Reblog: Beyond Buffett: How To Build Wealth Copying 9 Other Value Stock Pickers

Cloning can be Great for your Financial Health

While cloning Berkshire’s stock portfolio has proven to be a winning strategy, with Berkshire’s mammoth size today, a similar strategy employed in the coming decades will likely not do as well as the last few decades. With a market cap exceeding $400 billion, Berkshire needs to make very large bets to move the needle. This is in sharp contrast to its sub-$100 million market capitalization in the 1970s.

The good news is that there are at least a handful of value managers who manage a small fraction of what Buffett does. Here’s a list of nine such value managers who fit the bill (including yours truly!). They are listed below in alphabetical order:

The “Shamelessly Cloned Portfolio”

Inspired by the “Small Dogs of the Dow” strategy, we’ve created the “Shamelessly Cloned Portfolio.” The shameless portfolio comprises of five of the highest conviction ideas of our cloned managers. And like the Dogs, we set it and forget it for a year at the beginning of each year.

Having been in the industry for 18 years, Mohnish picked out eight value managers (plus himself) who have done well in the past and look poised to do well in the future.  Fei is an incredibly talented quant who dreams in the “R” programming language. After we came up with our shameless algorithm, she wrote the code and then we turned to our trusted friend Pi to help randomize the individual stock picks to minimize human biases.

The Life of Pi

The mathematical constant Pi (has an infinite stream of random digits following its decimal point (3.1415926535897…). At inception, our algorithm starts with the 1^st digit after the decimal point of Pi, which is 1. That corresponds to Appaloosa (Manager #1). Our algorithm picks the highest conviction bet in a manager’s portfolio. It then moves to digit 4, or Greenlight Capital, and does the same. If a holding has already been selected due to a prior manager, the algorithm picks the second largest position. It also jumps to the next digit of Pi if a value manager has already been selected.

The shameless algorithm avoids unprofitable businesses and certain industries like utilities and REITs. If the manager’s highest conviction idea is in a blocked industry, it looks at the 2^nd highest conviction idea of the same manager before moving to the next one.

We started in the year 2000 because that is the earliest we could retrieve 13-F data for the majority of the managers. Managers who did not file 13-Fs in the earlier years were skipped. For example, at inception in 2000, only Appaloosa, Greenlight, Markel, FPA, and Sequoia have publicly available portfolio data. The shameless algorithm thus skipped managers 2, 6, 8 and 9 when making selections that year.

The first year’s funds thus selected are 14537:

3.1415926535897…

The second year picks are 34751:

3.1415926535897932384626433832795028841…

And so on.

So, how did this 5-stock portfolio perform over the last 17+ years?

Well, the Shameless Portfolio blew the lights out! It beats the pants off the S&P 500 by 10.7% annualized! It also beats the Small Dogs of the Dow by 7% annualized!

Here are the stocks that Pi picked during this period:

Our algorithm picks new stocks on December 31^st of each year. For 2017, the algorithm picked Oracle, Berkshire Hathaway, Apple, Microsoft, and Charter Communications. For 2017, even though it’ll be a partial year, one can buy the 2017 picks anytime. After that, rebalancing should occur right after January 1. To optimize taxes, one can sell winners after 366 days and sell losers on or before the 364^th day.

As a public service, for as long as we can, we’ll publish the updated list of the 5 cloned ideas for the year. If not anywhere else, we’ll post it on Mohnish’s blog. In any case, we’ve laid out all our algorithm rules on Mohnish’s blog.

While there are no guarantees, lowly cloning can truly be great for your financial health. One can begin testing this strategy with a small portion of one’s networth and do it through a great broker like Interactive Brokers with commissions under $3/trade for small quantities. We hope you’ll join our merry band of shameless cloners.