Beyond Buffett: How To Build Wealth Copying 9 Other Value Stock Pickers

2/22/2017

I co-wrote this article in Forbes on an investment strategy called the “Shamelessly Cloned Portfolio.”

The shameless portfolio comprises of five of the highest conviction ideas of 9 value managers whom we shamelessly clone. Like the Small Dogs of the Dow and Uber Cannibals, we set it and forget it. I will publish the list of the top Shameless Cloned Ideas for a particular year on my blog on January 1 each year.

For 2017, even though it’ll be a partial year, one can buy the 2017 picks anytime. After that, rebalancing should occur right after January 1.

The Shameless Portfolio for 2017 contains:

Oracle (ORCL)
Berkshire Hathaway (BRK-B)
Apple (AAPL)
Microsoft (MSFT)
Charter Communications (CHTR)

We’ve laid out all our algorithm rules below.

One can begin testing this strategy with a small portion of one’s networth and do it through a great broker like Interactive Brokers with commissions under $3/trade for small quantities. We hope you’ll join our merry band of shameless cloners.

You can view the article here:

https://www.forbes.com/sites/janetnovack/2017/02/22/beyond-buffett-how-to-build-wealth-copying-9-other-value-stock-pickers/#7645cf00eaf9

I co-wrote the article with Fei Li, a talented quant at Dhandho Funds.

Enjoy!

Note, anyone who invests in any strategy needs to do their own research/due diligence and are themselves fully responsible for the outcome.

Appendix: Shameless Cloning Portfolio Rules

Selection Criteria:

No utilities, no REITs, no oil and gas exploration, no metals and mining and no multiline retailers.
Positive trailing-12-month net income

Rebalance Methodology:

Rebalance on Dec 31st of each year.
The old companies that are not in the new portfolio are sold. The “sell money” is accumulated and distributed equally among all new entrants.
If the same company is present in our portfolio for another year, then we leave it unchanged i.e. no rebalancing trades.
Dividends are reinvested into the same company that paid it.
If there is an involuntary removal through acquisition/delisting/bankruptcy then the cash is distributed equally among the remaining cloners.
If there are any spin-offs, the shares are sold and reinvested in the parent.

38 Comments

Alex

2/22/2017 01:42:07 pm

Thanks for this, I love it

A. K.

2/22/2017 02:27:25 pm

Very Fascinating and intrigued. Thanks Mohnish. If we pick managers today, doesn't that introduce forward looking information? We picked these guys because they have outperformed the S&P500 over the last 15 years. In year 2000, we didn't know these 10 would be good out of everyone else who filed 13f.

Is that a reasonable statement or am I missing something crucial?

Mohnish Pabrai link

2/22/2017 06:30:50 pm

Hi A.K.

I picked these managers not just because they have a great record, but rather because they have the right approach. For example, we picked Sequoia even though they have not done well over last 5+ years and had the Valeant saga. So, I think it'll work out fine.

2/23/2017 01:34:08 am

Gotcha. Thank you very much to you and Fei for sharing the strategy and your list of quality 13-f filers. Looking forward to trying this out.

Jee Manghani link

2/22/2017 02:37:24 pm

I'm curious why oil, gas, metals and mining are excluded? I can see why REITs and Utilities are.

2/22/2017 06:31:55 pm

That was a close call. In fact the performance numbers were even better if we included them. Wanted to try to get to better businesses.

Rahul

2/22/2017 05:43:32 pm

There is a 13D Activist Fund that offer investors exposure to shareholder activism as its primary investment strategy.

Similarly, it would be interesting if someone starts an actual fund that follows the strategy explained in this article. What do you think?

2/22/2017 06:33:34 pm

Sure. But the activist fund charges fees - and anyone who starts a fund based on this will charge fees. We have a max. of 10 trades a year with this. With Interactive Brokers that could be as low as $3/trade or $30/year.

