Don’t be ashamed to be a copycat or a cloner when it comes to investing. It can give you great long-term return while also reducing your investing stress by handing over decisions to other investors with more expertise, experience and a proven track record. You can basically outsource the investment process and thinking to these guys. Monish Pabrai who is a well know value investor, says that act of cloning other people’s best idea is a very powerful mental model. He stated in a lecture that it was 99% chance that you would do better by investing alongside the superinvestors instead of doing the stock picking yourself. I think this statement might be somewhat of an exaggeration, but I still think it’s an important statement and very important for the ones without the time and knowledge to analyse individual stocks themselves. Monish also told that he himself used the 13F’s to see what other great investors are buying and selling, and he considered it a goldmine for investors for idea generation.
One of the more underappreciated stock picking strategies is the strategy of buying and selling the same stocks as superinvestors are. Superinvestors are investors that has proven to have beaten the overall market for a long period of time. The reason why you should consider following this strategy is that these superinvestors are probably smarter than you, have more resources for doing deeper stock analysis than you and has a proven track record and more experience with picking the winner stocks. I think the main reason this strategy is not more followed is because most people think they are better at picking the winner stocks than the average investor. So they would rather do the stock picking themself than to rely on others, even if there is no data that supports that the average investor will outperform the superinvestors.
It’s also a myth that this strategy does not work because you will be too late to buy and sell the stocks of the investors you are following to get the desired returns. I have read that if you have copied Warren Buffett’s buys and sells for the last decades you would have beaten the S&P 500 with a wide margin. That is even if you had bought and sold the stocks at the worst timing after his buys and sells had been made public.
My ideas in this post comes from two books that covers the strategy of following the best investors. These two books are: Invest with the House by Mebane Faber, and Manual of ideas by John Mihaljevic.
How to follow superinvestors?
Investors that manage a certain amount of money (think it’s at least 100 mill $) have to file their stock holdings to the SEC every quarter. The filing is called 13F. This give anyone who want to look into the holdings of these investors as this is public information. Two great sources for this information can be found at Whalevisdom.com and Insidermonkey.com Here you can subscribe to E-mail alerts that will notify you when one of the investors you follow is filing a 13F. Another good source is Dataroma.com as they show the portfolios of the most famous long-term value investors.
There is a delay period of up to 90 days before you can get access to the buys and sells of these investors and that it something that you should keep in mind. I will come back to that later in the checklist. Also you should now that the 13F’s only shows the US stocks that the investor owns. There might not be a good idea to put all your investments into one single country. However among the US stocks there are several ADR’s which let you be exposed to the international stocks and ADR’s will be shown in the 13F’s.
How to implement the strategy?
Basically the strategy is buying and selling the same stocks as the superinvestor that you are following. For this or any strategy to work you need to keep consistent with the strategy for at least 10 years. That means you should not jump from superinvestor to a different one just because the one you have followed has not performed as you expected for the past 1-3 years. You should also follow investors that are long-term value investors, since their strategy will be aligned with your own. The hedge fund and superinvestors have been criticized lately for not being able to beat the S&P 500 the past years. To that I will say that the indexes have been mainly driven by the F.A.N.G stocks (Facebook, Amazon, Netflix, Google), which might be overpriced. At least we can say that the SP500 is overpriced on a shiller P/E, so there is no surprise that value as a strategy and then also value investors has underperformed the markets in the recent years. This might be the time for value investors and value stocks to outperform the high-flying tech stocks and other expensive stocks in the coming years.
Here is a checklist you should follow if you want to succeed following superinvestors.
- The investor you follow must be a long-term value investor. One way to find out this is to look at the average numbers of quarters that the investor is holding a stock. In general the longer the better. The reason you want an average holding period for the stocks is that if you are following someone with a short holding period you risk buying stocks that the investor has sold when you get their 13F stock holdings in your inbox. I advise to look for managers with a holding period of at least 4 quarters.
- You should buy their highest conviction stocks. That means you should only buy stocks that is one of their top 10 positions in terms of % of the total portfolio. You should also look for investors that has most of their money under management in their top 10 holdings, as that would indicate that they have a high conviction in these stocks. I think this number should be at least 50%. In my opinion you should also not invest in a stock that the manager has in their top 10 holdings if the stocks total percentage of the portfolio is less than 5%. That because 5% holding is not enough conviction even if that stock is in the top 10. Some managers have 50-100 stocks in their portfolio and equally distribute the money invested among them. These are manager we probably want to ignore.
