’t buy what others are buying. I first look at what they are buying. Then I buy what I can understand and limit myself to two-three decisions a year.”


To have a better understanding of how cloning can be advantageous, let us take the example of Walmart Inc.


Walmart is an American Corporation which operates in a chain of grocery stores and hypermarkets. Its founder, Sam Walton, has mentioned on numerous occasions,


“Most of everything I've done, I've copied from someone else.”


Mr. Walton, one by one visited the most successful grocery chains in the world, copied the best parts of each store and established his own one which came to be known as Walmart. Today Walmart is a $380 billion (As of 1st July,2021) company with more than 2.3 million employees across the length & breadth of the globe.


Not only Walton, but several other businessmen who have achieved success weren't the first in their industry with a breakthrough technology, they just copied an idea and made it more efficient. If people have achieved success in the past by simply copying and tweaking the idea a little bit, then cloning may be advantageous.


There are several other reasons to clone, for example, if you take a look at the stock market, there are more than 5,500 listed companies on the Bombay Stock Exchange (BSE) alone. Analyzing a company takes a lot of time and money, and it is simply impractical for an individual to scan each company one by one.


If you cannot analyze the economy and all the stocks and industries present in an economy, what can we do?


The answer is pretty straightforward. If we can take a look at the institutional holding pattern, we can get a decent idea about good-quality investments in every sphere.


There is a problem with this approach though; the data of a fund’s holdings for a period are released at the end of a particular period, i.e., end of that month or quarter. But why is it a problem? 


Let's suppose you want to buy a stock by looking at fund manager's holdings, you either have to look at the last period's holdings or you have to wait for the latest updates to come, which are generally, at the end of a month or quarter. A fund manager by then would have already purchased that instrument at the best possible price. It is possible that you have to overpay when you're buying, or, underpay when you're selling that stock. This doesn't mean that investors will not generate profits; it simply means that this strategy will not give us maximum returns in most of the cases. 


Questions may arise into your mind that why are people not cloning other’s ideas more frequently? Or if we know what works, why do we want to do something else?


The answer is related to human psychology. If humans were so prone to cloning, we wouldn't have different companies with different strategies, or, we wouldn't have different investors with different approaches. Everything would have been the same. It is seen that everyone wants to be different; we want to establish our own identity by following the path that we prefer.


It is seen that people generally do not want to clone. It is not easy to digest for us humans to just simply copy someone’s idea/philosophy and live with it. 


To overcome this factor, we should not just simply copy an investor's strategy, instead, one must carefully analyze the investment & do our own due-diligence before risking our capital.


In the words of Mohnish Pabrai, who is a very successful clone investor himself, 


“There's something in the human psyche and something in our evolution that makes we human beings averse to doing things the easy way or taking some simple ideas and just running with it. The few of us, who can transcend like Sam Walton and Bill Gates, etc, get a massive advantage. In fact, in the investing business, you see this all the time – no one is willing to clone."


Another factor attributing against cloning can be the DIY generation. Many young blooded individuals view the 20% CAGR returns generated by Mr. Buffet since inception as a slow & boring method of creating wealth. For them, the stock market is more like a game of roulette and the stakes are double or nothing.

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