Buffett's 50% per year on small sums

[Patmo]

 

 

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.

 

And then you buy it for 3x earnings because the owners are going through a divorce

[vinod1]

If Bill Gates or Steve Jobs or Jeff Bezos said that if they are starting now from scratch they can build a company to transform an industry or grow it to a multi-billion dollar size, most of us would concur in agreement. But we would not think we can do it ourselves or even something we can shoot for.

 

Buffett makes the comment that he can get 50% returns if he is starting small and we seem to think that is within realm of possibility for, if not for many, at least for some of us. Buffett himself made a comment along these lines in the past.

 

I think he is an off the chart genius in investing just as Bill Gates and Steve Jobs are in business. So I think having something like 50% return target might be setting up for disappointment.

 

If you consider the fact that the expected returns on broad equity market is like 4-6% and bond market is 2%, someone making even 10% for next 20 years is going to stand out.

 

Vinod

 

 

[Patmo]

I wouldnt be surprised if 50% was a floor year for warren buffet with small money. I'm probably on the opposite side of the spectrum from most fanboys who quote any WEB saying as if it were fact, but the guy is no joke. I'd expect AT LEAST 200 people in NA can pull off sustained 50% returns on small money and no institutional constraints, WEB would be in the higher tier of that group.

 

Making lots of money on small amounts is deceivingly easy if you have a mindset tailored for it. At that level, talent is still optional (of course, that helps tons though)

[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)

 

Jurgis, as you acknowledge the poll has not been worded right.  Come to think of it, How is the statement by Buffett worded?  Is he claiming he could do 50% once, 50% for 3 years, etc.? 

In its various forms I have seen, Buffett has claimed that if he was running 1-10 million he could get 50% returns...  it is never mentiomed how long. 

 

Getting 50% returns over 10 years (non-consecutive) historically, can be written off as a statistical fluke far too easily.  Buffett is claiming forward knowledge that he can do it. 

[writser]

If Bill Gates or Steve Jobs or Jeff Bezos said that if they are starting now from scratch they can build a company to transform an industry or grow it to a multi-billion dollar size, most of us would concur in agreement. But we would not think we can do it ourselves or even something we can shoot for.

 

I disagree. Bill, Steve and Jeff are obviously very smart and driven but watch out for survivorship bias. These guys were also extremely lucky to be at the right time and place with the right people (Woz!) and circumstances. Without their current wealth, network and reputation I'd say the odds are heavily stacked against them (_anyone_) transforming an industry.

 

Also, I believe the key to sustainable 50% returns (if possible, consider me skeptical) is to obsessively watch the market and research individual stocks and companies 24/7. Participating in this thread would certainly be detrimental. Might explain why only the sub-50% losers are responding. Too lazy to do the actual work :) .

[Uccmal]

If Bill Gates or Steve Jobs or Jeff Bezos said that if they are starting now from scratch they can build a company to transform an industry or grow it to a multi-billion dollar size, most of us would concur in agreement. But we would not think we can do it ourselves or even something we can shoot for.

 

I disagree. Bill, Steve and Jeff are obviously very smart and driven but watch out for survivorship bias. These guys were also extremely lucky to be at the right time and place with the right people (Woz!) and circumstances. Without their current wealth, network and reputation I'd say the odds are heavily stacked against _anyone_ transforming an industry.

 

Also, I believe the key to sustainable 50% returns (if possible, consider me skeptical) is to obsessively watch the market and research individual stocks and companies 24/7. Participating in this thread would certainly be detrimental. Might explain why only the sub-50% losers are responding. Too lazy to do the actual work :) .

 

Agree with your first paragraph.  Talent no doubt helps but luck (right place/right time/ right industry) plays a role.  An apt comparison is professional musicians or actors.  Neil Young has acknowledged the effect of luck in his career, as ornery as he is. 

