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Cloning Strategy


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I'm planning to implement a cloning strategy on Pabrai's fund and have listed out some basic rules that i plan on using while implementing the strategy. I am also interested in learning names (or CIK's) for investors who's portfolios are characterized similarly (concentrated portfolio, value oriented, long term holding period, no shorting). Feedback on what these rules may have missed would also be appreciated.

 

1)Buy only if position in company exceeds 10% of managers disclosed portfolio (only purchase high conviction ideas)

2)Sell stake in company once manager has completely sold out of the position (avoids noise associated with redemptions and cash requirements)

3)Only buy or sell stock based on position from one manager (avoids acting on conflicting information from competing portfolio managers + reduces turnover)

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Here are a few random thoughts:

- Understand the manager philosophy: Holding period, trading around position etc (need long holding periods with little trading to clone)

- Make sure you are comfortable and understand their picks (what kind of draw downs are they and you willing to tolerate)

- How much of their portfolio shows up in 13F (for example shorts and international stocks do not show)

- Few managers get to 10% and above

- Largest positions might be the ones that have appreciated, worked and are now being trimmed or sold soon

- Pabrai does no actually clone any one manager. He reads tons of 13Fs, tries to understand the thesis behind their picks and clones if he likes it.

- He is very, very patient. Clones very few picks. Little portfolio turnover. Can go for many months without buying a new stock

- That being said, the general approach of cloning can work very well.

:)

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One other thing to keep in mind is non US holdings:

 

http://www.dataroma.com/m/holdings.php?m=PI

 

Pabrai has mentioned in recent interviews he is finding value outside the US. The link above shows around 300m in positions when we know he has more capital to work with. So the gap is made up by international holdings or cash or some of each. So you won't be truly cloning.

 

I prefer to use cloning as yet another source of ideas and would not purely clone because I couldn't deal with owning something where I am not clear what the thesis and IV is. If I had to clone to some entity identically based on the information that is publicly available it would be the non WEB holdings at Berkshire. Specifically because Ted/Todd are working with less capital than WEB and if I had to hold something where I was not clear on the thesis I would want to know their level of DD was being done. I think they were selected primarily because of their history of not breaking rule #1.

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What are the non-WEB holdings of Berkshire? i am not familiar with the term

 

If you review Berkshire's 13F last produced for holdings as of 9/30/2014--you will see 48 holdings.  The largest ones are Buffett picks.  However, Todd and Ted each manage about $7 Billion if memory serves me and those holdings are included as well.  The non WEB holdings are those smaller ones.  Berkshire is not required and probably won't ever separate those out. 

 

 

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What are the non-WEB holdings of Berkshire? i am not familiar with the term

 

If you review Berkshire's 13F last produced for holdings as of 9/30/2014--you will see 48 holdings.  The largest ones are Buffett picks.  However, Todd and Ted each manage about $7 Billion if memory serves me and those holdings are included as well.  The non WEB holdings are those smaller ones.  Berkshire is not required and probably won't ever separate those out.

 

Most of these holdings also have a bit higher turnover, that is they are bought and sold. I say most, because some like Teds Davita seems to only increase.

Publications like Fortune do a good job at guessing who bought what.

http://fortune.com/2014/10/14/buffett-proteges-ted-weschler-todd-combs/

;)

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it seems he trades a bit more than pabrai so i'm not sure if that meets the criteria i'm looking for a PM.

 

Ubben doesn't trade. He operates like Private Equity. Takes decent size initial position, gains a board seat or two, works as

friendly activist to restructure company and allocate capital efficiently, then increases his stake significantly.

Holds these positions 5 yrs. He's well respected and regarded - doesn't look for fights as an activist - and then bail ST.

He's a methodical long term player that gets in bed with the company ONLY if the board is in agreement with his

proposed direction. If, after his initial buy, he can not get agreeement - yes - then he will bail - and that will look like a trade.

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  • 3 weeks later...

Market Folly on Pro's/Con's of Tracking Hedge Funds Via 13F Filings

 

http://www.marketfolly.com/2012/10/hedge-fund-13f-filing-pros-and-cons.html?m=1

 

3. Focus on long-term investors with lower turnover: 13F's are filed on a delayed basis and it is basically a snapshot of a fund's portfolio from 45 days ago.  A manager can easily sell out of a position by the time a filing becomes public.

 

This is exactly why following long-term oriented funds is key: to reduce the effect of the delayed disclosures.  Long-term investors are more likely to hold on to positions for an extended period of time.

 

Many long/short equity hedge funds actively trade around positions and so manager selection for 13F tracking is crucial.

 

Readers constantly ask us to cover activity from well known funds Steve Cohen's SAC Capital due to popularity, so we oblige.  But in reality, SAC is a horrible fund to track via SEC filings due to the fact that they actively trade in and out of stocks (not to mention there's a ton of portfolio managers each doing their own thing).

 

This is why value investors are often good bets to track: they buy and hold (or at least typically hold longer than one quarter!)  Even so, through backtesting 13F's, Alphaclone found that for most L/S funds, the "average holding periods are much longer than most people perceive them to be."  So the effect of the delay in disclosures is smaller than you think.  They've found the average holding period to be around 1 year.

 

Managers that run concentrated books (Pershing Square, Fairholme) are also usually good bets because they have lower turnover and every position adjustment they make is that much more important to their portfolio.  The same can be said for activist investors (JANA, ValueAct) that take a stake in a company and try to help implement positive change over longer periods of time.

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  • 3 weeks later...

To the article I would say due diligence is always required.  That having been said if you find an investor who possesses the following characteristics you will likely do okay with cloning:

 

  • Low Turnover

High Level of Concentration

  • Primarily focused on US companies
     

 

Put another way I would rather clone someone like Meacham than invest in pretty much any mutual fund. 

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one thing i've realized lately is that it is difficult to find a small-cap manager who meets this criteria. i guess when you manage more than 100 million and forced to disclose it becomes harder to deploy capital in smaller names. all the guys i've listed out before are pretty much mid-large cap investors.

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Has anyone considered adding a momentum criterion like closeness to the 52-week high to their cloning strategy? Here is an interesting article on the subject:

http://www.valuewalk.com/2014/12/52-week-high-momentum-investing/

 

And another from AQR: http://www.aqrindex.com/resources/docs/pdf/news/news_case_for_momentum.pdf

 

My gut is that it would better to buy a stock when it is cheaper than what a guru bought it for - but if one were to use momentum, he would buy when the stock is nearer to a 52-week high:

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Has anyone considered adding a momentum criterion like closeness to the 52-week high to their cloning strategy? Here is an interesting article on the subject:

http://www.valuewalk.com/2014/12/52-week-high-momentum-investing/

 

And another from AQR: http://www.aqrindex.com/resources/docs/pdf/news/news_case_for_momentum.pdf

 

My gut is that it would better to buy a stock when it is cheaper than what a guru bought it for - but if one were to use momentum, he would buy when the stock is nearer to a 52-week high:

 

i haven't i have just targeted buying at a similar price to what level they have gotten in at. beyond that haven't tried to optimize with a momentum or trend analysis of any sort.

 

I've analyzed all these guys holdings for the past quarter of additions/new purchases names to look into are DNOW, HAL, JPM, GOOG, LUK

Document1.pdf

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