Imitation is the sincerest form of flattery

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

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Here are the results

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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

3 comments

  1. nikhil says:

    Hi Vivek,

    For mere mortals like myself, cloning is probably one of the safest method to generate above average stock market returns. A few queries

    1) Market information about RK Damani buying a stock may not peter out immediately (that retail investors will get to know about it after a certain period of time) causing the stock prices to surge and thus you may not be comfortable buying at that level. Hypothetically waiting for one year, the stock may have run up too much for us to invest (e.g Gati run from mid 2013 to mid 2014).

    2) The person you clone may buy a stock as a part of a trade or value. I.e, he may hold it for a short term or the long term. How would you differentiate that.

    3) Sector specific – Suppose you decide to clone Rakesh Jhunjhunwala’s. As per publicly available information, he invested in SpiceJet in late 2014. However as per other investors of repute and professors of investing , we are always told that airline are a value destroyer. Now would you continue to clone RK and buy SpiceJet or would you only be comfortable to invest in particular sectors (circle of competence)

    Many Thanks
    nikhil

    • Vivek Bothra says:

      Hi Nikhil,
      I am not sure if I would be able to answer you completely still let me try
      1.I used 1 year as example however a diligent investor would be able to replicat a Guru in 3 months by following BSE filings, The idea isto undertand the reason of his buy if we can clone their process that would be ultimate gain for us. It is easier said that done
      2. This is where we need to be clonning right guys, A RJ does a lot of short term trading however a guy like RK or Prof Bakshi are long term investors most of their buys would be long term buys. But yes there is no scientific method to differniate between trade / long term investment
      3. As stated earlier if I clone their process i would be happy, however even marquee investors collects duds so that a risk we need to bear while clonning
      hope it addresses your queries

    • Aravind says:

      I agree to a fair extent that cloning is the best thing for duds and not so capable of doing research and feeling confident about their own stocks

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