The concept of circle of competence is well known in the investing community. I believe it was popularized by Warren Buffet, at least that’s how I first came accross it. Both Buffet and Munger have emphasized endless times to invest only in what you understand. And they’re not the only ones, other super investors like Peter Lynch have hammered the idea of leveraging whatever expertise you possess to make good investment by remaining within your circle of competence.
The idea of shameless cloning, as far as I can tell, is not as established. Cloning simply means copying the moves of someone else, whether buying or selling stocks. We can do it thanks to a report called 13F. This is quarterly filing that hedge funds have to submit and where they disclose their investments. So about a month after the end of every quarter, anyone can see what their favorite fund manager has bought or sold during the quarter. Shamess cloning means cloning someone indiscriminately, or (and this is my interpretation of it) without necessarily understanding why.
This is squarely in contradiction with the circle of competence precept. How can one invest in something without knowing why?
Mohnish Pabrai is a super investor that encourages cloning (even shameless cloning). He said that if one had simply cloned Warren Buffet, even with a 45 day delay, they would’ve gotten great results. Mohnish views cloning as an extra-layer of security. He describes it as “bowling with bumpers”.
I am a huge fan of almost-shameless-cloning. I added the almost part, because ideally, I’d prefer to understand and like something about the business I’m buying. I don’t have to understand all of it or in depth, and I don’t have to like everything about it. A little bit is enough, I just need to get a feel, an intuition for why this could be a great investment. And I don’t just clone super investors: anybody who is succesful at they do is fair game. The more succesful and knowledgeable they are, the easier it is for me to clone them.
Recent cloning examples are:
$GOED I acquired a micro position because I didn’t know the investors I was cloning prior, so I had little time to assess them
$EMO.V this was a bigger position (~ 5.5%) because I had time get acquainted with Doc Jones’s research before making my move
$BABA a no brainer after I learned that Mohnish bought stock (probably inspired by Charlie Munger)
After having cloned an investment decision, I can put in the work and improve my understanding of the business, which is necessary to be able to withstand periods of high volatility.
In a nutshell, cloning someone who knows what they’re doing allows me to acquire a small position which I would not have been able to otherwise. Then I can try and stretch my circle of competence to get it closer to the new holding. The better I have vetted those that I clone, the more protected my downside will be, and the more work I put in after the cloning decision, the more value I’ll be able to extract from it. As of today, my cloning positions don’t exceed ~5% initial allocation.
Deep cloning takes the idea to a whole other level. Once more, I got this from Guy Spier’s book. I call it deep cloning as opposed to shallow cloning; this is a heritage of my computer science background.
While shameless cloning makes you copy someone else’s decision, the goal of deep cloning is to copy their mindset. Instead of copying just the external signal when it manifests, you copy the source code. But how can you have access to someone else’s source code? The answer is: you can’t. So you hack it. And the best hack we have access to as humans is something called mirroring. Mirroring someone means doing what they do, the same way they do it. The more attention to detail you put into it, the better. You can mirror the way someone walks, the way they talk, the way they smile, the kind of jokes they make, etc. What’s the point, you say? Well if all the external signals someone sends are a result of their inner wiring, then by forcing ourselves to meticulously cop all of these signals, we end up unconsciously pushing our own inner wiring to align with theirs. Why? Because nature is efficient. And the most efficient way to copy a multitude of different signals is to adopt a internal framework from which they natural emerge.
The goal of deep cloning is to be able to behave like a master even when he’s not there to tell us what to do. We can ask and answer the question: “What would Mohnish Pabrai do in this stuation?”. We can study all of the rational decisions he made in his investment life and try to understand how he came to his conclusions (thankfully there’s a plethora of videos of Mohnish online, bless his generosity). But that is not enough. We must also understand why his mental setup made it easy for these ideas to emerge in the first place, so that similar ideas can emerge in our mind as well.