2/22/2017 07:07:30 pm

Mohnish, Do you think it is bit late to try out the strategy this year considering that these stocks have already moved up a lot this year?

nimish a mehta

2/22/2017 05:49:55 pm

Based on this criteria,stocks such as rain inds will not be bought as depended on metal and mining

2/22/2017 06:34:47 pm

Like I said, the historic performance was better when we included that industry. It was a close call. But these rules will do quite well.

Rico

2/22/2017 09:18:57 pm

Interesting article Monish and Fei, but I have a few questions. The stocks selected are based on order in which you list your table - in the article it seems to be alphabetical. If you were to change the order, for whatever reason, you would come up with a different set of securities and a different return. So my question is have you run the return backtest using other ordering in your initial table, say based on normalized returns, size of fund, concentration levels of managers, even reverse alphabetical order. Just concerned about data mining based on your one sample.

Thanks

Mohnish Pabrai

2/23/2017 07:13:48 am

Yes, we did run with a few different orders. For example Pabrai Funds was originally #3 because we were using the advisor name (Dalal Street). In general, other orders led to even better results.

rico

2/25/2017 07:27:52 pm

Any plans on providing information on other scenarios or ranking criteria that performed better than others? Worse than others?

Thanks

Peter

2/23/2017 02:34:11 am

Mohnish: How do you dwfine 'highest conviction' of a manager? The largest buy in the most recent 13F? The largest buy in the most recent 3 (or 4) 13Fs? The largest portfolio position which was also added to in the last 3-4 13Fs? Etc. Could you plz be a bit more specific? Thanks!

2/23/2017 07:15:55 am

Highest conviction is top two ideas which are the largest portfolio positions based on present value.

Chris link

2/27/2017 12:05:02 pm

Why is this year's Markel selection Berkshire Hathaway (BRK-B) vice Carmax Inc (KMX)? According to InsiderMonkey.com, Markel's top 3 investments are:
1) Carmax Inc
2) Berkshire Hathaway Inc (BRK.A)
3) Berkshire Hathaway Inc (BRK.B)

Was BRK.B selected because SUM(BRK.A and BRK.B) > Carmax
and
BRK.B fits into our budget a little better? :)

Thanks.

Sam Koshy

2/23/2017 08:42:52 am

why is this portfolio over load on technology &software stocks ? FMCG and Pharma not included too . Do you think the above selected stocks will be volatile enough to do some useful trades in the near future ?

Subhash

2/23/2017 10:38:17 am

Great article at an appropriate time. In the list of value manager at no 3. is FPA Capital, I assume this is FPA Crescent fund by Steven Romick, since this value manager has Oracle as the top holding.

Also what are your thoughts about Arlington Value Capital?

Tim

2/23/2017 07:57:26 pm

I don't know if I missed it somewhere, but is the allocation equal between all 5 stocks? Also, would using a platform like Motif be smart? Thanks!

Furkan

2/25/2017 12:08:53 am

Hi Monish,

Can a similar exercise be done on Indian stock markets... Or is it that back here it's difficult to get the details of the portfolio allocations of big funds...

Thanks
Furkan

Brian

2/25/2017 08:32:43 pm

Hi Mohnish,
Great article. What are your thoughts on taking into account changes in the principle manager of the fund and exclude the fund from the list.. For example with the Sequoia Fund Bill Ruane and Richard Cunniff were principles of the fund from the 1970's through late 2000's are no longer part of the management. Therefore this fund should not be included.

ChrisP link

2/27/2017 02:27:40 am

Hi. Thanks for the article. It came at a perfect time for me. I will join your "merry band of shameless cloners." :)

I just wanted to clarify something. Per the SEC website, TCI Fund Mgmt's top two choices were:
1) Yahoo
2) Charter Communications

Was Yahoo excluded from being selected because of its Net Income or for some other reason?

SEC: https://www.sec.gov/Archives/edgar/data/1647251/000164725116000020/xslForm13F_X01/Form13fInfoTable.xml

Yahoo finance: https://finance.yahoo.com/quote/YHOO/financials?p=YHOO

Thanks!

3/1/2017 05:18:52 pm

@Rahul: The strategy only makes sense if you follow it without tweaks for decades. If it were me, I'd just buy at present prices and leave it alone.

