Mohnish Pabrai, one of my favourite investors, delivered a lecture on value investing at the UC Davis Graduate School of Management in 2012 where he explained his philosophy of how we can all become great investors. He introduced the idea of cloning and said that an investor would dramatically improve their results if they simply copied what Buffett and other value investor does.
What is cloning?
Based on Mohnish, cloning is a powerful concept and the best strategy. It involves reverse engineering trades which meant applying the knowledge and expertise gained by the notable investors (the likes of warren Buffet, Charlie Munger) in our investing methodologies.
So does cloning really work? Mohnish Pabrai explained that a study by Gerald Martin and John Puthenpurackal ("Imitation is the Sincerest Form of Flattery") had proved that if investors had just bought the stocks that Warren Buffett had bought, months after the official announcement, and at significantly higher prices than what Warren Buffett paid for them, they would have made a lot of money. Investors where Mohnish Pabrai would closely follow include Seth Klarman, fund manager of Baupost, Longleaf Partners, Greenlight Capital, Pershing Square, Third Avenue and Fairfax Holdings.
The best way to practice cloning is to keep an eye on what the big investors are buying. This article will further extend the idea of cloning and look at the top 7 stocks bought by value investors in the Q1 2013 so that we can clone their actions and stocks bought.
1. Microsoft (NASDAQ:MSFT)
Microsoft is currently owned by 55 gurus with some of the most notably being Donald Yacktman, David Einhorn, Mason Hawkins of Southeastern Asset Management, Ron Muhlenkamp etc. In Q1 2013, investors such as Donald Yacktman, Steven Romick (FPA Crescent Fund), Thomas Russo added their stock holdings in Microsoft by 5% to 50%
Microsoft has been active in innovating new products, with the releases of Windows 8, Windows Phone 8 and Windows Surface tablet. Investors see Microsoft as having a dominant global franchise, an opportunity to increase its earnings in the emerging markets. The stock is selling at a low multiple of its cash flow and low multiple of earnings. Since the gurus bought it, the stock has been up 5%
2. Oracle (NASDAQ:ORCL)
Orcale is a provider of enterprise software and a provider of computer hardware products and services. Its software, hardware systems, and services businesses develop, manufacture, market, host and support database and middleware software, applications software, and hardware systems, with the latter consisting mainly of computer server and storage products. Oracle makes hardware and software for the cloud and data centers, with 100 of the Fortune 100 as their clients. Oracle is currently owned by 34 gurus such as Seth Klarman, Lou Simpson (an investor that Warren Buffett trusts), Tom Russo, Ruane Cuniff etc. In Q1 2013, Glenn Greenberg (Brave Warrior Advisors), Lou Simpson, Thomas Gayner (Markel Asset Management) bought the stock. Oracle's balance sheet contains approximately $37 billion in cash, with $19 billion in long-term liabilities and debt. The company has also been generating higher annual free cash flow for a solid decade.
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Disclosure: I am long ORCL.