Recently got a chance to read this insightful paper – Imitation is the sincerest form of flattery : Warren Buffet and Berkshire Hathaway

imi-1

What really interested me was this conclusion

“The market appears to under-react to the news of a Berkshire Hathaway stock investment since a hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index”

After reading this I was reminded of this advice by Mohnish Parbai

“Be a cloner… but clone the best”

I wanted to try this cloning exercise with an Indian investor, Unfortunately we don’t have a Warren Buffet in India. So I zeroed in on Radhakrishna Damani (RK) a respected value investor. As of March 31 , 2014 these were his key public holdings

3M India, Gati, Sterling Holiday Resorts, Sundaraman Finance, TV18 Broadcast, VST Industries

Back testing of cloning RK portfolio , this was our simple method

  • Hypothetically buy an investments one year after RK has bought to overcome any hangover effect of his entry in stock, therefore GATI can’t make the cut as it was brought by RK in December 2013
  • Get absolute and CAGR return for the investor as of 14.10.2014 from the above buy date and price

Here are the results

imi-2

Let’s overlook recent investments of Sterling holidays and TV18, on all other three, a cloning strategy would have made fantastic CAGR and absolute returns

PS: We are completely ignoring the huge dividend income pocketed

Now what are some of the flaws of this exercise

  • My back testing is based solely on publicly available information and there is a possibility that RK may be investing from some other firms other than Bright star investment Ltd which is not accounted in this test
  • The above analysis doesn’t include things bought and sold over years and not appearing as public holding as on 31.03.2014
  • The public holdings are only reported when they are 1% of nominal capital for a company , RK may have bought smaller stake that might not be doing well

What do we gain from this exercise

  • Cloning can work if we are cloning the right guy and we understand the underlying business
  • If you study each of the investment/ company which has been held for 3+ years, you would find a recurring pattern of underlying MOAT which is driving earnings and shareholder returns
  • Clonning can help you shortlist candidates for detailed research

After reading this what can seriously harm your finances?

If you start cloning wrong guys for short term benefits

All data used for this exercise is available for you to use here

Who do you clone ? Share in comments