 

Agree with paragraph two as well to a point.  Its hard work to become the best at any field.  The double edged problem with investing is that you need to know what to avoid.  A better question for Buffett might be: What would you avoid to get your 50% returns?  He has had some big recent failures in 'old' industry companies.  How would he avoid the inherent speculation in the tech service industry and still get the returns he claims he could get? 

[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.

 

And then you buy it for 3x earnings because the owners are going through a divorce

 

Bingo.  That's the key, opportunities come from external events.  A divorce, death of a parent etc.

 

These deals for companies at a few times earnings with high returns on capital are very common in the private company world.  In terms of returning cash to shareholders.  I own one niche company doing 30% ROI yearly, they dividend almost 100% of their earnings back to shareholders.

 

There was a video of Buffett talking in India.  A small cap value guy asked him what he'd be doing if he was managing less than $10m.  It's one of the best answers I've seen.  Buffett breaks from his script for a few minutes and mentions low book value stocks, net-nets, how he went through the Korean stocks.  Then almost as if he realizes what he's done he starts talking about how if you have a lot of money it isn't sustainable and he wants these great companies.

 

Buffett is opportunistic.  From what I've gathered he still does these crazy sorts of deals in his private account when possible.

 

I posted a series of links 2-3 years ago about a situation Buffett was involved in back in the early 2000s.  The company was a net-net and suddenly Buffett's name came on the register as a significant shareholder.  He made some boilerplate comment.  Then as quick as it was there it was gone, the stock had jumped 50%.  Then it fell again and he bought back in.  The guy was flipping nickles on a deep value play, nothing more, nothing less.  The paper asked if he was going to buy it for his empire, nope, just a cheap stock.

 

The issue with small stocks is they aren't scalable.  I spent a lot of time considering and researching the feasibility of a small value fund with the types of stocks I like.  My conclusion was that it's feasible below $5m in AUM, and potentially workable at $5m-$10m.  But $10m is the ceiling.  I spoke to a friend who runs a fund and looks at similar stocks and his comment was that at $8m and higher it becomes impossible to buy in size enough to move the needle.  So maybe that's the ceiling?

 

The only way to bust through that ceiling is to change strategies.  You can't do simple deep value situations anymore.  Now you need more liquid value plays (distressed situations) and stocks that have some hair attached.  Or the compounders and GARP stuff that's popular.  And suddenly when you make a shift like that the investor now has to be skilled in multiple investment styles, it's different altogether.

 

Anyone who tries to build a fund in these areas either remains small and lives on rice and beans forever.  Or they grow and shift their strategy.  This is truly the domain of the individual.

[Jurgis]

I was contacted privately by one person who says that they have had compounded annualized return over 50% for 5+ years. (So their claim is a bit different from selections in poll, but pretty much what we would consider "performance" of an investor). The person chose to remain anonymous.

[Cardboard]

"The double edged problem with investing is that you need to know what to avoid."

 

Buffett has mentioned in one of his annual letters that the key is to say no and I agree. See point #3 below.

 

I have done 50%+, 4 times in 20 years and 2 that were in consecutive years. However, the overall return over that period is now just over 20% since I blew up with the oil crash. I had become complacent to tell the truth. Wasn't working hard enough anymore and enjoying the good life. I can also attest that once the amounts grow larger, that it becomes really hard to deploy capital.

 

Doing 50% a year on sub $1 million has to be feasible and I did think a lot on how to do it following Buffett's comment. With over 350 million people in NA (while I don't know how many are at the investing game), the normal curve should indicate some capable to do it. Definitely outliers but, still.

 

In terms of strategy, I think that the following are some of the things needed and in order of difficulty:

 

1) You need to find bargains all the time. And if you want 50%, you have to aim for minimum doubles in one year's timeframe in order to reduce bad probabilities which will inevitably occur. This is the easy part IMO and does not require that much effort since there are so many sites and places for ideas.

 

2) You need to be heartless. You can't fall in love with your companies. They always have to be re-valued vs your other holdings and new ideas in terms of capital deployment. 

