Making 50% per year like Buffett (on small sums)

[netnet]

Buffett has famously said that he and other great investors can and would make 50% per year on small sums, i.e. on 1 million or so.  (See article/blog quoted below)

 

Buffett, of course, says that his (and other great investors') returns would drop off significantly with greater sums--say 100 million.  His point is that your universe of stocks and things to do varies inversely with the size of your portfolio.

 

Now personally, I use the Magic Formula returns as my hurdle rate--generally the Magic formula beats the S&P by 10 to 15 points per year. (And I assume that realistically Buffett really means that he or other "super investors" would beat the S&P by 30 to 40 points per year.) but an 30% to 40% hurdle, well let's just say I'm not there yet!!

 

So now my question is, for those of you willing to divulge, in what obscure corners of the markets are you looking to get outsized returns? As The thread on Tronox indicates, bankruptcy plays are one area.

 

Thoughts?

 

Netnet

 

 

 

Here is the first part of the blog found at: http://valuevista.blogspot.com/2007/06/warren-buffett-50-returns.html

 

 

 

 

 

Warren Buffett -- 50% Returns

 

 

Much attention has surrounded reports that Warren Buffett said he could generate 50% returms on small sums of money. Typically, three immediate questions arise:

 

Did he really say that? Did he really mean it? And, how would he (or me or my favorite money manager) do it?

 

Looking at the record of his comments, it's pretty clear that he said it (and repeated it) and he really means it.

 

Buffett seems to have got the set this ball rolling in 1999. At that year's BRK shareholder meeting, he was aked:

 

    Shareholder: Recently, at Wharton, Mr. Buffett, you talked about the problems of compounding large sums of money. You were quoted in the local paper as saying that you're confident that if you were working with a small sum closer to $1 million, you could compounded at a 50% rate. For those of us not saddled with a $100 million problem, could you talk about what types of investments you'd be looking at and where in today's market, you think significant inefficiencies exist?

 

    Buffett: I may have been very slightly misquoted, but I certainly said something to that effect. I talked about how I polled this group of 60 or so people I get together with every couple of years as to what rate they think they can compound money at if they were investing small sums: $100,000, $1million, $100 million, $1 billion, etc. And I pointed out how the return expectations of the members of this group go very rapidly down the slope.

 

    But it's true. I could name half a dozen people that I think can compound $1 million at 50% per year -- at least they'd have that return expectation -- if they needed it. They'd have to give that $1 million their full attention. But they couldn't compound $100 million or $1 billion at anything remotely like that rate.

 

[Packer16]

I can't attest to 50% returns but 20%s returns can be found in post-bankruptcies, cheap (3 to 5x FCF) out of favor moderately levered firms (radio companies), firms that are mis- categorized (SURW - broadband/cable co miscategorized as a telco), micro-cap asset conversion cos (ACME - liquidating television company), commodity asset conversion firms (oil sands co, SSW, SD) and smart capital allocator holding cos (FUR, FFH, SUR).  Many on this board are experts in doing well with the last category.  In addition, mispriced call LEAPs can be used in the later category.

 

Joel Greenblat (a guy with a 50% plus track record) names the above plus spinoffs.

 

Packer

 

 

[stahleyp]

I can't attest to 50% returns but 20%s returns can be found in post-bankruptcies, cheap (3 to 5x FCF) out of favor moderately levered firms (radio companies), firms that are mis- categorized (SURW - broadband/cable co miscategorized as a telco), micro-cap asset conversion cos (ACME - liquidating television company), commodity asset conversion firms (oil sands co, SSW, SD) and smart capital allocator holding cos (FUR, FFH, SUR).  Many on this board are experts in doing well with the last category.  In addition, mispriced call LEAPs can be used in the later category.

 

Joel Greenblat (a guy with a 50% plus track record) names the above plus spinoffs.

 

Packer

 

 

 

What's FUR and SUR? Are those the Canadian symbols?

[Packer16]

FUR is Withrop Realty Trust ran by a real estate investor named Michael Ashner and SUR is CNA Surety, a surety bond insurer that is majority owned by CNA and selling at a discount to book and has had a great underwriting record.  Thank Harry Long for bringing this gem ot our attention.  SUR is an example of a post artibtrage situation where 50% or more of a firm is purchased by another firm and subsequnetly trades a discount.

 

Packer

[Buffetteer]

I think if you're consistently outperforming the S&P by 10-15% per year, you don't need to change a thing, you'll be rich in no time.

[beerbaron]

Buffet would get 50% return because he has 70 years experience in the stock market. I  believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.

 

BeerBaron

[twacowfca]

We've had good success trading in and out of situations during the last 15 months where the probability of success is very high and the probability of meaningful loss is very low.  We are up over 100% compounded on these trades, better than with our few core holdings that have also gone up a lot, but are still selling near BV.

 

The first trade was one I'm sure other board members made: loading up on FFH in May - June 2009 when it was selling way below it's estimated forward BV -- a no-brainer.  We exited FFH soon after they announced their NYSE delisting that fall for a gain of 30 %+.  The proceeds went into BRK because it was still a bargain, and it appeared to be a 99% probability that they would be added to the S&P500.  After this happened, there was another gain of 20% or so, and we sold BRK.  Then, we did something that was a speculative hedge,  we took about 5% of our cash and bought S&P500 puts because The Fed had been sharply reducing the WSBASE, the high powered part of the money supply.  This worked out nicely with about a 500% gain in the puts when the market took a dive.  We closed out the puts when the WSBASE stabilized.  There were also a couple of other trades we made on misspricing in the options market that resulted in an immaterial loss.