- Consider diversifying between several investors. I would suggest diversifying between your top 5 investors. The reason for this is that if you follow just 1 investor your risk will increase. The manager can lose his motivation, he might be unlucky with his picks, he might go trough a nasty divorce that all can affect his future performance. You want to catch the average outperformance that these superinvestors are able to do, so it is wise to diversify among 5-10. So in practice you can choose 3 stocks in the top 10 holdings for each of the 5 investors. Then you will have a portfolio of 15 stocks with 3 high conviction stocks diversified between 5 investors.
- Be aware that the research on this strategy says that choosing the top one pick among these investors have performed much worse than if you had picked their top two or lower picks. The reason for this was that the top one picks had usually appreciated a lot in price and therefore was not a good buy. The stock’s price had already surpassed its intrinsic value. I think this problem can be solved by figuring out what price the manager had bought this stock at. I know that at Dataroma.com they inform about the estimated buyprice the manager had bought the stocks in his holding. In that way you will know if the top one holding has become the top holding because of a price increase or not.
- Avoid investors who are macro oriented and who shorts stocks. Not really sure how you can determine this by only looking at the stocks and numbers. But usually you can Google search the name of the manager and understand more of his stock picking strategy
- Avoid investors with a short track record. How long have they been in business? In the short time randomness and luck is the most important factor, in the long-term as more years pass luck become less of a factor and skill become more important. Choose managers who have a track record of at least 10 years.
- Managers with huge amount of assets under management might be limited in their future returns as its limitations on how small stocks they can buy. It might be a good idea too clone investors who are not having too much money under their management as they will be more flexible in what kind of investment they can do.
- It’s not really necessary, but it might help you if you choose stocks from the superinvestors that you also would consider good buys. That you also understand the business and the reason why you would buy this stock. If you also have a conviction it’s easier to hold onto the stocks even when the market crashes. If you have chosen stocks from the good managers, but you don’t understand the stocks it might be harder to hold onto them when the tide turns.
- When to sell a stock can be a somewhat tricky question. You can sell the stock when the manager is selling the stock, or you can sell the stock when the stock you have chosen is no longer in the top 10 holding of the investor you follow. In that case you can replace it with one of the new stocks on that managers top 10 list.
- There might be value in buying stocks that the manager is buying more of even if the price of the stock has gone down. That might be a very strong indication that the manager believes in the stock and you will have a oppertunity to buy the stock at a lower price than the manager has been able to do.
Here are some suggestions for superinvestors/funds that you might one to check out and consider to follow and clone:
-Monish Pabrai
-John Rodgers
-Tom Gayner
-Seth Klarman
-Tom Russo
-Jeffrey Ubben
-Chris Hohn
-Bill Ackman
-Francois Badelon
-Brian Bares
-Bruce Berkowitch
-David Einhorn
-Guy Spier
-Warren Buffett
-Glenn Greenberg
-Par Capital management
-Greenhaven associates
-Southernsun asset management
-Wynnefield capital management
-Akre capital management
-SPO-Advisory Corp
-Towle and Company
Conclusion:
Following and cloning the ideas of the best value investors with a proven track record can be a very sensible idea. But there can be difficulty in choosing the managers to follow that will perform well in the future. High returns in the past does not guarantee a high return in the future, even for these investors. Also as any other strategy, it will only work if you keep faithful to the strategy over several years and you have to mentally be prepared to have several years of underperformance. Even the best investors as Warren Buffett and other great value investors have had 2-3 years in a row of underperformance compared to the index. You should also spend time figuring out which managers that has a strategy that you agree with.
Here are some screenshots from webpages that you can use to follow the superinvestors:
ValueAct Holdings: Current stock holdings: From highest percentage of total portfolio to lowest
Top 10 in % of total portfolio and average holding time in top 10: ValueAct Holdings. As you can see from the numbers market with a red circle, ValueAct has more than 90% of the assets in their top 10 stock picks, and the average holding period for the top 10 picks is more than 7 quarters. All good signs that this manager is following a long term value investing strategy.