 

3) You need to sort out bargains and buy only the ones that are near perfect: cheap, positive catalyst or trend in place and good supply/demand for the shares (if you buy something and a major holder is in the process of liquidating, you have to wait or counter balance his selling).

 

The last point is very tough since it requires a very high degree of discipline, an uncanny ability to recognize a shift and access to information that is not public or difficult to get.

 

Cardboard

[NeverLoseMoney]

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.

There probably are people capable of making 50% on small sums in public markets.

 

I think a few things are essential to be able to get anywhere close to achieving that:

- extreme concentration

- distressed or forced sellers on the other side of the transaction

- a hard catalyst that is virtually guaranteed to cause the mispriced security to reprice in short order

 

In the quote above Buffett talked about investing in obscure stuff trading at extremely low P/E's. I love searching for stocks like this myself, but I don't think you can get anywhere near achieving 50% returns consistently by doing that, even if you're only running a million dollar portfolio. If you find a few companies at those multiples, you should do very well, but they got so cheap because they are very obscure and usually illiquid. That situation is unlikely to change in the near future for any particular stock. So your bargains would often remain very cheap for at least a few years. That should destroy any chance of getting these types of returns. I think your buys will have to reprice very quickly to get anywhere near 50%.

 

And I agree with writser that people capable of doing it would not be posting in this thread. That would be the dumbest thing to do, wouldn't it? If you are capable of achieving 50% returns consistently you don't need other people's money to get extremely rich, so you wouldn't want to be running a fund. That would only hurt you, because you would be sharing extremely valuable ideas with outside investors. Extra money from outsiders would only lead to your strategy failing earlier. You certainly wouldn't need more competition for those very scarce ideas, so you wouldn't be sharing them on a message board or a blog just to get credit from people on the internet. You would just make your money and shut up.

[no_free_lunch]

With regards to the poll, there are people on the board who include capital saved in their return.  So if you start with $10k, add $10k per year plus a bit of gains maybe you are now at $100k 5 years later.  That is like 60% per year or something but completely different from what we  are talking about.  Frankly, I think a lot of people just do things like this to fudge their numbers, intentionally or unintentionally.

 

I am going to back to what I said earlier.  If this is possible find me some small mutual fund with the performance record to back it up.  Forget 50%, can we even find a consistent 20% return?

[Jurgis]

I am going to back to what I said earlier.  If this is possible find me some small mutual fund with the performance record to back it up.  Forget 50%, can we even find a consistent 20% return?

 

You can't find such mutual fund for couple of reasons:

1. Nobody runs 10M mutual fund. 50% becomes way harder to achieve if you look at 100M+ funds.

2. Even if they ran 10M fund, by the time you get performance record, it would be 1B+ fund. Good performers soak up capital like sponges.

3. Mutual fund issues with cash outflows during crashes (2008-2009-2010) kills performance. Also holding cash to satisfy outflows kills performance. Also getting cash inflows you can't deploy kills performance.

 

You might find a fund that runs 20% for 5+ years. Unlikely for 10+ years. I've had another thread on trying to find mutual funds that outperform SP500, but Morningstar free screener is broken  :'( and I could not get far with this project. Still looking for pointers for a free fund screener that works.

[Gregmal]

And I agree with writser that people capable of doing it would not be posting in this thread. That would be the dumbest thing to do, wouldn't it? If you are capable of achieving 50% returns consistently you don't need other people's money to get extremely rich, so you wouldn't want to be running a fund. That would only hurt you, because you would be sharing extremely valuable ideas with outside investors. Extra money from outsiders would only lead to your strategy failing earlier. You certainly wouldn't need more competition for those very scarce ideas, so you wouldn't be sharing them on a message board or a blog just to get credit from people on the internet. You would just make your money and shut up.

 

Pretty much this, although with some exceptions. For the most part, 2/20 works on scale. Bigger you are the better. However with smaller amounts of money, at a normal fund fee structure, its just not worth the time taking other peoples money if you can indeed make yourself 50% per year. You have 5,000,000 of outside money and do 50%, thats $100,000 upfront and $500,000 in performance fees. Whereas if you have only 1,000,000 of your own money you can make more or less the same but without the headache of dealing with all the crap that comes with managing money for other people.

