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The Downsides of Shameless Cloning


joka
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Hello fellow investors!

 

I have been a passive investor for quite some time until I, around a year ago, adopted the shameless cloner strategy and allocated a portion of my portfolio using this strategy. It is currently a smaller part of my portfolio and I am taking my time to try and figure out what the possible downsides of such a strategy might be before I increase that portion and thus starting this thread to get your inputs. 

 

My cloning strategy as of today is that I identify a handful of Buy & Hold Value Investors with a long and solid track record and more importantly are investors I feel comfortable cloning purely based on my assessment of their personalities and to what extent I trust their ability and decency. Of course this is based on public material and one could argue that it is not entirely representative of who they really are but the reasoning here is that the more I trust the manager, the more likely I am to not panic in tough times assuming they keep their positions in whatever company I have cloned. 

 

Secondly, I don't clone single ideas but ideas that appear in many of the portfolios of the managers I have chosen to clone and is selling for a similar price to what the lowest price during the quarter they bought was. A great example would be Alphabet, which appears as a top holding for almost all of the investors I clone and many of which have been adding significantly to during last quarter. My logic here is that if multiple investors have went through the analysis and concluded the same thing, it is far more likely to be correct than if only one investors does so. Having multiple investors owning the same stock you clone also helps when one or two investors sell that holding for whatever reason and my rule is that, unless all or a huge majority of the managers I have cloned sells, I wont sell. This again makes it easy with conviction and allowing me to hold the position for a long time as I think conviction is a big challenge when cloning. 

 

In conclusion, the main risks I have identified are conviction (which I counter through multiple investors I find trustworthy investing before I clone) & the fact that only US holdings are public which I am ok with today as the US is where I invest most of my money anyways. My question to you guys is, what am I missing? 

Edited by joka
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Posted (edited)

Hey @Gamecock-YT, that is a valid point and the way I think about that is two-fold. First, I do clone but I also clone companies I am able to understand and I try to figure out what the thesis of the investment manager is by reading their shareholder letters, listening to interviews and so on and so forth so I do a fair bit of research myself as well. However, I do have some positions that I can't claim I grasp fully and those are more of a pure clone. In that case, I rely on the fact that the investors I have cloned are super long term (inactive) investors and they make the analysis and buy once they decide they want to own a company for many years. If all of the investors I clone chooses to sell out all of their position, I am ok with doing that with a 3 month delay. I think that managers could sell for many reasons and all don't have to be because they think the investment is a bad one but maybe they found a better idea but if everybody that I cloned sells, that is a sign that they may have found a flaw in the analysis and I would sell the moment I found out which will be delayed. I am thinking that delay wont matter much over the long term if I sold three months prior unless the company goes completely bankrupt. If I were to clone shorter term investors, this would be a big problem however. For example, looking at Michael Burry who can change his entire portfolio within a quarter is not someone I would clone for this exact reason but Charlie Munger who makes a move once every decade is easier to clone and a 3 month delay may matter less in that case. Now imagine having 5 Charlie Munger type investors who would all need to sell out for me to sell. I am assuming that is unlikely in this case. 

 

Edited by joka
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@jokaMy father does what you describe. It has worked reasonably well for him. He got ripped on BABA, but has had a lot of success with the strategy. You will still always need to have a portion of your own conviction/thought. He follows a handful of managers that align closely with his lines of thinking and longer term holding. 

 

I do notice he gets wishy washy on new holdings that flounder but overall its worked out for him. He uses me as a sounding board on most of his investments. I do a lot more bottom up analysis but like to use 13Fs for ideas. I like looking for peoples Ideas that have declined since the 13F reporting / publication lag. Looking at other investors ideas is a great starting filter. They purchased the company for a reason. If they bought it to early can I buy it once its reached closer to the bottom? assuming there is not a fundamental deterioration of the overall business? 

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Posted (edited)

@Longnose, good to hear! Have he done this for long? BABA is a good case study as many have sold out of that position which made shameless cloners a little shaky but that is where it helps to have more than one investor you clone that idea from and of course have your own conviction as you say. In my case for example, it didn't matter much that Pabrai sold out (which we later found out was a tax loss harvesting play) but the majority of the folks I cloned still kept their position and thus, so did I. 

Edited by joka
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1 hour ago, joka said:

@Longnose, good to hear! Have he done this for long? BABA is a good case study as many have sold out of that position which made shameless cloners a little shaky but that is where it helps to have more than one investor you clone that idea from and of course have your own conviction as you say. In my case for example, it didn't matter much that Pabrai sold out (which we later found out was a tax loss harvesting play) but the majority of the folks I cloned still kept their position and thus, so did I. 

About 5 years ish prior to that he was all in ETF's Mutual funds. - Hes tracked slightly better than the S&P since starting the strategy. He likes that he feels more connected to the companies hes invested in vs the feeling of broad indexing. He sold out of baba when Charlie sold half. 

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Posted (edited)
21 minutes ago, ERICOPOLY said:

My grandmother did well buying shares after tips from her broker.

 

How is getting advice from a broker, and following that advice, any different than shameless cloning?

 

If your grandmothers broker is Buffet and he gives her a quarterly update, I'd say there is no difference 😉 Jokes aside though, shameless cloning allows you to choose amongst known investors with a proven track record and loads of material to research these people to clone. There is no crooked incentive on their behalf either and they are invested in the tips you take and aren't just giving tips for the sake of giving tips. I'd say that is significantly different but I take your point that in the end, you are just taking tips from someone.

Edited by joka
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Since you mention that you try to understand the thesis behind super investors decisions, have you decided what will you do if you dont share their thinking and thesis? I think it would be better to proceed the same whether you like an idea or not, since cloning is delegating investment decisions to super investors after all, but it is up to you obviously.

