Disclaimer: This is not investment advice. The author is long the stocks mentioned in this article and may buy or sell them at any time. His views may be biased or wrong. Blind imitation of investments is dangerous. Please do your own research and due diligence.
Standing on the shoulders of giants is a concept known since the Middle Age. Famously, Sir Isaac Newton wrote in a letter to Robert Hooke:
“What Descartes did was a good step. You have added much several ways, & especially in taking the colours of thin plates into philosophical consideration. If I have seen further it is by standing on the shoulders of Giants.”
In today’s investment world where a lot of information is shared freely and rapidly on the internet, imitation is probably one of the most important investment concepts. People check what Uncle Warren and other famous investors are doing via their 13-F Filings which can be accessed easily on pages like Whalewisdom , Dataroma or Gurufocus . Fund managers publish their quarterly letters and discuss positions and there is collections of these available, eg. on Reddit . People like myself present their ideas on free Substacks or Blogs and there is a number of interesting ones out there. Then there is Fintwit, Internet forums and podcasts. Basically, people are really throwing more ideas at the curious investor than she can handle (at least this applies to me.
This has good and bad consequences. The good is that you do not have to have any ideas yourself. Of course, it is desirable and makes you interesting to be the first/only one to come up with a name but it is clearly not necessary. Also, no matter what name you look at, there may be some material available beyond official filings and company presentations. Even better, some of the publishers will be happy to exchange views about investments, so it is a great chance to discuss and learn. To quote Monish Pabrai : "Many of the best ideas are already out there for us to see; we just have to clone them."
On the flipside, the online investment community is a jungle andyou can clearly get lost in it. There is just so much information, you cannot digest it all. So you need good filtering techniques if you want to imitate. Also, there are major risks to imitation. In my experience, imitation may facilitate your access to an investment and provide ideas you would not have had otherwise. But it can be no replacement to your own thinking and work. Even the brightest minds may err. Never outsource your research! There is also a risk of stocks which a mentioned (too) often get overpromoted which may be a particular phenomenon on social media like Fintwit or Reddit.
With these advantages and risks to imitative investing investment, what could be a good approach to it? Here are some factors which I consider critical:
Filter what and whom you read: There is just so much stuff out there that you cannot read it all. Start somewhere and save authors who, in your view, provide great content. These are your “Cloning Champions” They should be investors whose style you understand and consider similar to yours. Check which other authors your Cloning Champions recommend. Some of them will have a blogroll, provide links or recommend other readings. Be open to read a new author from time to time to improve and extend your reading network.
Organize your reading: Make sure you get alerted when your Cloning Champions publish something new. I am using Netvibes as a tool to get alerted on blog posts. The reddit forum can help with quarterly letters and you can subscribe to your favourite substacks.
Consider your circle of competence: “The important thing about your circle of competence is not how big it is, but that you stay inside of it” Warren Buffett famously said. Alway keep that in mind. In my case, I will likely not take a close look at a biotech post - even when it comes from an investor I really appreciate. Recently, I read a number of tempting posts on Petrobras by people I appreciate - but a Brazilian Oil giant is not for me. And the inclusion list only starts here. I have never done and do not intend to do crypto, airlines, metals, uranium or Russia so any pitch is just lost on me. Also, I put to the side very quickly ideas that relate to retail, real estate, commodities or China - there are other people who understand these better than me
Check the write-up for balance: I filter out overpromotional writers in step one but also good writers will from time to time publish a one-sided piece. This may be because they do not have enough time or are very excited about their idea. I really prefer write-ups which discuss risks or weak spots of a company and what may go wrong. Another point is that valuation is often done sloppily. I do not avocate overeingineering it, but when I read “15x EV/EBITDA for such a high quality business is a no-brainer”, I have questions. When it comes to projections, assumed profitabily and growth have to be challenged.
Interact: In many cases, there is as much value in the interaction/comments of a post as in the post itself. And you can be a part of it. So read the Q&A in the comments and ask anything that is unclear/does not make sense to you.
Never outsource your research: Once the above has been done and you like the idea, you can start your own journey to understand the company. Ideally, there will be a lot of confirmation of what you have already read but you may also well find additional or contradictory inforation which turn you off.
With these thoughts on imitation out of the way, I can confess that I own three new portfolio positions where I am standing on the shoulders of giants. Each of these are currently 2-3% of my portfolio. One of my Cloning Champions is Dave Waters at Alluvial Capital, a very interesting US fund investing globally in off-the-beaten-track companiesand special situations. If I were US-based, I would consider allocating some money with Dave and Alluvial, but in my setup there might be tax issues with that.
Alluvial recently put out a presentation on French IT Distributor WeConnect which immediately clicked with me. I think this is a company in a very interesting sector (distribution). It is still small, owner-led and should have a good runway for growth. In addition, it has a great track record both on growth (<2x since 2017), return on capital (around 14%, ROE around 20%) and trades at EV/EBIT of around 4x. All the details are in the deck, it is really worth reading.
The second idea, is also inspired by Dave and Alluvial, but it is not the only source. I started a postion in P10 Inc (ticker PX) . This one took me longer than WeConnect. P10 is a private markets investment management firm. They have acquired various Private Equity, Private Debt, VC and other Alternative Asset Managers. Typically, these managers charge a fixed plus incentive fee structure (2 plus 20 being the famous one). Under P10’s model, it acquires for cash the PE manager and the right to fixed fee (say 2%) of its existing and future funds, leaving the incentive fee to the teams. Funds are often raised for a term of around 10 years which leads to a great visibility and predictability on P10’s revenues for the future. Also, many of the funds are focused on the middle market and have performed well, making future fund raises likely. P10 is also growing through acquisitions and diversifying its product offerings. PE and VC are in a tough spot right now which causes some market scepticism but I do not think this will last forever. If you want to learn more about P10, here is a video of Dave discussing it with Andrew Walker:
The third addition to my portfolio is a Japanese company whose products I am using a lot: Shimano. Shimano is a manufacturer of parts and components for the cycling industry. While I have been well-aware of the company for a long time, I never considered it as an investment until I read a really outstanding piece in German by Jonathan Neuscheler (Abilitato.de) . This research is also worth your time and if you are not a German speaker, Google Translate can helpyou with it. Shimano is the clear leader in the bike component industry. They are very profitable with operating margins and ROEs >20% and have grown a lot in the last years. While some of this growth may have been due to Covid tailwinds which now abate, cycling in general is on the rise and electric bikes should be a secular tailwind for them. Shimano trades at around 9x EV/EBIT or 13.5x P/E which I find reasonable. Like many Japanese companies, their balance sheet is too conservative as 20% of the market cap is in net cash and while there is a dividend, the yield of 1.1% is meagre. Interestingly, they performed a small share repurchase in 2021 and another one in 2022 (1% of the shares), so at least they know the concept.
I would like to thank my Cloning Champions Dave and Jonathan for helping me with my capital allocation.
Finally, a quick update on special situations. In the last weeks, I collected Contingent Value Rights (CVRs) on the three As where mergers closed, Abiomed, Akouos and Applied Genetic Technologies. I have no particular view on the CVRs but found them reasonably cheap to pick up (I bought at a small premium to the Cash Price on AKUS and AGTC and at a small discount on ABMD), so collected some cheap lottery tickets here. CVRs in my view sometimes get underestimated by investors and there have been cases where they worked really badly (anyone remember Sanofi/GCVRZ?). On the other hand, I have had some wins in the space so always interesting to check out. Another CVR situation I am watching is the RFP merger.
That may have been my last post for the year. Thanks for reading & supporting the Augustusville substack, happy holidays and have a good start to the new year!