The last time I spoke about the philosophy of a copycat investor on the investment approach taken and what drives the investment decision, I tried to distinguish the copycat investor from the coattail investor. This time I want to look at the copycat investor in a little different way. If you are going to copy the ways of Mark Zuckerberg, you cannot start another Facebook and expect the same level of success. Seek to connect the earth in a different business space.
Peter Thiel in his book Zero to One wrote about the principle of moving an idea from zero to being number one in a space. He went on further to encourage that the investor avert becoming disruptive when entering a business space, but rather try to create a difference and strive to become a monopoly.
There is only one Berkshire Hathaway and indeed only one Warren Buffett, only one Apple, and only Microsoft.
Be a monopoly (the only one your investment space)
Being non competitive is an advantage (market disruption is not necessarily a good thing)
Bolt on useful ideas to complete your own (reference what works)
Bring different talent to bear on your efforts (check your ideas)
Beware of the known risk and provide for it (caveat emptor)
A common investment practice of some investors is to lend themselves to coat tailing other investors with a hope of receiving similar success and they do so not knowing why a particular investment philosophy is practiced in the first place.
While coat tailing is good to practice, I believe more can be had from the benefits of becoming a copy cat investor. This investment style is a little different from coat tailing. A coat tailing investor sits and waits for the copycat investor to go to pasture first with cash and then he follows.
On the other hand the copycat investor has a principle of practice that informs his investment approach and he isn't sitting and waiting for anyone else to lead off. The copycat investor would much rather no crowd to contend with in his investment space.
The coat tail investor searches for the executed investments opportunity and follow the copycat investor.
Who is a copycat investor though?
Warren Buffett is a copycat investor.
How?
He copied;
Ben Graham's net net approach,
Phil Fisher's scuttlebutt approach,
Henry Singleton's capital allocation approach
Charlie Munger's circle of competence approach
Lego's approach
Mr. Buffett was not interested in coat tailing any these folks, but his preference was to take a little piece of each person's style to make himself whole. Ben Graham turned him down when he suggested Geico as a good investment. Today he owns Geico.
Phil Fisher's approach was too focused on trading the stock at a profit as oppose to owning the company for its long term earning power.
Henry Singleton called everything he touched Teledyne, but his key principle was allocating capital where he could receive the highest and best return on capital employed.
Charlie Munger's approach was simply sticking to what works well and stay within that circle of competence of what he knew.
Lastly, the Lego approach is where Berkshire Hathaway bolts on companies and tucks in other companies into its holdings and guard its competitive advantage with a wider economic moat as much as possible.
There are a few steps to
prequalifying an investment. Most good investors have some kind of checklist ritual
that they go through before making an investment. Setting the right environment is a prerequisite and Mohnish Pabrai has a very good mental model worth cloning that by firstly moving away from Wall Street like Warren Buffett.
As I’ve always said, “copying
good habits is the cheapest investment you can make”. Then the other questions an
investor wants to ask are:
What are the goals of the
investment?
What are the actions required
to be taken?
When do you review your
investment position?
Why are you still in the
investment?
What are the risks associated
with making the investment?
Why, Why and Why?
You need a checklist of items to assist you to avoid risk as also to stay focus on the most important things as you make an investment decision. I refer you to the following;
It is clear to me that the new business model evolves on sharing or what is otherwise called "the connection economy". I cite this only because I am wondering: how do you get a competitive advantage in this new connection economy?
The connection economy will find share of mind, share of interest, but not share of space. The connection economy business will seek to find its fan from anywhere the internet ecosystem exists. Call the fan base a clubs, tribes or Googlites or any of the other Dot.com connectors. AirBnB, Uber, Facebook and the list goes on, it is all about connecting.
What is the investment insight here? The business model must be scale-able, pollinate-able, but difficult to copy.
Only but a few persons understand the effect of compounding interest return on the invested capital quite like Mohnish Pabrai.
He best explains how he has invested Pabrai Funds capital in his book: The Dhandho Investor.
An investor can focus on one or two ideas and have your investment come through and staying in a small space watching over that investment. I'd say "you in your small corner and I in mine". Find that one thing that works for you and go do it.
Stock picking is not a first pass post business game like that of horse picking searching for a winner. There is no investment objective in picking a stock without considering the business behind the stock.
Picking a winning horse to win at the Preakness is easy if you should go by the past record of that race horse, but not only is the horse's past record important, but so is the jockey's ability to bring the horse home to the winner's enclosure.
A stock is tied to a business and the business is tied to the management like a jockey to a horse. So the management of the business is so important when picking a stock.
Light weight is a competitive advantage for a winning horse and low cost is a competitive advantage for a winning stock.
At the racetrack it may be in your interest to watch the tote board every race, but at the stock market there is no need to watch the ticker board every day.
You will have to throw away your losing ticket at the racetrack, but at the stock market, you can hold your ticket until another day, months, years when Mr. Market feels a little enthusiastic to take you up on a higher price than you paid for that stock.
I'd rather picking stocks over picking horses to win.