[Uccmal]

"The double edged problem with investing is that you need to know what to avoid."

 

Buffett has mentioned in one of his annual letters that the key is to say no and I agree. See point #3 below.

 

I have done 50%+, 4 times in 20 years and 2 that were in consecutive years. However, the overall return over that period is now just over 20% since I blew up with the oil crash. I had become complacent to tell the truth. Wasn't working hard enough anymore and enjoying the good life. I can also attest that once the amounts grow larger, that it becomes really hard to deploy capital.

 

Doing 50% a year on sub $1 million has to be feasible and I did think a lot on how to do it following Buffett's comment. With over 350 million people in NA (while I don't know how many are at the investing game), the normal curve should indicate some capable to do it. Definitely outliers but, still.

 

In terms of strategy, I think that the following are some of the things needed and in order of difficulty:

 

1) You need to find bargains all the time. And if you want 50%, you have to aim for minimum doubles in one year's timeframe in order to reduce bad probabilities which will inevitably occur. This is the easy part IMO and does not require that much effort since there are so many sites and places for ideas.

 

2) You need to be heartless. You can't fall in love with your companies. They always have to be re-valued vs your other holdings and new ideas in terms of capital deployment. 

 

3) You need to sort out bargains and buy only the ones that are near perfect: cheap, positive catalyst or trend in place and good supply/demand for the shares (if you buy something and a major holder is in the process of liquidating, you have to wait or counter balance his selling).

 

The last point is very tough since it requires a very high degree of discipline, an uncanny ability to recognize a shift and access to information that is not public or difficult to get.

 

Cardboard

 

I have had 2 years in the last 12 with >50% returns.  Its partly luck.  The biggest winner was the FFH options.  On the other hand I have had a couple of dismal years (one with -30%). When I toss out the best year and the worst year to clean up the stats my CAGR is over 20%.  That is from the time I stopped adding outside capital.  I definitely do not expect this going forward since I have become more cautious leaning towards GARP, and much lazier.  I suppose I could be out overturning rocks every day but I feel more comfortable operating as I am and waiting for the inevitable market correction when I will activate. 

 

Another question for Buffett.  He doesn't have to rely on investing for his income.  Could he do his 50%, keep up with the mortgage on a 700,000 house, educate three kids, etc., today, with no other source of cash.  One bad year, early on, and he would be fried.  There are so many extraneous factors in his claim.  In fact, had he hit a couple of bad years early on, would we even know who he is right now.  The message board could be called the Corner of Liberty Media and Apple. 

[scorpioncapital]

This Buffet claim is the closest I've seen him come to boasting. Clearly he can't imagine 50% per year is a trivial amount. Of course, one doesn't say the starting amount or for how many years. If I borrow my neighbour's lawnmower and mow some lawn my return is infinite. He chipped in a small amount to the capital of the partnerships so his returns are personally above 50% but due to leverage. Leverage can produce these returns if done right.

 

 

 

[NeverLoseMoney]

Quoting the post from oddballstocks to provide a few links for those interested.

 

 

There was a video of Buffett talking in India.  A small cap value guy asked him what he'd be doing if he was managing less than $10m.  It's one of the best answers I've seen.  Buffett breaks from his script for a few minutes and mentions low book value stocks, net-nets, how he went through the Korean stocks.  Then almost as if he realizes what he's done he starts talking about how if you have a lot of money it isn't sustainable and he wants these great companies.

The video: https://www.youtube.com/watch?v=BPTz-jLkPOc&feature=youtu.be&t=9m52s

 

Buffett is opportunistic.  From what I've gathered he still does these crazy sorts of deals in his private account when possible.

