How to clone?

Now that we have understood why we should clone, let us understand how to clone?

Cloning can vary from person to person, there are a number of financial instruments like stocks, bonds, commodities, etc. from which one can decide to clone and moreover there are multiple markets to choose from. There are Developed economies like The United States, The United Kingdom coupled with Emerging Market economies like India, Philippines, South Korea, amongst others.

Investors must be mindful of adequately diversifying their holdings even if they are cloning. For instance, instead of exactly cloning a value investor’s portfolio, you can add some of the top holdings of a growth investor’s as well. The key to successful cloning is to bid a reasonable risk-return profile.

Suppose, you decide to invest in an equity strategy, you may consider adding alternative investments like gold or fixed income instruments into your portfolio. Traditionally, gold and equity have demonstrated a negative correlation. This implies that Gold shall outperform in a period of poor market performance thereby lending stability to your portfolio. 

The first step towards cloning is to create a process. This can be rigorous and requires a lot of effort. Here are some of the ways using which you can get started:

1.Selecting an investor or a group of investors and creating a replica of their portfolio –

We all revere someone or the other’s thought process & ideologies in the market. Over the years, I’ve been humbled by the learnings of these market wizards who possess an infinite stream of knowledge. And what better than cloning the entire portfolio!

2.Selecting a group of investors and replicating a portfolio of their top picks-

This investment style is much-more prone to selection bias given the contradictory philosophies.

Personally speaking, I find small caps to be a much more lucrative investment than their larger peers. And who can ace this game better than the likes of Porinju Veliyath, Ashish Kacholia and Mukul Agarwal? 

And there it is! A tailor-made portfolio that is equally allocated amongst the twelve stocks (top four holdings in each of the portfolio)

3.Selecting a group of investors, studying their stock picks and investing in the ones which fall in your circle of competence –

This is a more suitable approach for people who understand a little about the markets, and do not want to bet on something completely unknown to them. Investing blindly can be dangerous and it is best to stick to your circle of competence. 

Circle of competence is a broad term and for me it signifies those companies I understand in and out; the fundamentally strong stocks which I would add further in market dips.

4.Following only the largest holding of investors whom you want to follow –

An example would be to only purchase the largest holding of all your favourite market veterans.

The hardest part of cloning an investment is not to create one, but instead, knowing when to buy & sell. Allocating a huge chunk right at the peak of the market cycle is seldom a great idea. Yes, cloning does involve timing the market since these are ready made portfolios which we work with. Of course, the new purchases can be added as and when the data is made public but the already existing ones are sizable and must be paid attention to.

In this regard, it is crucial to note that cloning is not a fool proof strategy with guaranteed profits. A legendary investor with an impressive track record, has the right to be wrong. Mistakes are imperative while making investments and those who quickly correct usually survive the longest in the financial jungle.