Want Buffett’s Returns? Here’s How to Get Them | #13

Episode Summary

Executive Summary: The episode is a humorous but substantive deep dive into cloning hedge fund managers via 13F filings. Meb Faber explains why following select long-only, patient managers can beat the market, using Buffett and others as case studies. The discussion covers benefits, pitfalls, lag effects, concentration, and how to practically implement a 13F-based strategy.

Main Topics: Politics-as-hook, then a pivot to investing (Priority: 3/5): The episode opens with political humor and a playful Hillary Clinton/Fiverr bit before quickly shifting to the real subject: whether public holdings disclosures can be used for profitable investing. The origin and logic of 13F cloning (Priority: 5/5): Meb explains how his interest in 13F filings began in college, how he backtested the idea, and why copying skilled managers can work if the right managers are selected. Buffett as the flagship case study (Priority: 5/5): Buffett’s 13F portfolio is used to show that a simple equal-weight clone of top holdings could outperform the market meaningfully over long periods, though not without volatility. Why stock picking is hard and active managers matter (Priority: 4/5): The conversation emphasizes the asymmetric distribution of stock returns and argues that a few winners drive most gains, which is why identifying rare superior managers can be valuable. Pros and cons of 13F replication (Priority: 5/5): Benefits include access, transparency, liquidity, lower fees, and tax efficiency; drawbacks include delay, hidden shorts/derivatives, style drift, and managers whose edge lies outside disclosed longs. Implementation and portfolio construction (Priority: 4/5): Meb discusses practical rules: avoid the most crowded names, ignore the top position, diversify across managers, and use 20–50 holdings or a basket of holdings 2–5 from multiple managers. Behavioral discipline and manager selection (Priority: 4/5): A major theme is that even good strategies can fail if investors can’t withstand underperformance. The right approach requires patience, judgment, and awareness of a manager’s style and temperament.

Key Arguments: 13F filings can be a useful source of alpha because they reveal what skilled long-only managers own, with a lag that is often acceptable for long-term investors. Buffett is the ideal cloning candidate because he is a durable, value-oriented stock picker with a long record of outperformance and relatively low turnover. Equal-weighting top holdings can be simpler and often works better than trying to mimic exact portfolio weights. The biggest challenge is not the data; it is investor psychology. Many managers and strategies underperform for years even when the long-run edge is real. Crowded hedge fund consensus names are usually a bad idea; the best opportunities are often unique, less-owned ideas from distinctive managers. The top holding is often not the best idea to clone because it may reflect price appreciation rather than highest conviction, and the 45-day reporting lag worsens that effect. 13F cloning is best suited to long-only, low-turnover equity managers, not macro, short-heavy, arbitrage, or black-box strategies. The strategy works best when diversified across multiple managers and when investors understand that some years will feature significant tracking error and drawdowns.

Data Points: Hillary Clinton cattle futures trade return: $1,000 to $100,000 in 10 months - Used as a humorous illustration of extreme and implausible compounding Return on that trade: 9,900% - The implied one-year return from the cattle futures story Hypothetical compounding at 50% annually: $300 billion - Even a far lower compounded return would still make her one of the richest people in the world 13F filing delay: 45 days - SEC reporting lag between quarter-end and public disclosure Manager universe threshold: Over $100 million under management - Managers with AUM above this level must disclose holdings via 13F Buffett clone outperformance since 2000: 5 percentage points per year - Equal-weighted top-10 Buffett holdings versus the market AQR backtest horizon: Since the 1970s - Referenced as showing even larger Buffett outperformance over longer history Buffett clone outperformance over the 1970s onward: About 12 percentage points per year - Cited from an AQR paper using a longer sample Stock underperformance rate: 64% - Among the top 3,000 U.S. stocks since 1983, from the Longboard study referenced Unprofitable stocks: 39% - Share of stocks that are not profitable in the cited study Stocks losing at least 75% of value: 19% - Illustrates the skewness of stock return distributions Share of market gains from winners: 25% of stocks responsible for all market gains - Shows why diversification is needed to own the few big winners Hedge fund fee drag example: 6.6 percentage points - Illustrated using a 20% gross return and 2-and-20 fee structure State Street manager survey: 99% would fire after one or two years of underperformance - Used to highlight investor impatience and behavioral constraints Tracking lag impact on returns: About 1 percentage point per year - Average drag from using delayed 13F information in backtests Berkshire vs. clone result: Buffett stock picks beat Berkshire slightly - Compared the direct 13F clone to owning Berkshire itself Typical hedge fund industry size: 10,000 hedge funds - Used to argue against copying broad hedge fund consensus trades Ideal portfolio size from cloning strategy: 20 to 50 stocks - Suggested range for an individual investor implementing 13F-based ideas Crowded hedge fund consensus basket: Top 20 hedge fund-owned stocks - Mentioned as the kind of crowded basket they would prefer to avoid Top-10 holdings approach: Equal-weighted - The preferred simple implementation method for cloning managers

Pivotal Quotes: "I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting there and trying to dream it up all yourself. Nobody's that smart." — Charlie Munger (quoted by Meb): Used to justify learning from proven investors rather than trying to invent everything independently "The game is rigged against you, and in two ways." — Meb Faber: Introduces the argument that stock selection has adverse odds and high failure rates "You don't want the beta of hedge funds. You don't want the broad hedge fund industry returns because they're crap." — Meb Faber: Explains why broad consensus copying is inferior to selecting distinctive managers

Implications: For investors, the episode suggests a disciplined way to harvest manager skill via public disclosures, but only with patience, diversification, and selectivity. For the industry, it reinforces that disclosed long books can be mined, yet true edge often lies in hidden positions and execution.