Shouldn't We Just Copy Warren Buffett's Portfolio?

I could not come up with these ideas on my own. I came up with this idea from Warren and Charlie, and I copied it. So, one of the most important models that you can adopt is the model of cloning. When you see someone doing something smart, uh, just incorporate it.

So, that is Monish Pabrai. You may know him as the author of "The Dando Investor," which is a very good book that you should definitely read. But, more broadly, he is known as an extremely successful Buffett-Munger style value investor. And as you can tell by that first clip, he is a big fan of the idea of cloning the world’s best investors, being a copycat, and making no apologies for it.

And it might surprise you that I'm making this video because how many times in the past have I said very firmly that you should not buy a stock simply because somebody else bought it? Right? I say that a lot. But in all honesty, I actually really like the cloning strategy. And dare I say it, I actually do it myself. But this strategy may not be exactly what you think, so stick around, and we'll discuss what the cloning strategy is all about, how successful you'd be if you cloned an investor like Warren Buffett, and also the trick to make sure you're implementing this strategy the right way.

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Also, quick update: Mo's going strong seven days in, and I just wanted to thank, so far, Peter, Mark, Joel, Phillip, Senna, and Henry for donating. As at the time of this recording, we’re raising money for men’s mental health. So, if you’re interested, you can check out the link down in the description. I'll be growing this filth all month long.

But with that said, cloning. Alright, put simply, in investing, cloning is just following the investments of great investors and making some of those investments for yourself. And you might say, you know, how is this possible for me? I'm not in Warren Buffett’s rich circles. Charlie Munger never replies to my emails. How will I be in on what they're buying and when they're buying it?

But here's the thing: this is what's great for us as the little guys. The big-name investors that control more than a hundred million dollars—they have a hundred million in assets under management—have to file a quarterly 13F form with the SEC within 45 days after that quarter ends. And in it, they have to disclose the equity holdings, and this is public data.

In fact, this right here is Berkshire Hathaway's most recent 13F filing, and in it, we can see what companies Buffett holds, how many shares, and you know we can compare that to last quarter. Although, in reality, there are websites like, you know, Data Roamer or Ticker.com or Whale Wisdom that can automatically do that for you.

But yes, each quarter we can tune into Berkshire's 13F and see what Buffett holds and what he's been buying and selling. Interestingly, back in 2008, there was a study on how well you’d do cloning Warren Buffett. They looked at how well a portfolio of Buffett stocks would do if you only got to buy them after his 13F information became public.

So, they analyzed the time period of 1976 to 2006, so a 30-year time period, and they found that on average, this cloning portfolio would have averaged 24.58% per year. In that same time period, the S&P 500 only averaged 13.83%. This is the cloner portfolio, and this is the S&P 500. It's pretty remarkable.

Interestingly, they also found that just holding Berkshire Hathaway stock would have actually been the best decision to make during this time period. But nonetheless, this study proved the point that cloning Warren Buffett actually works. Monish Pabrai figured this out too; he is a shameless cloner. You know, in investing, there are no rules against plagiarism, so why not use the best investing minds in the world and leapfrog your portfolio off of their ideas? It makes sense.

But here's the confusing bit: you should never invest in a company because somebody else has invested in it. I don’t care if it’s Jimmy down the road or if it’s Warren Buffett, CEO of Berkshire Hathaway. You don’t invest in a business because someone else bought it.

So, let's now listen to Monish Pabrai explain how that rule and the cloning strategy are able to co-exist.

“Well, I mean, I think cloning is a very powerful mental model, and I don’t fully understand why. But, I’ve been a student of learning for more than, I would say, more than 33, 34 years, and it’s giving me a huge edge to understand as much as I do about cloning. But I still don’t understand much. One of the main things I don’t understand about cloning is why so many humans have an aversion to it. What I do understand is just a small sliver of humans embrace it, and most don’t. And so the ones who do embrace it get an edge.

But in investing, I think cloning is an approach you should take as a starting point of research. So if I find that I respect some investor and understand how their brain works, and I look at their portfolio, and I find some companies, and once I look at their portfolio, from then on, the cloning piece is history, and I have to turn my own brain on.”

So, I think that's a really good explanation of how to use the cloning strategy. You actually don't use it to simply copy another investor's portfolio. You use cloning to help you find businesses to add to your watch list.

And this is a question that I get asked, you know, occasionally. You know, Brandon, how do you find the next business to dive into? And a large part of my answer to that question is by watching what other great investors are doing. Remember, we get an update every three months; there are always fresh ideas from someone.

