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 (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 (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.
3. Western Union (WU)
The Company is engaged in global money
transfer and payment services, providing people with fast, reliable and convenient
ways to send money around the world. Its services are available through a
network of over 410,000 agent locations in more than 200 countries and
territories. Western Union is owned by value investors such as John Rogers
(Ariel Appreciation), Donald Yacktman etc. In Q1 2013, investors increased
their holdings of Western Union between 15% to 120%. Western Union is deemed to
be a cheap stock by investors where it is currently traded at about 6 times
EBITDA (Earnings before Interest, Depreciation and Amortization).
Coca Cola owns and markets four of the
world's top five nonalcoholic sparkling beverage brands: Coca-Cola, Diet Coke,
Fanta and Sprite. Though not considered a fast grower, the company gained 91%
over the past 10 years, the maker of the globally beloved beverage had
consistent long-term performance, pricing power and ever-increasing global
consumption rates. Coca Cola is owned by 28 gurus with the most famous of them
being Warren Buffett. Beside Warren Buffett, Joel Greenblatt (author of “You
can be a stock genius”), Donald Yacktman, Ken Fisher, David Winters of
Wintergreen Fund, Bill Gates, Jeremy Grantham also owned the stock. In 1Q 2013,
Donald Yacktman, Robert Zagunia of Jensen Funds, Thomas Russo all bought the
stock. Since their purchase, Coca Cola is up 10%.
To know the rest of the stocks which the gurus are buying, please click here
