Reblog: Beyond Buffett: How To Build Wealth Copying 9 Other Value Stock Pickers
Santa knocks on all our doors not once, but four times a year. During his off-season, he reliably shows up bearing profitable gifts on February 14th, May 15th, August 14th and November 14th. These are the deadlines for 13-F filings with the SEC.
The “13-F” is a quarterly disclosure required of all individuals and entities who have $100 million or more invested in US equity markets. The 13-F is due within 45 days of quarter-end and lists the updated stock positions of the managers. These filings are publicly available at no charge to anyone. Websites like Dataroma make it a breeze to track the picks of various value investors. There is such a thing as a free lunch.
Non-believers will complain that buying these picks after a multi-month delay simply can’t work because markets are too efficient. Well… not so fast. A 2008 study by Professors Gerald Martin and John Puthenpurackal entitled, Imitation is the Sincerest Form of Flattery, cloned Berkshire Hathaway’s equity portfolio between 1976 and 2006 by investing in the positions with a substantial delay. Their cloned portfolio always bought (or sold) on the last trading day of the month that it was publicly disclosed that Buffett had bought a new stock or lightened up on an existing one.
An active manager who beats the S&P 500 by 3% annually on a long-term basis is ascribed cult status. The study found that this Buffett cloning strategy made mincemeat of the S&P 500 Index by beating it by 10.75% annually over thirty years – and all of it by “working” for less than an hour a month. Shameless cloning works!
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:
|Manager Number||Value Manager|
|2||Cedar Rock Capital|
|6||Pabrai Investment Funds|
|8||TCI Fund Management|
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 1st 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 2nd 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:
The second year picks are 34751:
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:
|Year||Holding 1||Holding 2||Holding 3||Holding 4||Holding 5|
|2000||Waste Management||Agribrands International||Berkshire Hathaway||KEMET||Federal Home Loan Mortgage Corporation|
|2001||Arrow Electronics||Visteon||Berkshire Hathaway||Allergan Medical||Michaels Stores|
|2002||Ross Stores||MDC Holdings||Berkshire Hathaway||Allergan Medical||Fifth Third Bancorp|
|2003||Michaels Stores||MDC Holdings||Berkshire Hathaway||Kindred Healthcare||Fifth Third Bancorp|
|2004||Michaels Stores||MDC Holdings||Berkshire Hathaway||Progressive||Ross Stores|
|2005||Freescale Semiconductor||MDC Holdings||Berkshire Hathaway||Progressive||Gartner|
|2006||Freescale Semiconductor||Altria Group||Ensco||Patterson-UTI Energy||Kimberly-Clark|
|Greenlight||Cedar Rock||FPA||FPA||Cedar Rock|
|2007||CEMEX||Altria Group||Ensco||Ameriprise Financial||McDonald’s|
|2008||Berkshire Hathaway||Thomson Reuters||Ensco||Union Pacific||Helix Energy Solutions Group|
|2009||Berkshire Hathaway||Fairfax Financial||Hillshire Brands||Union Pacific||Dr Pepper Snapple|
|2010||Berkshire Hathaway||Ensco||Bank of America||British American Tobacco||CarMax|
|2011||Berkshire Hathaway||Ensco||Valeant Pharmaceuticals||Union Pacific||Rowan Companies|
|2012||Royal Bank of Scotland||British American Tobacco||Valeant Pharmaceuticals||Apple||Twenty-First Century Fox|
|2013||Seagate Technology||British American Tobacco||Berkshire Hathaway||Apple||Twenty-First Century Fox|
|2014||Valeant Pharmaceuticals||British American Tobacco||Citigroup||Microsoft||Aon|
|2015||Moody’s||British American Tobacco||Berkshire Hathaway||Microsoft||Alphabet|
|2016||Fiat Chrysler||British American Tobacco||Apple||Microsoft||Comcast|
|2017||Oracle||Berkshire Hathaway||Apple||Microsoft||Charter Communications|
Our algorithm picks new stocks on December 31st 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 364th 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.
The original article is authored by Fei Li & Mohnish Pabrai, appears on forbes.com and is available here.