People admire history’s greatest innovators: Benjamin Franklin, Leonardo da Vinci, Thomas Edison, the Wright brothers, Steve Jobs.
Few of us are great innovators ourselves, however.
So it doesn’t make a lot of sense to try to create a novel investment system – or some entirely new method of securities analysis.
It’s far more lucrative – and much less trouble – to shamelessly clone the best ideas of others.
Let me give you a few examples…
In my previous life as a portfolio manager, I regularly studied the top investment holdings of the nation’s top equity fund managers. (They are required to report them each quarter in their 13F filings.)
I would search for ideas that overlapped and then work backward to see what made these companies so exceptional that the best managers in the country were avidly buying them.
I picked up a ton of big winners this way.
Over the years, I copied and refined my own trading systems. One is geared toward momentum stocks.
I read the books and research of William O’Neil – founder of the famous CANSLIM system – and pored over every issue of his paper, Investor’s Business Daily.
Every technique he recommended that worked, I kept. Every one that didn’t, I rejected. Or at least modified.
(For example, O’Neil recommends that you sell any stock that goes against you by 7% or 8%. But that’s too tight a stop – and will cause you to stop out so often that you feel like you’re spinning your wheels.)
Thirty years ago, I also learned to ride the coattails of knowledgeable insiders.
I bought the same stocks as corporate officers and directors who possess plenty of material, nonpublic information.
I didn’t invent momentum trading. And I wasn’t the first to closely monitor insider buying.
I just took these good ideas, tested them exhaustively, and kept tweaking them to obtain better and better results.
This happens all the time in the world of business.
Walmart founder Sam Walton invented absolutely nothing. But he copied everything that everyone else in retail was doing that was smart.
In the process, he created the world’s largest chain of retail stores – and became one of the nation’s richest men.
Steelmaker Andrew Carnegie wasted no time trying to reap great wealth from radical innovations in metallurgy. “Pioneering don’t pay,” he said.
Chairman of Berkshire Hathaway Chairman Warren Buffett cloned his mentor Benjamin Graham’s approach.
And plenty of others – including me – have cloned parts of Buffett’s approach.
Why don’t more people do this in business… in investing… and in life?
Some folks seem to prefer learning things the hard way. I’ve never understood why.
Unless you really are a Jonas Salk or an Alexander Graham Bell, it’s hubris to start from square one and try to create something entirely new.
It’s also time-consuming, frustrating and expensive.
Yet people seem to have something in their DNA that prevents them from adopting good ideas easily.
If you watch what the smartest people are doing, you can apply their best ideas to your own life, your own business and your own portfolio.
Mohnish Pabrai, an Indian-American businessman, may not be a household name. But he is one of the preeminent investors of his generation.
Pabrai claims that he owes his success entirely to following the methods, principles and ideas of those he most admires.
“When you encounter these truths that other people don’t understand, you just have to latch on to them big-time,” he says. “Anytime you get a truth that humanity doesn’t understand, that’s a huge competitive advantage.”
Some people worry that others might find their ideas derivative. Pabrai isn’t one of them.
He only cares what works.
Follow his example. Make a habit of searching for the best ideas. And adopt them unhesitatingly.
Why don’t more people do this?
Because it requires them to check their egos at the door.