Importance of CLONING

Lessons from Mr Market
1

I have been a subscriber to this site since 9th December 2011. What I observed in recent times IS that ValuePickr has benefited me immensely. Involuntarily I was investing my funds in shares discussed by the Master Pickers over here. And now after more than a year I haverealizedthat the gains made by me have far exceeded my returns ever since i started investing in shares.

Today my portfolio mirrors the holdings of ValuePickr, Hitesh, Ayush, Hemant Gupta, Dhwanil and the likes. So what have I ended up doing is just CLONING.

Recently i came across A video of Mohnish Pabrai ( of Dhandho Investors fame) addressing students of University of California, Davis and he was speaking on CLONING.

He said that when he read Tom Peters ( at the age of 24) he never believed what he was saying. Tom Peters was saying that if you are running a business, try sitting with your competitors and lay out your competitive advantages to them and how you are making money etc. They will listen to you but when they leave there will be no change in theirbehavior. They will run their business the way they have been running.

To prove Tom Peters wrong Mohnish decided that he would do 2 things:

1). If he sees anyone one ( competitor or from any other industry) doing something smart, he would adopt it.

2). Share his competitive advantages with his competitors and observe if there is any change in theirbehavior.

After 25 years he proved Tom Peters wrong by cloning Warren Buffett partnership rules but also noticed that competitors listen to you but never implement your competitive advantages.

There are very few who clone which forms just 1% while 99% reject it.

A few examples given by Mohnish were of Walmart and Microsoft.

Walmart did not have many innovations in the first 15 years of their existence. Many trade practices were lifted from Sears and KMart. Sam Walton was a cloner and spent most of his time in competitors stores.

Microsoft is also one of the biggest and successful cloner. Every product was cloned. Windows was lifted from Mac. Word from Word Perfect. Excel from Lotus. Bing from Google.

How many guys here are willing to take up the challenge of CLONING?? or wish to be in the 99% who are left behind.

I am sure that we can have one of the best PORTFOLIOS ever. Let us all share our expertise and make a list of 10-20 SHARES which can benefit all of us.

Best Stock Pickers at ValuePickr, request you to put your heads together and make a list soon, so that others can CLONE.

Cloner Tony

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Hi Tony,

I am a practitioner of shameless cloning!

I came to know Mr. Parag Parikh (ppfas.com) about a year ago. I read his articles and seen videos of his interviews and classes. Was very impressed. Contemplated subscribing to their PMS but being a small investor didn’t have the corpus for the minimum investment amount criteria of 25 lacs. So, decided to clone by going through their various search reports published on moneycontrol. Should say have had reasonable success!

Chanced upon ValuePickr and am now trying to clone Hitesh. Invested in Unichem and Thangamayil.

Thanks,

Balaji.

haverealizedthat theirbehavior.

1).

2). theirbehavior.

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Hi Tony,

You posted by new found investing philosophy, which I call copy-paste investing (from copy-paste engineering). The good thing is that it works, and it works really well. So one can easily extend this idea into finding good stock picker than finding good stocks. The 1st one is much much easier way out.

What I observe that, slowly large number of folks have started following the same thing.
And that is a not a very good sign as per me. This is what will be side effect of such approach.

1). The multiplication syndrome : The more folks started blindly following the chosen stock pickers, this will in turn will result in having a multiplicative buying pressure, whenever some stock is recommended by a stock picker. Now suppose a stock picker (say Hiteshji) buy 100 qty of stock “X”, and recommend it, and because of the following another 500-5000 qty of stocks got bought by the followers. So the price of stock will start rising even without change in fundamentals. This is result is what I call is “valuepicks blog guy effect” [Most of the time, the valuepickr guy recommend something, the stock hit upper circuit for next few days, turning his recommendation a self-fulfilling prophecy]

2). Collaboration vs Recommendation : This shall be detrimental to the forum like valuepickr, where the aim is to collaborative pick stocks, and increase the stock picking ability of the learner. Free lunches have a general tendency to spoil the eaters (assuming “no free lunch” theory is not valid)

3). Sustainability : What if stock-pickrs stop giving reco to other? what will happen to the follower (a thing to ponder about the stock follower)

4). Error multiplication : What if few of the stocks which are being recommended turn sour? and how shall that interract with multiplicative effect

There are another 3-4 points more to it, which anyone can think of. So we must be careful about these side effect before following it.

Let me be very clear about it, we at valuepickr have few super duper stock picker in midcap space, with solid past track record and unmatched eagerness to share their stock tips freely. I myself follow the copy-paste approach most of the time, because it pays me way better than my ideas. But at the same time we need to know why the method work, and when can it goes wrong.

