The Man Who Cloned Warren Buffet

I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody is that smart. — Charlie Munger

Warren Buffett’s investing strategy and fund’s fee structure are unique that few are motivated to copy it as his fund works in favour of the investors, not the fund manager. A usual fund is structured with a 2 and 20% approach where investors pay a 2% flat fee regardless of portfolio performance and 20% of their return on capital.

However, Mr Buffett structured his fund in a way that’s more beneficial to their investor. He charges no fee for management of their money with an annual income of $100,000. He charges 25% when the annual return is over six per cent.

Buffett’s approach to picking stocks grew of three core concepts that he’d learnt from Benjamin Graham.

  1. Whenever you buy a stock, you’re purchasing part of a company with an underlying value and business operations, not just a piece of paper for speculators to trade.
  2. View the market as a “voting machine,” not as a ”weighing machine,” which means that the stock prices fail to reflect the true value of the business. As Benjamin Graham wrote in “The Intelligent Investor”, it’s useful to think of the market as a manic-depressive who let’s his enthusiasm and fear run away with him.
  3. You should buy a stock only when it is selling far lower than your conservative estimate of its worth. The gap between its current price and the company’s intrinsic value provides what Graham called “Margin of safety.”

Monish Pabrai did exactly just that. He did what Buffett had done successfully for decades. The fee structure for his fund was the same as that of Berkshire, reasoning that this is an honourable way to do business.

Mr Buffett provided Pabrai with many filters that help him sorting through stocks.

  1. One of Buffett’s “core commandments” is that you can invest in a company only if it falls within your circle of competence. When Pabrai invests in a company, he asks himself if he really understands all underlying factors that can affect its operations in future. He pushes himself to consider whether he is at the centre of his circle of competence, on edge, or outside it.
  2. A company has to trade at a large enough discount to provide enough margin of safety. He doesn’t bother to construct an elaborate spreadsheet that gives him an illusion that he can precisely predict the future. He only invests in companies so cheap where it is a ‘no brainer.’
  3. Under Charlie Munger’s influence, Buffett gradually shifted away from merely cheap stocks to buying better businesses. This meant that the company should have a durable compatible advantage and be run by an honest and capable CEO.
  4. The company’s financial statement should be simple and clear. As Buffett observed, if one cannot understand a financial statement of the company is because the writers don’t want you to understand it.
  5. Never short sell a stock as the upside is only 100%, but the downside is unlimited. You can lose an infinite amount of money if the stock soars in price.

For Pabrai, one of the secrets to investing is avoiding anything that seems too hard. He automatically passes on investment in countries such as Russia and Zimbabwe, given their contempt for shareholder rights. These rules have served him well over the years, and remarkably, none of these rules is his own. He adapted these from other successful investors.

To conclude, Pabrai says that Humans have something weird in their DNA, which prevent them from adapting to good ideas easily. He observes his world inside and outside of his industry. When he sees someone doing something smart, he forces himself to adapt to it. Just like he did in copying Warren Buffett, it has served him well over the years, to say the least.

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