@Rico: There are too many to list them all.

@Chris: That’s right. Berkshire Hathaway was selected over Carmax because the sum of the BRK.A and BRK.B positions is greater than Carmax. We choose the share class with higher trading volume. Hence BRK.B over BRK.A

@Sam: The list is determined by automated algorithms. We do not exclude FMCG or Pharmaceuticals. The strategy is about selecting value stocks not volatile ones.

@Subhash There was a typo in the article. It has been corrected. FPA (First Pacific Advisors) is the investment management firm. We study the holdings owned by the firm not just FPA Capital.
Allan Mecham of Arlington Value is a great manager. But we didn’t do too badly without him.

@Tim: Initial investment would be equally allocated across all the 5 stocks but if the same company continues to present in our portfolio for another year, then we leave its position unchanged. Refer to the Appendix in the blog post for detailed rules.

@Furkan: It is meaningfully harder. India has no 13-F type filing requirement. One needs to do a lot of data scraping off individual company filings.

@Brian: Even though the principle managers have changed, the investing approach has not changed at Sequoia Fund.

@ChrisP: That’s correct. Yahoo had a negative trailing twelve month net income. Also the algorithm does not consider companies for selection if they announced that they are being acquired (which is the case for Yahoo).

Chris, ChrisP

3/1/2017 06:57:07 pm

Thanks!!

3/2/2017 07:12:06 pm

Ah, got it. Thank you.

3/5/2017 08:39:33 pm

So thats a NO.

3/8/2017 09:18:02 am

Thank you for clarifying.

Holden Alexander link

3/20/2017 04:47:30 pm

Hey Mohnish,

The eight funds (plus yourself) were selected based on past performance and optimism of future performance. If your optimism changes on any of these funds (fund manager drifts away from original intent, divorce, retirement/death, etc.), will you be updating your list? Thanks!

Holden

4/3/2017 03:55:39 pm

The funds were picked because they have the right investment approach. If anything meaningful changes, I will consider tweaking the list.

praveen

4/12/2017 09:35:21 am

Hi Mohnish,

How about capital gains tax on this strategy when we sell our investments?

5/17/2017 05:46:18 pm

We did not consider capital gains tax during our backtesting because the tax situation is different for different individuals. This strategy is ideal for an IRA/tax deferred account. The outperformance of the strategy would still hold with the capital gains tax. Moreover, since we rebalance only once a year, you would only be subject to a long term capital gains tax.

David

6/21/2017 07:21:40 am

Hi Mohnesh,
I see the algorithm selected British American Tobacco from Cedar Rock Capital for years 2012 through 2016. I have checked the F13 for Capital Rock and I don't see British American Tobacco as one of the holdings. Am I missing something ?

Thanks

7/27/2017 07:01:43 am

Hi David, 13F’s only list the US holdings of the manager. Hence, you wouldn’t find British American Tobacco (a UK company) in there.

Poland Spring

8/14/2017 06:28:16 pm

How might one find a full breakdown of Cedar Rock's portfolio?

Karan Sharma link

9/14/2017 03:42:47 am

Hi Mohnish,

I had a specific query regarding highest conviction pick. What if the current highest conviction pick was a very early investment and due to a price increase it has become the highest conviction pick over the years. Don't you think we could be very late in identifying some picks by investors. Also we might be buying some companies when the investors might ideally be selling them ?

trons link

12/5/2017 11:14:15 pm

Hi Karen.

Good point. Yes I agree nr 1 can be highest conviction because of price appreciation which is not the best way to assume the conviction of the manager. However I think it's possible to see the estimated buyprice of the stock the manager has picked. Also this strategy can be built up slowly so u just wait until your favourite managers makes a NEW high conviction buy.

Jan link

12/15/2017 05:48:15 am

Inspired by Monish ideas about Cloning, I made a blogpost on how to implement a investing-strategy of following these superinvestors. https://warrenbuffettspreadsheet.wordpress.com/2017/12/15/be-a-shameless-cloner-invest-along-with-superinvestors/