My friend Ravi was home for lunch on weekend. After food, as we went out for a stroll, he told me a story of a famous motivational speaker.
At a huge gathering once, the speaker proclaimed, “The best years of my life were spent in the arms of a woman, who wasn’t my wife.”
The audience was in a state of shock and silence at thus revelation, especially because it was coming from someone they looked up to.
The speaker than added, “She was my mother.”
What followed then was a huge round of applause and laughter.
Ravi then told me the story of a male participant at this event who was his friend from school. This gentleman tried to trick his wife with a similar joke.
Just before dinner, he said loudly to his wife entering the kitchen while she was cooking, “The best years of my life were spent in the arms of a woman, and that wasn’t you.”
Now, as he tried to remember the next line, and by the time he regained his senses, he was on a hospital bed, recovering from burns of boiling water!
If you have stopped laughing by now, let’s concentrate on the moral of these two stories – that of the motivational speaker and Ravi’s other friend.
The moral is – Don’t copy, if you cannot paste well.
Copy-pasting is often respectably known as imitating, or cloning, or coat-tailing. Some people also call it ‘inspired action.’
Of course, it’s always good to get inspired by others. But the problem occurs when we allow others to think on our behalf, and when we blindly copy/clone/coat-tail what others have done/are doing or said/saying.
It’s a natural human bias to act this way, especially when we are working under the influence of an authority or someone who has had success in the past. Cloning such people is a low hanging fruit especially given that we have been raised on ideas like ‘why reinvent the wheel?’
Now please don’t get me wrong here. I agree there is often no point reinventing the wheel, and often it’s a good idea to learn from the best in their respective fields. So, copy-pasting, or cloning, or coat-tailing is not a bad idea (always).
But like what happened with Ravi’s friend, it’s a horrible idea –
- When you don’t know whether the person is worth copying or not,
- When you don’t know whether the idea is worth copying or not,
- When you don’t know how to paste well even if the person and the idea are worth copying,
- When you don’t know what you may get into by pasting what you have copied (because you do not use your 1.5 kg brain for 1.5 minutes), and
- When you don’t know how you my react after the realization sets in that your copy-paste job has gone wrong.
Consider investing, and you will find this copy-paste job (sorry, cloning) rampant. This isn’t a bad, lowly, idea at all, and cloning as a strategy may work very well in investing.
In fact, there are “shameless cloners” like Mohnish Pabrai (not me, Mohnish calls himself a shameless cloner) who have done extremely well cloning other master investors like Warren Buffett. In a video talk to students of an MBA class (17:44), he said this –
If you set up an investment operation…like an operation I run…and instead of tearing your hair out…trying to find stocks to buy, what you should do is just look at what the great investors are buying.
You can then evaluate the ones that fall within your circle of competence and buy those. With a 120 IQ, you can set up an operation like this, just cloning the great investors. And I believe you will do quite well.
In fact, most of the picks that Pabrai funds has, have come from some other investor. I am a…shameless cloner. I have no problem…like Sam Walton had no problems taking ideas from other supermarkets…taking ideas from wherever I get them.
Mohnish also said this in an interview …
…cloning is a very powerful notion. No good books have been written on cloning yet. If you take what Buffett did, then you are already beating the S&P by 11.5% per year. Mostly what Pabrai Funds did was to copy the other investors. I just give a slight tweak to it. I don’t buy what others are buying. I look at what they are buying. Then I buy what I can understand and limit myself to two-three decisions a year.
Guy Spier wrote this in his book The Education of a Value Investor –
Mohnish…sometimes jokes that he’s never had an original idea in his life, but this doesn’t bother him in the least. Indeed, this is often the way progress works: we copy the best ideas and make them our own.
Now, taking cues from what Mohnish said, the cloners reading this would not mind being shameless themselves in cloning others (it’s been a profitable strategy, after all). But often, they would miss out a very important act Mohnish described above, first in the video and then in the interview –
… just look at what the great investors are buying. You can then evaluate the ones that fall within your circle of competence and buy those.
Mostly what Pabrai Funds did was to copy the other investors. I just give a slight tweak to it. I don’t buy what others are buying. I look at what they are buying. Then I buy what I can understand and limit myself to two-three decisions a year.
Ah, ‘staying within your circle of competence ’ is exactly what Buffett also advises, right? Another shameless cloning by Mohnish, you see. But then, you would do yourself a world of good by taking his “clone, but stay within your circle of competence” advice seriously.
Knowing what you don’t know is the dawn of wisdom, said a wise man. Doing what you don’t know is the dawn of disaster, I say.
Blindly cloning investment ideas that one does not understand well – and thus it is blind – is just one problem that leads cloners to disaster. Another is when the cloner is blinded by authority bias and the success of the one being cloned, and thus fails to consider investment horizons .
What this means is that while the original thinker of the idea may be a trader in a specific stock, you may fall into a pit when you consider it as a long-term investment and fail to sell even when the former is dumping the stock after realizing trading profits.
