Trail Blazers vs Trail Followers: The Hidden Dangers of 13F Cloning

A friend asked me once why I like long-distance solo backpacking trips. It's because it is long-form meditation through physical exertion.

You're disconnected from the modern world. There is nothing except walking, eating, sleeping, and thinking.

A lot of thinking.

You're able to think all day because of the established trails. You don't have to spend your brain power on pathfinding. You don't have to constantly pull out your topo map and compass to figure out where you are and how to get to where you're going. You have the security blanket of a well-worn trail that lets you know that others have safely made it there before, and you will too if you just follow their lead.

This conservation of mental and physical energy isn't just a human trait. Other animals, like wolves, have evolved similar behaviors to maximize their chances of survival.

Wolves, even more than some creatures, seek the path of least resistance. Survival hinges on a brutal imperative: more energy must be gained than lost, across endless hard miles. To fail is to die. A hunting pack in tough going moves single file, commonly covering fifteen to thirty miles a day, with different animals taking turns in the taxing lead position. This isn't a matter of wanderlust, but necessity—covering the empty distance between meals. Research shows that wolves far more often fail in their hunts than succeed and, even when hungry, don't bother to study, let alone attack, the vast majority of animals they see, apparently recognizing that the price of a meal—precious calories burned in the chase and kill, as well as risk of injury—might be too steep.

A Wolf Called Romeo by Nick Jans

It's no wonder that quarterly 13F tracking is so popular.

These investment filings serve as established trails in the investing landscape.

Finding and researching a new company to invest in demands significant time, energy, and brainpower. Even after this thorough work, uncertainty often remains.

Following an established, successful investor lets you leverage their research, reduce your effort, and boost confidence in your investment decisions. If a renowned investor commits to a stock, shouldn't you buy it too?

Yet following these established trails isn't without risk. Like a hiker who becomes complacent, investors may neglect basic safety precautions.

You can't completely shut off your brain while hiking and drift into pure idle thought. You must still double-check your route, stay aware of your surroundings, ration your food accordingly, and monitor your water supply. Otherwise, you could put yourself in grave danger.

Similarly, following "star investors" can breed complacency and overconfidence. Blindly following their 13Fs without conducting basic due diligence and understanding the drawbacks of 13F cloning can put your money at serious risk.

13F Following Risks

Delayed Information

13F filings have a significant 45-day reporting delay. During this time, market conditions, company fundamentals, or the fund's position could change dramatically, making the information stale or irrelevant by the time it becomes public.

Portfolio Size and Strategy Mismatch

Professional investors often manage billions of dollars and can take positions that would be impractical or impossible for smaller investors to replicate. They may also employ complex strategies involving position sizing, diversification, and risk management that aren't apparent from 13F filings alone.

Limited Position Visibility

13Fs only show long equity positions. They don't reveal short positions, derivatives, options strategies, or other hedging instruments that might be crucial to the fund's overall investment approach. This partial view could lead to a dangerous misunderstanding of the complete investment thesis.

Unknown Entry Points

13Fs don't show the price at which positions were established. The fund may have acquired shares at much lower prices, making their risk-reward calculation very different from someone buying at current market prices.

Strategy Opacity

Investment managers often have sophisticated frameworks for position management that aren't disclosed in 13F filings. A fund might be scaling into or out of positions, adjusting exposure based on market conditions, or implementing complex risk management strategies - none of which are visible to outside observers.

Different Investment Horizons

A manager's holding period can vary significantly from what appears in quarterly filings. Some positions might be part of a multi-year thesis, while others could be shorter-term tactical trades. Without understanding these time horizons, following their moves could lead to misaligned investment decisions.

The False Sense of Security

Established trails can make hikers complacent about basic safety precautions. Similarly, following "star investors" can lead to reduced due diligence and overconfidence in investment decisions.

The solution in both cases is the same: use the established path as a guide, but always do your own research, stay alert to current conditions, and be prepared to make your own decisions when necessary.

Just as a smart hiker carries a map and compass even on well-marked trails, a prudent investor should develop their own analysis skills and not rely solely on following others' footsteps.