1 Like
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Interesting post started by Tony and very valid points by Subash. At some level, each one of us is a cloner - as defined by borrowing ideas (including individual investors, big brokers, professional investment analysts etc). That becomes the starting point. The end result ie actual investment should be driven by one’s own analysis. Which is what even Mohnish Pabrai says. Because that would lend confidence in your investment to handle downfalls. In the lecture, (http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2012/Pabrai_2012.htm) Mohnish says that he “separates the wheat from the chaff” (so to say) even in cloning. And that remains the key. Blindly copy pasting / cloning has risks articulated by Subash. As a novice investor, when someone posts an idea that I like, I tend to draw confidence from others’ investments in it, though I myself have studied it. That is the benefit of this site and its seniors. This and the collaborative effort. These competitive advantages / moats are absent in firms that also offer paid services, and run the above risks.

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Hi All,

I have received interesting feed back. Nice to see various participants giving their views. From this debate we can surely draw better conclusions from each one’s own experiences.

Please do listen to the video which i have referred above.

Would like feed back from our seasoned stock pickers like Hitesh, Ayush, Donald, Hemant, Safir et al.

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On face of it there does not seem to be much that is wrong in cloning investments of someone you admire. But an even better way is to grow yourself by trying to learn his investment style and aim to outshine him.

Just buying stocks someone has bought – this has a small risk attached to it and that is about the intention of the guy you are copying – you dont want to get taken for a ride-- so the idea should be to try to clone him in a manner that suits you and benefits you.

3 Likes
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Idea should be taken from anybody, but one need to get convinced and analyze it well. In a nutshell " Nakal ke liye bhee akal chahiyee"

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To me cloning has two meanings:

1). Copying the original

2). Re creating

As I look to cloning i lay stress on the later. I re create my own strategies.

All of us will agree that there are two methods used in the analysis of securities. One is fundamental analysis and the other is technical analysis. If one has really spent his valuable time at ValuePickr one will realise that a lot of time and effort has been spent on fundamental analysis and the depth of it is truly amazing. For fundamental analysis i rely on ValuePickr. Then the next question is when to buy. This answer is provided by technical analysis.

My personal experience has been that once i do my own analysis of the stock to be purchased from the list of stocks mentioned at Valuepickr then i do a technical analysis. This has paid me rich dividends.

A recent example was Murudeshwar Ceramics. This stock was mentioned in Techno Funda by Hitesh. I did my own analysis (Point and Figure) and drew my ownconclusionsthat the stock had strong support at 18. I did my buy at 18.40 and recently partly sold out at 22. Although the charts showed it could go up and it did touch 24.50, i booked profits. In hind site a little to early. One can never get the highest or lowest prices for sure.

So one can safely conclude that one can clone the best stock pickers here as well as formulate one’s own operating system to maximise one’s gains.

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Read this beautiful article on State of the Market blog.

Myth: Stock Price and Earnings growth move in sync

May 25, 2012ByDeepak Singh


Do stock price and earnings move together? Well, thatas a big trap people fall into. They look into earnings growth a buy the stock and then scratch their head why stock is not moving.

Let us take one example:

Below is the EPS and monthly chart of Power Grid over last four years


Source: Chartalert.com

Just see how EPS has grown from Rs. 4.8 in FY10 to now estimates of 8.2 in FY13. But has stock price moved at all in last 3-4 years. On 1st April 2009: the stock was trading at Rs. 96 and three years later the stock is trading at Rs. 105. That means a despite EPS growing by 70%: the price appreciation has been less than 10% excluding dividends. The Problem: The PE has shrunk from 20 times forward earnings to 12 times forward earnings.

What does this mean?

Do not get excited by earnings growth per se. There are many things that goes into price movement from current PE to investor expectation to sectoral outlook to corporate Governance to ownership interest. You can have the best stock but if no one wants to own it: the pe will only go down.

Also, stocks make 80% of the move in 20% of the times. It means earnings grow over a period of time and then stock just violently moves in a compressed time frame to discount all the good news. Thatas why watch for technical breakouts because when they happen: they signal that aggressive price discounting has begun.

And the biggest lesson: Analysts can forecast Earnings BUT what matters is PE i.e. How much multiples market wants to give a stock and no analyst [fundamental, technical] can predict that. Thatas why companyas earnings can grow but if market becomes disinterested in a stockathe PE may disappoint you for long long long long time.

Chalte Chalte

Stock Price growth = Fn [Performance versus Expectations] and High PE or Low PE reflects how company is doing vis-a-vis expectations.

Sometimes, market builds false expectation and then investors have to suffer. Thatas why there is saying the job of management is to manage expectations because they can deliver best earnings growth but if they fail to manage expectations a investors will tend to suffer.

Ok…recent example is Facebook IPO. The Facebook companyas earnings will grow exponentially over next 3-5 years [it’s given] but does that mean stock price will performa

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Hi Subash,

What i meant by Cloning is RECREATING. It just does not work in the long run if one copies and pastes. There are no free lunches on Dalal Street.The only way to be Successful in any walk of life is to continually educate yourself and learn from the past mistakes. The Point and Figure methodology has been around for more than a hundred years. This has been the basis of modern Technical Analysis which is highly computerised and using new tools for analysis. I believe in keeping it SIMPLE and hence vouch for its usage even today. This tool is being recreated today.