On the other hand, consider this. Despite Warren Buffett reporting his stock picks for decades now, we don’t know of many investors like Mohnish Pabrai who have cloned Buffett to tremendous success. Why?
The reason is not far to fetch. Many people like to refer to themselves as long-term investors. But when it comes down to it, most investors – even the ones cloning Buffett – want to see results in the first 6 to 12 months of owning a stock. And if that does not happen with the cloned idea, the one who was cloned is questioned for his analysis and investment.
People often fail to look within, at their own mistakes. They also fail to differentiate between their investment horizon and that of the one being cloned.
The third problem with blind cloning is that investors fail to assess the interests of the one being cloned. Again, authority and recency biases (recent success of the cloned) are at play.
This may not be the case when you clone someone like a Warren Buffett. But when you clone unscrupulous people – Twitter and various stock forums are great breeding grounds for such people – with hidden agendas – like those looking for greater fools – you may become like that hungry and thirsty donkey who would not know whether to search for food first, or water.
In short, you would not know what to do when the tide turns for the worse, simply because you did not know what you were doing in the first place.
In Alice Schroeder’s biography of Warren Buffett, The Snowball: Warren Buffett and the Business of Life , Buffett admits that much of his early success was the result of “coat-tailing.” He followed the activities of great investors – like Graham – whose ideas could make him a lot of money.
Now, despite his early coat-tailing, Buffett has taught us repeatedly that one of the greatest sins in investing is not knowing what we are doing. And blind, unintelligent cloning is exactly that. Like people buying IBM because Buffett did, and not applying their thinking to assess whether the company was real investment grade.
This brings us to the next downside of blind cloning, which is participating in the mistake of the one who is cloned. Even the best of investors makes mistakes. Buffett has made many, like he claimed that his thesis on IBM was flawed.
You will make mistakes even when you invest in original ideas, but at least those mistakes would be your own and maybe leave you with worthwhile lessons. But when you make mistakes just because the thesis of the one you cloned was wrong, whom do you lay the blame on? And what lessons do you learn?
There’s an adage that you are the average of the five people you most associate with. This suggests that the five people you spend the most time with shape who you are. It borrows from the law of averages, which is the theory that “the result of any given situation will be the average of all outcomes.”
This is cloning in autopilot. Over time, you become a 20% clone each of the five people you associate with the most. This is a good way to live, but only when you choose the right people to associate with.
This is also true in investing. Choose the right people, then clone their behaviour, thinking, process, and orientation – and never blindly their ideas – and you will become like them over time.
Choosing the right investors is the key here, because the stock market is filled with a lot of foxes in sheep’s clothing.
One rule I follow while trying to identify such right people is this – I try to identify the wrong people whom I will not clone. Rule of inversion, you see. It works like a charm here. And who are such wrong people? These are the ones who publicly talk about their stock picks (except those who talk about their process alongside), do it often, and boast about their recent successes.
Seth Klarman wrote this in his commentary in the sixth edition of Security Analysis –
Far too many people approach the stock market with a focus on making money quickly. Such an orientation involves speculation rather than investment and is based on the hope that share prices will rise irrespective of valuation. Speculators generally regard stocks as pieces of paper to be quickly traded back and forth, foolishly decoupling them from business reality and valuation criteria.
Speculative approaches—which pay little or no attention to downside risk—are especially popular in rising markets. In heady times, few are sufficiently disciplined to maintain strict standards of valuation and risk aversion, especially when most of those abandoning such standards are quickly getting rich. After all, it is easy to confuse genius with a bull market.
Blind cloning is a popular game people play in rising markets. This is because such markets give birth to a lot of geniuses who look worth cloning, and suddenly there is a flood of cloned ideas that are rocking the charts.
But, my dear friend, I suggest you choose wisely, especially the people you want to clone. And then, as I mentioned above, don’t clone their ideas (before you run them through your own thinking) but their behaviour, thinking, process, and orientation if these suit you well.
And it is fine if you were to ignore my above advice. But take this final one – when you clone, always remember to cover yourself well. Because when it “rains” in the stock market, it often pours.
Vishal Kataria says
I’m guilty of this to an extent. I copy a friend’s investing strategy. If it works for him, it works for me. If it doesn’t work for him, it fails for me too.
The biggest takeaway for me from this post is to analyze why someone worth copying does what they do. Then find patterns and turn it into a heuristic.
I like Mohnish’ statement of “limit to 2-3 ideas per year”. We bring our own biases to every decision. If you have to discern and eliminate your biases 3 times a year that seems very doable. The more decisions the less you will be able to. That’s why almost all traders fail, and even most investors. The average holding period of a NYSE stock is around 8 months. A recipe for disaster.
Shiva S says
I liked the article and has been great help. Also as per Mohnish Pabrai , it is important to copy highest conviction ideas (biggest best) only. Please see comments starting @ 56:18 minutes in this video .