Cloning top ideas from value investors

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.

Top 7 stocks bought by investors in Q1 2013

  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).

  4. Coca Cola (KO)
    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 Market 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%.

  5. Apollo (APOL)
    Apollo offers distinctive educational programs and services both online and on-campus at the undergraduate, master's and doctoral levels principally through these wholly-owned educational subsidiaries: The University of Phoenix, Inc. ('University of Phoenix'); Institute for Professional Development ('IPD'); and The College for Financial Planning Institutes Corporation ('CFFP'). The stock is owned by 17 gurus and is bought by Steven Romick (FPA), Ray Dalio (Bridgewater) and Donald Yactkman. The company is going through a challenging environment which explains the cheapness of the stock. Investor Donald Yacktman’s assessment of the business is that it is facing a large number of issues, including enrollment pressures and competitive challenges from other higher education institutions. However they think that over the long term, the company's competitive position is solid and the valuation is compelling.

  6. CH Robinson Worldwide (CHRW)
    CH Robinson is a third party logistics provider, offering freight transportation and logistics, outsource solutions, information services and produce sourcing throughout North America, South America, Europe, Asia and Australia. At $9.47 billion, the company has the largest market cap of competitors in its sector. The stock is owned by investors such as Joel Greenblatt, Steven Cohen, Donald Yacktman, Chuck Royce, John Hussman and Ray Dalio. The stock is currently trading at $56.35 and the intrinsic value is estimated at around 94.87

  7. Google (GOOG)
    Google principally provides paid search, which is an effective, measurable, and high return on investment form of advertising. Google provides paid search on desktop computers, tablets, and mobile phones and has market shares that range from 65% to 85% throughout much of the world. Additionally, Google has one of the largest Display advertising networks in the industry, which is growing extremely fast and is quickly becoming a more meaningful part of the business. With market shares in the search business that range from 65% to 85% in most countries throughout the world, it is reasonable to conclude that Google has a strong competitive position. Google's revenue is roughly 15 times higher than its nearest competitor. The stock is owned by 50 gurus. Some of the most established shareholders include Tweedy Browne, David Winters, George Soros, Mario Gabelli, Glenn Greenberg, David Tepper, Ruane Cunniff, Jean-Marie Eveillard, David Einhorn etc. Investors who bought the stock in Q1 2013 believes that Company’s competitive edge is still very robust and that the stock is cheap, especially relative to its potential growth rate