So, in my book, that’s the first step in finding new businesses to dive into. And then the second step is asking, is that business within my circle of competence? If it is, great! If it isn’t, don’t even bother. You know, for example, I look up to Warren Buffett more than any other investor. Warren Buffett, he loves to buy Bank of America stock. It’s his second-largest position behind Apple.

You know, Bank of America may be a great stock, but banking is well outside of my interests and my circle of competence. So, I’ve naturally never looked into that one despite many great investors owning it.

But, for example, when I saw that lots of investors were buying Google when the stock market crashed last year, that did entice me to do my due diligence, and I ended up buying. So, cloning isn’t actually about copying, after all. Cloning should actually be seen as an ideas generator. Then, as Monish says, it's up to you to turn your brain on and then go deep on the business yourself.

So, it’s just a tool to get a short list. It doesn’t really matter what that investor does in the future or in the past, or whether they have lost their way or whatever has happened. You’re looking at a specific position they’ve made, and you’re just using it as a way to reduce the funnel of stocks to look at.

So, if you identified, you know, five or ten great investors, and you just spent your time looking at their portfolio, that is a way better way to invest than throwing darts or running some, you know, quantitative screens or whatever else to get a short list.

Because at the end of the day, investing has a basic problem. The basic problem is the data set is too large. There are 50,000 public stocks in the world. Even if I spend all my time on them, I would never be able to become an expert on even 5,000 of them, or even 500 of them, or even 100 of them.

Okay, it’s just the data set’s too large. So, we need some way of culling the data, and cloning is a great way to cull that data set. So, as Monish says, there are around 50,000 publicly traded companies worldwide. That’s too many to screen. Even if we have the most vigorous screening criteria, we’d still return hundreds and hundreds of stocks. It’s just... it’s way too much data.

So, you know, don’t be afraid to use the ideas of investors you admire to help give you ideas. You know, focus on reverse engineering what their thought process might be. And then if you see something there and it’s in your circle of competence, then yeah, for sure dive in. It’s a perfectly sound strategy; it’s perfectly legal, and you know it’ll probably lead you to some pretty killer businesses.

But of course, as Monish says, make sure you also do your own research to figure out if you’re interested in it yourself. Cloning is good; blindly copying is bad.

So, that’s cloning, and you know, one stock you might have seen me talking about fairly recently was actually brought to my attention by cloning. This stock is, of course, Alibaba. You know, in Q1, Charlie Munger and Monish Pabrai, two great investors that I respect and follow from quarter to quarter, but then in Q2, you know, Guy Spier jumped in as well as Phil Town.

So at that point, I was really asking myself, you know, is there something to this? So I started digging into it, and I was reading annual reports and investor presentations. I was running discounted cash flow models, and I came to the conclusion that yes, this is a business I understand, yes, it’s got a big moat, yes, it’s well-managed, and yes, it’s at a margin of safety price.

So I didn’t copy those great investors, but I did follow Monish Pabrai’s cloning strategy. That idea to look into Alibaba was not at all an original idea. I did not find that one myself. I don’t claim to be some stock market wizard with all the ideas. But I think that’s the point: you don’t have to be right. And in fact, by just cloning great investors, you can find some really good deals in the stock market.

So lastly, I want to finish on how do you implement this yourself? Well, it’s actually pretty easy. The 13Fs, as I've been saying, are due out 45 days after the end of each quarter. So just put a reminder in your phone to log on to a website like Data Roamer, Whale Wisdom, and at around that time, and just spend half an hour looking up your favorite investors, what moves they've made.

And then from there, write down any recurring companies or companies that stand out to you, and then decide if you want to go into that extra detail and read about it. But obviously, don’t feel as though you have to do something. Don’t feel as though you should make an investment each quarter. Definitely not. In fact, most quarters you probably do nothing.

But occasionally, you’ll get a situation like what I had with Alibaba, where you see that four out of the eight super investors that you follow closely are buying this stock, and then it’s kind of a hint that you might want to check that out further.

So overall, that’s cloning. That is Monish Pabrai's method that he believes is very underutilized in the investing community. I hope you guys enjoyed the video. If you did, leave a like on it, subscribe to the channel if you have not done so already. If you’d like to see more videos similar to this, more value investing videos.

I appreciate you guys watching. If you wanted to learn how I go about my investing, the four... the Warren Buffett four kind of key pillar process, then you can check out profitable links are in the description below. Check out New Money Clips if you want even more New Money content.

But guys, that will do us for today. Thank you very much for watching, and I'll see you guys in the next video. Thanks again to Sharesight for sponsoring this video.

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But, uh, that's it for today, guys. Thanks very much to Sharesight for sponsoring this content, and I'll see you guys next time.

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