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10 hours ago, ERICOPOLY said:

My grandmother did well buying shares after tips from her broker.

 

How is getting advice from a broker, and following that advice, any different than shameless cloning?

 

It isn't, but the whole 'this person did x and did well' argument is a fallacy.

That's like smokers saying "my grandfather smoked and he lived to be 97".

 

I don't have a problem with cloning but actually cloning with success is difficult. There could be additional hedges you are unaware of, you might not clone the entire portfolio and pick more losers than winners, you can clone someone who was really good in a certain macro environment and now the environment changed, he starts losing money...

 

I see little value in cloning guys like Buffet or Ackman when you can just buy BRK or PSH, unless you are certain that a certain pick will outperform their average portfolio but in that case you need to do some due diligence anyway.

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11 hours ago, elliott said:

Since you mention that you try to understand the thesis behind super investors decisions, have you decided what will you do if you dont share their thinking and thesis? I think it would be better to proceed the same whether you like an idea or not, since cloning is delegating investment decisions to super investors after all, but it is up to you obviously.

 

That's a good point @elliott and it might be sub-optimal to add my own filter and not just follow a strict cloning process. My research is usually to understand the investors thesis so that I can stay calm in moments of turbulence and I haven't really disagreed with any one investor yet. However, it could be that I choose not to clone a specific company in case I happen to own several similar businesses or something along those lines. 

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Posted (edited)
1 hour ago, Paarslaars said:

 

It isn't, but the whole 'this person did x and did well' argument is a fallacy.

That's like smokers saying "my grandfather smoked and he lived to be 97".

 

I don't have a problem with cloning but actually cloning with success is difficult. There could be additional hedges you are unaware of, you might not clone the entire portfolio and pick more losers than winners, you can clone someone who was really good in a certain macro environment and now the environment changed, he starts losing money...

 

I see little value in cloning guys like Buffet or Ackman when you can just buy BRK or PSH, unless you are certain that a certain pick will outperform their average portfolio but in that case you need to do some due diligence anyway.

 

@Paarslaars, the point about the hedges is really interesting and something I have thought about but not really acted on. The kind of investors I clone are usually long-only, buy&hold, concentrated type investors like for example Guy Spier, Seth Klarman, Prem Watsa etc. What kind of hedging would such investors have you think? I usually tend to clone largest holdings and so I am betting on high conviction bets that have been made by several "superinvestors" to try to counter the effect of choosing losers. I am not thinking about it on a portfolio basis (although I try to have some diversification) but mostly I think on a company-by-company basis and the investors I follow are not macro-type investors so I am ok with their approach working less well during certain periods. I try to have an infinite time frame in those cases. You are right though, when it comes to Berkshire, I do own a large chunk of my portfolio in it and as half of that portfolio is Apple for example, I would not clone a purchase in Apple but might clone some position they have a 5% holding in.  

Edited by joka
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Shameless cloning = brainless cloning. I think the likes of Guy Spier, Seth Klarman and Prem Watsa have underperformed index investing for a long time, why would you want to clone them?

I think looking at what other investors are buying and why has value but you need to put your own thinking behind these ideas and then  It’s not cloning (cloning means carbon copying) any more.

 

I think cloning in a strict sense does not work in most cases.

 

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2 hours ago, Spekulatius said:

Shameless cloning = brainless cloning. I think the likes of Guy Spier, Seth Klarman and Prem Watsa have underperformed index investing for a long time, why would you want to clone them?

I think looking at what other investors are buying and why has value but you need to put your own thinking behind these ideas and then  It’s not cloning (cloning means carbon copying) any more.

 

I think cloning in a strict sense does not work in most cases.

 

 

@Spekulatius, a few questions. We can discuss the managers to clone all day but I am more interested about the latter. Fundamentally, I agree with you that it is great to analyze a company, grasp it fully and only then make an investment. I am completely onboard on that idea and believe in it wholeheartedly. I think that I am more of a taker of ideas than a full cloner but I am interested in knowing why it is that you think shameless cloning wouldn't work? For example, if you can take the best ideas of the best fund managers and copy that idea to the same or a lower price that they bought it for, what would be the reason this would not work? All I can come up with is conviction and if you do not understand the idea, you may act irrationally. Other than that, what would be the reasons you think this would not generate good returns? My theory, and I think this has been backtested, is that it should generate superior returns as you are literally copying the best to the same price. Fundementally, I am assuming that their ideas will always be better than mine given their experience, resources and so on. 

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@joka I think one issue why cloning doesn’t work is the information lag. It’s up to 3 month on entry and exit, if you are talking about using 13F. When a manager is actively promoting a position ( basically pumping a stock where he has a position in) it’s even worse because you might be buying what he is selling. This is what happened with many FinTwit small cap and mid cap stocks that were and still are handed around.

 

If you are using the 13F’s as an source for ideas, that in my opinion is not cloning. I do this as well and get ideas from it every once in a while. I do think that in this case you need to understand what you are buying, there is really no shortcut around this.

if you want to shortcut due diligence, you need to invest in their vehicles or just do index investing.

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Posted (edited)

@Spekulatius, is that an issue with extreme long term investors that intend to hold positions indefinitely, assuming you can still pick the stock up for the same price they bought it for? I am not talking about managers promoting their positions here but rather 13F filings. 

Edited by joka
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“Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2% in favor of index funds.” ~John Bogle, founder of Vanguard

 

Hedge funds have done worse. 

 

Shamelessly clone the index and prosper. 

 

The risks doing cloning are

1) cloning a star hedge fund manager who is past his/her prime. 

2) cloning a star hedge fund manager's dud stocks

 

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Most fund managers shape up their books into filing date. What you see is what’s beneficial to them more often than not. It’s why you see confidentiality notice filings when they want to hide something. Best just to do your own work. 

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