Being a selective copycat is not a bad thing in stock markets. With the launch of PiggyBack, we plan to learn and profit in the process. (PBL #0 2022)
“To use something that someone else has made or done in order to get an advantage.” — Cambridge Dictionary
The most promising ideas we can think of are usually already set in motion by smarter, more resourceful, or better-connected people. Our superiors may turn out to be neighbors down the same street if the idea is very crowded. Or if we got early to the party, they may be niche players on the other side of the world. Tough luck, but learn to be happy with competition for good ideas as a fact in life.
Now, as investors – in particular as minority investors in public stock markets – we have the opportunity to invest in our superiors. And we can afford to wait until we get confident that these superiors are stacking odds in our favor.
This marks the launch of the PiggyBack Letter (PBL), a free weekly stock market newsletter. PBL brings you free opportunities to learn from proven and promising capital allocators – via their present, past, and potential future public stock market investments.
We will select and analyze “our” capital allocators and investment situations from a value investing lens. For all readers interested to be able to follow, we have provided a separate background post on value investing.
This first PBL post introduces "piggyback investing", a concept specific to PiggyBack.
Johan Eklund, CFA
PS: If this does indeed sound interesting, please consider getting in early as a free PBL subscriber:
DISCLAIMER: This publication and all related communications are for informational and educational purposes only. All readers are assumed to accept the full version of this disclaimer, available at the following link.
What is Piggyback Investing?
“To gain knowledge or resource advantages from active investors by studying or investing in their public securities positions.” — Johan Eklund, CFA, PiggyBack
As minority investors, the public stock market records offer us vast hunting grounds. These records contain tracks of where and how proven capital allocators invest. With selective tracking we can try to identify:
Past investments where an allocator revealed some of their unique knowledge or strategy. We can study strategies employed, mistakes made and successes achieved in these events. The insights and techniques we pick up may improve our own investing.
Current investments of the allocator. Specifically, active investments where the allocator may use their resources for our benefit. The presence of the “right” allocator may signal interesting investments to further research. Add the right incentives and the allocator may also act as a catalyst to improve the investment case. For example, by demanding improved and more long-term capital allocation from its investments.
Future potential investments of allocators. As we pick up strategies and traits from many allocators we may start selecting “similar” stocks. The allocators may not agree, and likely never will set foot in these specific copycat investments. But we gain experience with our growing set of borrowed ideas and behaviors. We start to internalize. Over time competition drives us to "our" strategies, suited for our times and markets. We evolve.
In all these cases, we are climbing onto the backs of “giants” to improve our public stock market investing. With PiggyBack, we call this “piggyback investing”.
Capital Allocator Traits
Our allocator “giants” reveal themselves by leaving tracks that convince us of at least two attributes:
Superior investing skills. We search for sound strategies, high-quality investment processes, and good execution. If the strategies employed involve hard-to-copy allocator resources that is preferable.
Caveat: Never confuse investing skills with short-term investment outcomes. In a single bull market and ignoring risks, many “lucky fool” strategies produce "impressive" returns. The skillful are easier to separate from the fools after full business cycles. (For many Western stock markets we would argue there were no full cycles in the 2010s and early 2020s. Remember that quantitative easing and zero-interest-rate episode anyone?)
Decent minority treatment. A track record of repeatedly profiting at the expense of minority investors is a big red flag. So is maintaining close business relationships with entities that do. In general, we want to piggyback allocators who show good character.
Exception: Investing is seldom black or white. If we are comfortable, it can make sense to partner with skillful allocators despite predatory tendencies. Especially if the situation offers us a deep valuation discount or protective terms. But we should not fool ourselves to enter a predator's cage without a clear idea of who is next for lunch.