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Fundamental Analysis answers the question of " What to buy", while Technical Analysis answers the question of “when to buy”. In his book Tom Dorsey’s Trading Tips, the author refers to an article written by Gretchen Morgenson in the New York Times (December 31, 2000) titled " How did so many get it Wrong". She poses a question, " How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers?" The article was not very flattering on the fundamentalist’s work to say the least.

In the article, Anthony Noto at Goldman Sachs sums up the dilemma faced by fundamental analysts, and in doing so, points out why it is important to incorporate technical analysis with your fundamental analysis. Mr. Noto goes on to say " Our research is driven by fundamental analysis and is not influenced by anything else". He went on to explain that the companies he follows saw their stock prices drop last spring not because their operations were failing,but because the market psychology had changed. He downgraded the stocks much later because only then had it become clear through his research that the companies’ results (fundamentals) weredeteriorating. In hindsight he said, " We should have lowered our ratings sooner. We regret that."

Mr. Noto outlines exactly what the problem is with using fundamental analysis by itself. Fundamental analysis is a lagging indicator. In essence he says that the stocks began to break down technically before it became visible to him that the fundamentals were changing. Market psychology is technical analysis.When market psychology changes it means that there are more sell signals than buy signals. Those who are watching can detect this subtle change. Nothing is perfect not even technical analysis, but the trouble will show up in the technical picture before it shows up in the fundamental picture.

Therefore to sum up one can conclude that the true key to success is using both schools of thought simultaneously and continually educate oneself. This has borne me rich dividends. This is how I keep RECREATING myself and cloning.

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Here is the link to New York Times article HOW DID SO MANY GET IT SO WRONG?

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I went through the UCD video yesterday, and I loved it not just for just cloning mental model but for knowing why exactly it works (99% of the folks won’t apply it even after observing that it works) and that makes its a great mental model. Besides I love the way he explain various simple investing strategies for being above at 80-98% of the stock market participants, i.e

1). Dollar cost averaging, or SIP type approach on index fund (Personally I know it works, and it gave me 10% lead over sensex flat :))

2). Buying shares of Berkshire Hathway (It gives 7% odd advantage over sensex for last 30 odd years)

3). Buying stocks which big guys like Buffet, Browne are buying (it give some 8-10% odd advantage over sensex)

And sensex as we know grows at an average CAGR of 8-12% odd. So these strategies can give you 20%+ CAGR return in long run :slight_smile:

With so many seemingly simple, yet perfectly do-able strategies, I feel sorry for folks who loose money :frowning: . To me the biggest advantage one can have with the rest is by constantly reading books/magazine/articles/posts, watching awesome videos like this and summarizing what he is reading. This is the only way one can get to know these simple strategies and why they work, and apply them personally.

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Hi Tony,

Thanks for your nice article on why stock price doesn’t always follow the earning growth rate. The simple reason is that you have paid way too high price for the stock, and hence you are suffering from the “PE derating”.

PE re-rating and PE de-rating are two of the most powerful force in investing, with the capability of making or breaking you. Majority of the money we have made at valuepickr mostly likely is due to riding PE re-rating wave.

I strongly suggest everyone to read PE-rerating and PE-derating section at TED. They are just awesome.

And here is what Howard Mark said for the same

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Nice discussions. Yes, this is a fantastic video and a must watch…I came across the same few months back and was amazed.

There has been so much of work already done to make investing simple that we all just need to have patience and keep practicing these over a period of time. Thanks to the internet and so many good platforms, that one can learn this art in a shorter period.

Ayush

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we can easily download these videos (basically just audio is important) and listen in the car while driving. instead of FM gossip or bollywood numbers :slight_smile:

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Once again i wish to reiterate that what I meant by cloning I never meant copy and paste. I meant recreating. While dwelling on this subject I would draw the attention of my valued readers and the varied ideas and interesting comments I received, here is one more link to Mohnish Pabrai and how he has kept recreating himself and improving his chances of making better investments with few errors.

Please do read this link and also watch the embedded video too.

At the end of it one can only learn from one’s mistakes.

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Few more good link on cloning/copy-paste investing

http://learningvalueinvesting.wordpress.com/2012/08/29/clone/

http://perfectresearch.blogspot.in/2012/08/notes-from-meeting-with-value-investor.html

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Nice article discussed here. Many of my s/w friends look at software code re-usability and optimize it further for better results.

There is no harm except that the person you follow should have a good tracker record (like many of valuepickr senior folks).

I am not trying to refute RJ here that a person cannot live on borrowed ideas but there is less harm following the best.

~Supratik

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(This is probably not the correct thread to post this) but this is where you could go wrong for not doing homework

http://www.moneylife.in/article/how-nomuras-rating-remained-buy-and-hold-while-tulip-telecom-wilted-from-rs180-to-rs11/31319.html

~Supratik