 

I posted a series of links 2-3 years ago about a situation Buffett was involved in back in the early 2000s.  The company was a net-net and suddenly Buffett's name came on the register as a significant shareholder.  He made some boilerplate comment.  Then as quick as it was there it was gone, the stock had jumped 50%.  Then it fell again and he bought back in.  The guy was flipping nickles on a deep value play, nothing more, nothing less.  The paper asked if he was going to buy it for his empire, nope, just a cheap stock.

That was Bell Industries in 1999-2000:

 

- http://articles.latimes.com/1999/dec/14/business/fi-43809

- http://articles.latimes.com/2000/jan/18/business/fi-55214

- http://articles.latimes.com/2000/nov/09/business/fi-49227

[BG2008]

Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance. 

 

 

[wabuffo]

In my opinion - there's no way Buffett can achieve 50% cumulative returns without the use of borrowed money. 

 

His actual portfolios always involved borrowed money of some sort.  Always.  I think his genius is that he is able to avoid losses ("rule no 2, never forget rule no. 1"...) because leverage will magnify gains but will also magnify losses.

 

wabuffo

[augustabound]

Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance.

 

Ericopoly is the first person I thought about actually.

[rb]

Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance.

 

Ericopoly is the first person I thought about actually.

Ericopoly made it with options so I think that brings us back to the idea that you need some significant leverage to do this.

[wabuffo]

In my opinion - there's no way Buffett can achieve 50% cumulative returns without the use of borrowed money.

 

His actual portfolios always involved borrowed money of some sort.  Always.  I think his genius is that he is able to avoid losses ("rule no 2, never forget rule no. 1"...) because leverage will magnify gains but will also magnify losses.

 

I forgot to add that one of the reasons one can't make 50% returns with a long-only (no margin, no options) account, is the inevitable market swoons will make it hard for the portfolio to also not suffer a mark-to-market loss.  So in addition to leverage, Buffett also used long-short strategies and market-neutral positions to make sure he beat the Dow during down markets.  He was doing this almost from Day 1 of his Graham-Newman days.

 

I don't think its possible to do 50% returns for, say, 5 years straight with a long-only portfolio (and no margin, options, etc)... even for Buffett.

 

Something tells me that Buffett probably regrets that 1999 Business Week quote about 50% returns, but what do I know.

 

wabuffo

 

[JayGatsby]

Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance.

 

Ericopoly is the first person I thought about actually.

Ericopoly made it with options so I think that brings us back to the idea that you need some significant leverage to do this.

I think Soros and the team at Quantum (Rogers, Druckenmiller) were in that bucket as well. Rogers said they used a lot of leverage and got a lot of bets right.

[Jurgis]

I forgot to add that one of the reasons one can't make 50% returns with a long-only (no margin, no options) account, is the inevitable market swoons will make it hard for the portfolio to also not suffer a mark-to-market loss.

 

So I am in the camp that it is very hard to impossible to make 50% annualized returns for long term consistently. (Although by now we have 6 people in the poll who marked to have done so).

 

However, IMO people think about this in wrong way - and my poll did not help: you don't have 50% returns on years of market swoons. But you have 300-400% return couple years after market swoon which returns you to over 50% returns annualized.

 

Same with undervalued nanocaps. Sure, they might not move for a year. But if/when they move, they can move 100-300% making up for waiting time.

 

And, yeah, it is possible to have 100%+ yearly return without leverage or options.

 

(No, I'm not one of the 6 Buffetts in the poll).

[KCLarkin]

Something tells me that Buffett probably regrets that 1999 Business Week quote about 50% returns, but what do I know.

 

Normally, I'd agree. But he has repeated it many times since. Or at least not taken the opportunity to walk it back.

[rb]

Something tells me that Buffett probably regrets that 1999 Business Week quote about 50% returns, but what do I know.

 

Normally, I'd agree. But he has repeated it many times since. Or at least not taken the opportunity to walk it back.

Yes I remember him talking about making 50% on small sums around 2011 or 2012. Not sure if he said per year or that there are stocks at 50% discount to IV.