On occasion, Mohnish Pabrai has told a story he learned from management guru Tom Peters about imitation. Apparently there were two gas stations on the same corner. Each propriator could clearly see what the other was doing. One of them began building his business by extending full service to some, but not all, of his customers. The rival concluded that this wouldn’t work and refused to copy the practice even as he saw his competitor take away business.
The lesson: imitating smart practices works and – equally important – many, if not most, people fail to practice intelligent imitation, even in the face of evidence that it works (better than what they are currently doing). Mohnish practices what he preaches and has built a successful money management business largely – by his own admission – on imitating the practices of Warren Buffett and Charlie Munger.
At a recent talk he gave (via Skype) at the Ivey School of Business in Ontario, Mohnish spoke of the value of only making an investment if the stock is already owned by a successful value investor such as Warren Buffett or Prem Watsa. (Buffett himself benefited from cloning, for example, getting involved in GEICO when he learned that Graham was on the board.)
Mohnish compares this to only bowling with the bumpers up. He argues that you will make fewer mistakes than going it alone.
This is excellent advice. These great investors have enormous experience and are backing their ideas with serious capital, much of it their own. Mohnish goes on to argue that you could be successful by being a blind follower, but that few are willing to do this. He may very well be correct.
Nevertheless, I believe it makes sense to only invest when you understand a given investment. The issue is one of human behavior. It can be hard enough to stay with a position through periods of extreme volatility; this is doubly difficult if you don’t have conviction borne of your own understanding, particularly if you are a focused investor.
If you want to beat the market, one very intelligent thing to do is to limit your investments to those that are owned by a great value investor with a long-term proven track record. The market affords no style points for being innovative and creative. Money is earned by being right.