There are 50,000+ publicly traded businesses globally. Even a 10 person investment team can only evaluate a few hundred public companies every year. How does a retail investor like me identify great businesses from a very large dataset? Recently I watched the lecture given by Mohnish Pabrai at MDI. His solution to the problem is – Be a cloner.
What does he mean by cloning? He looks at the portfolio of those who are better than him and rediscover why they did those investments and purchases them if it makes sense to him. How do I know if cloning is a good idea? I am not smart enough to figure out the answer myself and hence I decided to get the answer from multiple disciplines. I looked at evolution for an answer. In the book The Selfish Gene – Richard Dawkins writes
Some butterflies taste nasty. They are usually brightly and distinctively coloured, and birds learn to avoid them by their ‘warning’ marks. Now other species of butterfly that do not taste nasty cash in. They mimic the nasty ones. They are born looking like them in colour and shape (but not taste). They frequently fool human naturalists, and they also fool birds. A bird who has once tasted a genuinely nasty butterfly tends to avoid all butterflies that look the same. This includes the mimics, and so genes for mimicry are favored by natural selection. That is how mimicry evolves.
Genes for mimicry are favored by natural selection and hence those butterflies survive and pass on their genes to subsequent generations. We have mirror neurons which enables us learn from observing the actions of others. In the book Mastery – Robert Greene writes
In the 1990s a group of Italian neuroscientists discovered something that could help explain this increasing hunting prowess of our primitive ancestors, and in turn something about mastery as it exists today. In studying the brains of monkeys, they found that particular motor command neurons will not only fire when they execute a very specific action – such as pulling a lever to get a peanut or taking hold of a banana – but that these neurons will also fire when monkeys observe another performing the same actions. These were soon dubbed mirror neurons. This neuronal firing meant that these primates would experience a similar sensation in both doing and observing the same deed, allowing them to put themselves in the place of another and perceive its movements as it they were doing them. Recent experiments have demonstrated the existence of such neurons in humans, but on a much higher level of sophistication. A monkey or primate can see an action from the point of view of the performer and imagine its intentions, but we can take this further. Without any visual cues or any action on the part of others, we can place ourselves inside their minds and imagine what they might be thinking.
From evolution I went to the world of business. Sam Walton founded Walmart in the year 1962. He started with a single store in Bentonville, Arkansas. At that time Sears with its brand name and billions of dollars was a giant in the retail business. How did Walton get past them? He cloned all the smart ideas from other people. Charlie Munger wrote about this.
It’s quite interesting to think about Wal-Mart starting from a single store in Bentonville, Arkansas – against Sears Roebuck with its name, reputation and all of its billions. How does a guy in Bentonville, Arkansas with no money blow right by Sears, Roebuck? And he does it in his own lifetime – in fact, during his own late lifetime because he was already pretty old by the time he started out with one little store. He played the chain store game harder and better than anyone else. Walton invented practically nothing. But he copied everything anybody else ever did that was smart – and he did it with more fanaticism and better employee manipulation. So he just blew right by them all.
From all this I concluded that cloning the actions of experts is a powerful mental model. The key is not to blindly clone but to rediscover the actions of the experts.
For investing here are few places to look for ideas to clone: (1) gurufocus (2) valueinvestorsclub (3) sumzero (4) cornerofberkshireandfairfax (5) manualofideas (6) fundooprofessor. Recently I came across two stocks purchased by the experts I follow.
Ajay Piramal paid Rs 723 per share for Shriram Transport. Sanjay Bakshi wrote about this as a quality business here. The stock is currently selling at Rs 598 almost 20% below Piramal’s purchase price.
Buffett owns 68.11 million shares of IBM and he paid an average price of $171.50. The stock is currently selling at $174.67.
Should I go ahead and buy them? No. I am trying to rediscover why they did these purchases. If I like the business and the price then I would buy if not I will wait for the next cloning opportunity.