I Shamelessly Cloned India’s Top Investors to Make 41% Returns | Mohnish Pabrai | Copycat Investing

Summary

In this video, the concept of 'shameless cloning' is explored, where investors replicate the portfolios of successful investors like Mohnish Pabrai. The narrator builds a 'cloned portfolio' by selecting high-conviction stocks based on shareholding percentages, using data sourced from SEBI disclosures. After backtesting over 8 quarters, the strategy shows a 41.4% annualized return, outperforming even the top small-cap funds. However, the strategy is not without its challenges, including manual intervention and the volatility of small-cap stocks. Despite these, the strategy offers a potential path for replicable, scalable investing.

Takeaways

• 😀 Shameless cloning is a strategy where you replicate the high-conviction investments of top investors to build a profitable portfolio.
• 😀 The strategy is based on the concept introduced by Mohnish Pabrai, who has never shared a detailed system for cloning—until now.
• 😀 The key to successful cloning is identifying investors with high conviction, using verifiable data like SEBI’s disclosure of shareholders owning over 1%.
• 😀 Data can be extracted from platforms like Trendlyne to find investors who hold over 1% of a stock. This data helps identify genuine, high-conviction bets.
• 😀 To build a 'shamelessly cloned portfolio,' you need to focus on stocks where marquee investors hold significant shares, not just large investment amounts.
• 😀 Using a percentage of shareholding rather than the corpus size to define 'conviction' provides a more authentic method for stock selection.
• 😀 After collecting data and verifying it through sources like Google Finance and ChatGPT, stocks with the highest conviction are selected for the portfolio.
• 😀 Backtesting the cloned portfolio over 8 quarters showed an impressive 41.4% annualized return, far outpacing the Nifty 50's 12.5% return in the same period.
• 😀 While cloning can yield high returns, it’s important to remember that some stocks will perform poorly, with 35% of the picks in the portfolio showing losses.
• 😀 This strategy is not risk-free—most of the stocks in the cloned portfolio are small-cap or micro-cap, which can be highly volatile.
• 😀 Although the cloning approach has worked well, replicating it manually requires diligence and may come with minor errors, making manual intervention necessary.

Q & A

What is 'shameless cloning' in the context of investing?

Shameless cloning refers to the practice of replicating the high-conviction investment ideas of successful investors like Mohnish Pabrai or Warren Buffett. It involves copying their strategies without necessarily conducting original research, focusing instead on what others have already identified as valuable investment opportunities.

How does the SEBI rule regarding 1% shareholder disclosure help investors?

SEBI’s rule mandates that publicly listed companies disclose the names of shareholders who own more than 1% of the company’s shares. This provides a transparent and verifiable way to track significant investors, which helps in identifying high-conviction ideas from well-established investors.

How is ‘conviction’ defined when selecting stocks for cloning?

Conviction is defined by the percentage of shares an investor holds in a particular company. A higher percentage indicates greater conviction, meaning the investor has a significant stake in that company. The idea is to focus on stocks where marquee investors have the most significant ownership.

Why are small-cap and micro-cap stocks preferred in this cloning strategy?

Small-cap and micro-cap stocks are preferred because they offer higher growth potential, which can lead to outsized returns. However, these stocks also come with higher volatility, which is why they are suitable for high-conviction cloning strategies, though they might not be suitable for all investors due to their risk.

What are the key tools used to identify investable stocks in the cloning strategy?

The main tools used are Trendlyne, for extracting shareholder information; Google Finance, to track share prices; and ChatGPT, to retrieve stock codes. These tools provide the data required to identify, track, and analyze the high-conviction stocks held by top investors.

How does the backtesting process work for the cloning strategy?

Backtesting is done by simulating investments of 10,000 rupees in each of the selected stocks, based on the shareholding patterns of the investors. The simulation spans over the last 8 quarters, tracking the performance of each stock and calculating the returns on these hypothetical investments.

What was the performance of the cloned portfolio in the backtest?

The backtested portfolio delivered an annualized return of 41.4%, significantly outperforming the Nifty 50, which returned 12.5% during the same period. It also outperformed the best-performing small-cap fund, the Quant Small Cap fund, which returned 29.9%.

What are the risks associated with the shameless cloning strategy?

The main risks include the volatility of small-cap and micro-cap stocks, which make up a large portion of the portfolio. Additionally, about 35% of the stocks in the cloned portfolio were exited at a loss, highlighting the fact that even high-conviction stocks can sometimes underperform.

Why is the Nifty 50 not considered a relevant benchmark for this strategy?

The Nifty 50 is not a relevant benchmark because most of the stocks in the cloned portfolio are small-cap and micro-cap companies, which have much higher growth potential (but also higher risk). The Nifty 50, consisting of large-cap stocks, does not capture the same type of investments and risk profile.

Can this shameless cloning strategy be used with mutual funds or smallcases?

Currently, there are no mutual funds or smallcases built around the shameless cloning strategy. Fund houses are unlikely to implement this approach because it involves copying other investors' strategies, which could be hard to justify and may not appeal to fund managers' reputations.