Copying the investing style of the world’s successful investors seems to be an excellent investing strategy. However, how much of this style can we duplicate?
In general, copying Warren Buffett and Charlie Munger’s investing style is possible. The style revolves around buying great businesses under excellent management when trading at an attractive price to its intrinsic value.
Due to the U.S. 13F filling, anyone can see what those super investors are buying. If you can buy what they own, it can guarantee an adequate return if the asset is still available at a good price.
However, there is a huge difference between owning something you understand very well and cloning someone else portfolio. The biggest issue is that you do not know anything about the business, which means you do not have a safe exit strategy. In other words, you will not be able to tell if the stock fluctuations are just short market turbulence or fundamental issues with the business.
Therefore, anyone can copy Warren Buffett’s portfolio, but your circle of competence is not the same as his. The safest way to invest is to copy the style, not the portfolio. Therefore, it is critical to understand the Buffett-Munger style of investing.
What is the Buffett-Munger style of investing
The Buffett-Munger style of investing comes from Benjamin Graham which revolve around four fundamental principles to evaluate businesses:
Understand the business you want to own, which needs to be in your circle of competence. It would be best if you owned a business you are interested in and could explain how the business produces income and what industry.
Understand the business’s competitive advantage over other businesses in the industry. What are the features that make this business special? Understanding the moat gives the investor a reasonable argument of why this business will be relevant in the next 5-10 years. You can learn more about the economic moat here.
The Buffett-Munger style of investing in stocks is like owning an entire business that you do not manage, even if you own a small slice of the business. Therefore, the investor must demand management that can be trusted to run the business and bring profit. Learn about how to Assessing Management Before Buying Shares.
4- Margin of Safety
No matter how good the business is, it will not be attractive until it trades significantly below its intrinsic or fair value. Bargain buying is the most critical part of this style. It gives the investor confidence in case the investor was wrong in their analysis as it can at least guarantee a break-even or minimal losses of initial invested value. You can learn more about The Margin of Safety.
This investing style is not that complicated in theory, and it can be self-taught if the investor is willing to learn. If you are a beginner, you can teach yourself to invest in the stock market by reading a detailed plan of how beginners can start their investing journey.
Exactly to what degree we can duplicate the Buffett-Munger style?
Understanding the Buffett-Munger style of investing is the first step to finding success in the stock market. We need to know to what degree we can duplicate this style. The answer to this question lies with Mohnish Pabrai, also known as the shameless cloner.
Mohnish Pabrai is an investor who has successfully duplicated every aspect of Warren Buffett and Charlie Munger’s style of investing and core business. Mohnish has also authored a book that details many of his thoughts regarding this style called the Dhandho Investor. The following is a video of Mohnish explaining how he duplicated this style:
Summary of the Video
If you have watched this video to the end, you will realise that you need to work alone to find success in investing. Mohnish does not have staff and managers that run the Pabrai fund. Warren Buffett is the CEO of Berkshire Hathaway, yet he makes individual investment decisions, and so is Charlie Munger. None of those guys has full-time analytes that give them investing ideas; they do all the work themselves.
This style is quite different to how this industry operates. Mutual funds hire many stock analysts who search for investments ideas. The truth is that most conventional mutual funds have failed to beat the S&P 500.
Working alone and being able to start with small capital is an extremely attractive business model for many young investors. However, there are a few challenges that you need to know.
What are the challenges with the Buffett-Munger style of investing?
Mohnish never worked in the investing industry; his only source of learning was from Warran Buffett and Charlie Munger. Not everyone who wants to copy this style might be in the same position as Mohnish, yet we can list the challenges associated with adopting such a style:
1- Learn value investing
You need to invest time in learning to teach yourself to invest. You can not become an investor if you do not have the passion for investing and willing to prove yourself. Most of your investment decisions will be made by you; therefore, adequate education in the company you want to buy is required.
2- Compound your investment and be less active
Be patient by buying undervalued companies and holding for a very long time until you make ten times your original capital.
3- Only duplicate this style if you have passion for it
You can not be successful at anything if you do not have a passion for it. You will be spending hours, days, months and years valuing, learning and analysing companies; therefore, some level of interest is required.
4- No trading stocks when the market is open
Do not allow temptation in your investing journey. The stock can change significantly in a few minutes, but actual business changes take months, if not years. Therefore, do not be a day trader because it is mostly speculative.
5- Develop a system to be able to work alone
You need to understand the challenges and risks of working alone. You will be your own boss, which means you need to discipline yourself.
6- Have consistent income
You can not invest if you do not have a stable income that enables you to invest. This is a long term investing style; therefore, you need to be sure that you have sustainable income that does not force you to sell for living needs.
7- Get out of debt
You should not be burdened with credit card debts and personal loans that eat away your investment returns. The investor should be able to save money to fund his investment ideas, and too many debts can get in the way of that.
I am too lazy to to duplicate such style can we just copy successful investors portfolio?
This industry is weird because sometimes you do not have to think much about investment, and sometimes you have to think very hard about the decision.
Just copying a super investor’s portfolio is not a good idea as you are not doing your due diligence by analysing the stock. Your circle of competence is based on your experience, and it is different from Warren Buffett, Charlie Munger and Mohnish Pabrai.
Yet this has not stopped many people from copying those people. Therefore, you need to do it at your own risk. Even Warren Buffett can be wrong, and he was wrong many times during his career.
The Bottom Line
Therefore, investing like Warren Buffett and Charlie Munger is a successful way to go about investing and can be copied by anyone.
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