Buffett's 50% per year on small sums

[netnet]

Recently, Buffett, talking about his salad days, said that he would guarantee that he could make 50% per year on 1 to 10 million (maybe 50, I don't have the direct quote in front of me).  I just came across a random podcast, that opined that Buffett really meant using control situations. Personally, I don't think that is what he meant, but I was wondering what some on the board think. (with only 1 million you are not going to have more than one control situation.)

 

 

[Jurgis]

I think consensus is that 50% is hard to unachievable.

 

Arb? - not at this time.

Value stocks in foreign exchanges? - maybe. Doubtful you can get 50%, but maybe.

Moaty situations in small caps? - I doubt there's many (any?).

US micro/nanocaps? - If you select best ideas from CoBF and other microcap investors, yeah, you could make maybe 20-30% a year. I don't see 50%.

Distressed debt? - maybe, but situational. Picasso is da man.

Control situations? - really? from what I've seen here most of them are tough and rather crapshoot.

Spinoffs? - not really.

 

Am I missing any other ideas/areas?

 

Edit: I somewhat skipped really situational ideas like levered Florida houses in 2010 or so...

[augustabound]

From the 2005 Kansas U visit to Berkshire,

 

According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

 

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

 

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

 

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

[Jurgis]

Seems like US/foreign micro/nanocaps then. I'm still doubtful, but I'll let our nanocap experts to comment. ;)

 

Edit: just to counterargue a bit my claim

 

If you select best ideas from CoBF and other microcap investors, yeah, you could make maybe 20-30% a year.

 

people may not post best nanocap ideas due to low liquidity, building positions themselves.

 

OTOH, we'd still see post-mortem 50%+ claims perhaps. In reports, letters to investors, etc. IMO I don't see enough of them to agree with Buffett. But surely he knows better.  8)

[jmp8822]

Recently, Buffett, talking about his salad days, said that he would guarantee that he could make 50% per year on 1 to 10 million (maybe 50, I don't have the direct quote in front of me).  I just came across a random podcast, that opined that Buffett really meant using control situations. Personally, I don't think that is what he meant, but I was wondering what some on the board think. (with only 1 million you are not going to have more than one control situation.)

 

I'm not exactly sure how he would do 50-percent per year, but here is my strategy:

 

Concentrate your capital in your best couple ideas.

Use options if appropriate.

Pick stocks that you think are worth two times or more where they are trading today - ideally with some reason it might be more obvious next year what the company is actually worth.

Watch out for levered firms if you are concentrated.

Think of every idea as opportunity cost versus the other idea.

 

What this will lead to in your portfolio:

 

Higher average volatility than the market.

Potential large mark-to-market or permanent losses - not okay for everyone.

 

Bottom-line:

 

50-percent per year is possible if you are a good stock picker and concentrate your ideas.

[Jurgis]

Just for fun, this deserves a poll.

[augustabound]

Shai Dardashti followed up with a letter to Buffett.

He responded by basically saying his Daehan Flour example from South Korea around 2006 would be what he would do today.

IIRC, it was selling at about a 2 or 3 PE. Stable, boring business etc.

[Picasso]

I think it's very possible to do 50% on $1-10 million without options, warrants or margin.  It takes some concentration and sucking up lots of volatility, but I think some have the mental and emotional capacity to do it.  I know people who put up those numbers but it takes unusual skills and mindset.  You'll know those people when you meet them.  They're just wired differently and can easily breakdown complex situations or remain level headed in almost any market condition. 

[Jurgis]

Poll posted at http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/i've-had-50-annualized-returns-for/ for resident Buffett wannabes ... and regular people too.  8)

[rukawa]

Supposedly negative enterprise stocks do get 50% a year over the period from 1972-2012:

https://blogs.cfainstitute.org/investor/2013/07/10/returns-on-negative-enterprise-value-stocks-money-for-nothing/

which is 40 years long.

 

Not sure how replicable this strategy is. Also not sure if the result is real. But its pretty interesting. At the time Buffett did this he was definitely a Grahamite. So its not a quality based strategy. Its really just incredibly deep value. Buffett also most certainly did not mean control situations since at this time he didn't have large enough sums to control anything. I think that over the short term you also have to be lucky with timing...you really need to have a booming economy. A deep value strategy won't work well during all time periods.

[InspireByReason]

Well I don't have a huge dataset to show off with but so far I'm hovering around the 50% gain mark for my first year with a highly focused deep value portfolio. I think to do what I do you have to either be extremely confident and/or insane. I haven't been able to figure out which one it is yet.

[Gregmal]

Maybe for a few years but I'd imagine if you did it long enough you'd run into the same issues Buffett is talking about. That said I just don't see how this can be done through investing, especially in an environment like this one. Definitely possible, although still incredibly difficult, if you're trading actively though.

 

Don't know if anyone here follows or what the consensus is on a fellow by the name of Timothy Sykes, but definitely using a strategy similar to the one he employs would give you the best shot IMO. Basically just taking advantage of less liquid or manipulated situations where the guy on the other end of the trade is not, lets be polite, a sophisticated investor.

[MG2014]

Have you considered that he wouldn't be investing in public markets at all with such 'small' sums? Maybe he'd do mini LBO's with small private businesses.

[Jurgis]

Have you considered that he wouldn't be investing in public markets at all with such 'small' sums? Maybe he'd do mini LBO's with small private businesses.

 

I thought that was part of OPs question and two people gave answers from Buffett directly that he meant public markets...  ::) (though he might do both).

[rb]

Hey, forget the 50%. I'd be happy as a clam if i could do 20% consistently. You can count me in the camp which doesn't think 50% is possible. But then I'm not Buffett. Here's my thoughts.

 

There are definitely a lot less of those companies out there today.

1. As Buffett said in that quote technology today made it really easy to find these companies so the market is a lot more efficient from that respect.

2. You have a ton of PE shops today that employ a lot of people to look for these companies and then snap them up.

 

If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big. So then you're looking at some special situations that are miss priced on an asset base. But if the companies aren't good then you need to get some control in order to release/realize the value. I don't know how you do that with 1-10 million given today's market caps. Maybe you find the company build a position and then release your research to PE shops press release style?

 

All that being said sometimes the market creates situations where you find good companies with the characteristics that Buffett talks about such as MSFT or CSCO circa 2011-2012. But that was a specific situation at a specific point in time. To say that there's always something like that going on is a big stretch imo.

[no_free_lunch]

I am with rb, 20% would be great.

 

I think that if this was possible then you should be able to find evidence of people doing it.  Maybe not 50%, but I can't even find a fund that has done 20% over the past decade.  I am not sure what kind of opportunities there are in public markets for sub $1m that there isn't for say a fund with $50-100m aum so it seems you should be able to find an example.

[Uccmal]

I am with rb, 20% would be great.

 

I think that if this was possible then you should be able to find evidence of people doing it.  Maybe not 50%, but I can't even find a fund that has done 20% over the past decade.  I am not sure what kind of opportunities there are in public markets for sub $1m that there isn't for say a fund with $50-100m aum so it seems you should be able to find an example.

 

The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.  Occams Razor. 

 

I just looked up Buffetts compound rate of return from the start of the partnerships to their wind up and it was (only) 31.6%.  It didn't hurt one bit that he started at the exact start of the baby boom driven bull market, and the cunning bastard got out right before the crash. 

[Jurgis]

The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.  Occams Razor. 

 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o

Just sayin'

 

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)

[rb]

Well if that's true these guys should step into the light. If they're doing it with small companies we can even set up a CoBF cabal where we pull funds together and get sizable positions to extract value.  If the research is for real I'm down for at least half a mil a pop.

[Jurgis]

Well if that's true these guys should step into the light. If they're doing it with small companies we can even set up a CoBF cabal where we pull funds together and get sizable positions to extract value.  If the research is for real I'm down for at least half a mil a pop.

 

It's also possible that someone started with 1K or 10K and now has 57K or 570K after 10 years.

 

Anyway, I'd be interested if some of these people stepped into the light. If they are interested in double confidentiality, I'd be happy to correspond via private messages and not disclose even their CoBF identities to others.

[oddballstocks]

 

 

If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.

 

 

I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

 

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

 

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b. 

[rb]

 

 

If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.

 

 

I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

 

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

 

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b.

You are 100% correct. I didn't want to get into all the nuances about business in one post. Of course this is what Berkshire initially set out to do. Solve that growth ceiling by buying companies with good ROIC by buying them and engineer growth by taking their cash flow and buy other like companies.

 

The issue with is that those kind of companies don't really have a reason to be public. Case in point, the companies that BRK bought were private. Now I'm sure that there are cases where these guys are not very good at corporate finance but I didn't say that there are no companies like that. My point was that they would be very rare and definitely not available all the time when one want to go shopping.

[kab60]

 

 

If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.

 

 

I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

 

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

 

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b.

You are 100% correct. I didn't want to get into all the nuances about business in one post. Of course this is what Berkshire initially set out to do. Solve that growth ceiling by buying companies with good ROIC by buying them and engineer growth by taking their cash flow and buy other like companies.

 

The issue with is that those kind of companies don't really have a reason to be public. Case in point, the companies that BRK bought were private. Now I'm sure that there are cases where these guys are not very good at corporate finance but I didn't say that there are no companies like that. My point was that they would be very rare and definitely not available all the time when one want to go shopping.

If these businesses don't grow, why do you need high ROIC (unless it's because it implies a moat?) I get the attraction to cheap, no-growth companies in a nice niche, but isn't the problem typically that those cashflows don't all get returned (suboptimal capital allocation).

[Uccmal]

The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.  Occams Razor. 

 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o

Just sayin'

 

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)

 

Extraordinary claims require extraordinary proof.  Non?

[DooDiligence]

The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.  Occams Razor. 

 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o

Just sayin'

 

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)

 

Extraordinary claims require extraordinary proof.  Non?

 

I had 2 years 2013 (GMCR) & 2014 (EW not sure if this one counts since I made a bundle that year on Calls but didn't actually sell any of the equity until last year & this year)

 

Either way I attribute both to luck even though I did visit stores & talk to managers re: K-Cup & Keurig machine sales for GMCR & read up on heart disease & valve replacements & competition (mainly Medtronic) for nearly a month before moving on EW.

 

I agree with you that anyone claiming to be a wizard should either step forward or ask Parsad to remove their vote...