 

We came out of that volatile period with a gain in the trading funds of 20%+.  Some of these funds then went back into BRK before their inclusion in the Russell indexes: another gain of 8-10%.  Around this time BRE was added because our game theory analysis indicated that Apollo's offer had a very high probability to close. It's up about  10% since our purchase and may pop another 3-6% Monday because Brit announced after the market closed Friday that they will recommend acceptance of the latest sweetened offer.  

 

The point is that none of this involves finding obscure situations or microcaps that are not feasible for investment of large funds.  Most of what I've described doesn't require esoteric knowledge.  Any good value investor can do it, and many of you do this easy stuff all the time.  :)

[vinod1]

Buffet would get 50% return because he has 70 years experience in the stock market. I  believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.

 

BeerBaron

 

I think that is an extremely good point that often seems to get ignored.

 

For all his talk about getting 50% returns, if you look at what Buffett has actually achieved, it had been about 25%-30% in his partnership days. This I would take it as the upper limit of realistic performance that can be achieved by a super investor. Mere mortals should not be too dis-satisfied with something lower.

 

Vinod

[twacowfca]

Buffet would get 50% return because he has 70 years experience in the stock market. I  believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.

 

BeerBaron

 

I think that is an extremely good point that often seems to get ignored.

 

For all his talk about getting 50% returns, if you look at what Buffett has actually achieved, it had been about 25%-30% in his partnership days. This I would take it as the upper limit of realistic performance that can be achieved by a super investor. Mere mortals should not be too dis-satisfied with something lower.

 

Vinod

 

I agree.  Carnegie's annual compounded return was 23% after he went into the steel business, but his compounded return was much higher early in his investing career.  Buffett, Templeton and many other great investors also had much higher returns at first when they weren't investing large sums.

[coc]

I agree with you guys, and one thing I would add is to caution against forgetting the "silent evidence" here. Investors we know very well today, we know them because they successfully achieved very high returns early in their careers and continued on by earning still high returns as they grew. That's the only way to even become a Carnegie or a Buffett unless you've inherited a Trump-ian wad of capital.

 

But the risk you take is ignoring the investors we've never heard of who, attempting to earn extremely high returns, fell out of the investing gene pool. It is not easy to earn those kind of returns...if it were, everyone would be doing it.

 

By the way, some people are totally fine assuming extra risk, reasoning that if they lose the money, they are young enough or have enough earning power to start again. I see no problem with that, as long as you're being honest with yourself. The problem I see is gearing up your risks without being aware of it.

 

50% can be done in a low-risk way, but god would it be hard. I like the point that Buffett has been in the game for 70-years, which helps...

[netnet]

50% can be done in a low-risk way, but god would it be hard.

There is no doubt that it is hard.  Munger has a particularly apt quote about this,  something to the effect that you can't get there with smooth, uncalloused hands.  You have to work really, really hard.  But then he says (rightly) that about any well done endeavor!

 

One interesting question what kinds of returns would a young Buffett or Munger get today?  Or are the claims of 50% just a kind of hindsight bias plus the 70 years of experience?  We do have Greenblatt, as an example, who seemed to get those kinds of returns.

 

Carnegie's annual compounded return was 23% after he went into the steel business, but his compounded return was much higher early in his investing career.

I didn't know Carnegie was an investor, I'll have to pick up a biography.  Thanks for that.

 

 

I think if you're consistently outperforming the S&P by 10-15% per year, you don't need to change a thing, you'll be rich in no time.

 That's why I use the Magic Formula as my hurdle rate.  (Unfortunately, if the S&P is stagnant for another decade, 10% better than the S&P is good, but 10% per year isn't great! But it is better not to be greedy)

[scorpioncapital]

Did Buffett achieve a 50% annual return when he was younger or is he claiming this as of today? I believe the partnership was shy of 50% per year. Obviously a claim that an experienced 70 year old investor can do 50% on small sums is a completely useless statement in relation to a relatively unexperienced 30 year old.

[Parsad]

Buffett made nowhere close to 50% annualized in his partnership days.  His gross return was about 31% annualized and his net return to partners was about 24.6% annualized over the 12 years from 1957-1968.  I think Buffett was talking in terms of the 70 year old Buffett.  Do I think the 70-year old Buffett could do 50% per year...yes!  But the younger Buffett could not according to his partnership returns.  Cheers!   

[coc]

Buffett made nowhere close to 50% annualized in his partnership days.  His gross return was about 31% annualized and his net return to partners was about 24.6% annualized over the 12 years from 1957-1968.  I think Buffett was talking in terms of the 70 year old Buffett.  Do I think the 70-year old Buffett could do 50% per year...yes!  But the younger Buffett could not according to his partnership returns.  Cheers!   

 

Agree with Sanjeev.

 

Although one thing I think (I think) I remember from the Snowball was that he was running at 60% or something prior to his partnership (in the Columbia/Graham-Newman days).

[Guest Bronco]

Tough to prove or disprove this...but I think much of the potential gains would relate to the times we are in.  Would be much easier to get huge gains starting a fund 2 years ago as opposed to now, for instance.

 

Whether Buffett could get 50% or merely 30%, he will always be a legend and da man until someone can replicate his success.  I still think the BRK story is being written, and the company will continue to grow. 

 

The fact that he kicked ass in his partnerships, in a public company, and in his own personal account - well, no need to doubt this guy.

[twacowfca]

Buffett made nowhere close to 50% annualized in his partnership days.  His gross return was about 31% annualized and his net return to partners was about 24.6% annualized over the 12 years from 1957-1968.  I think Buffett was talking in terms of the 70 year old Buffett.  Do I think the 70-year old Buffett could do 50% per year...yes!  But the younger Buffett could not according to his partnership returns.  Cheers!    

 

Agree with Sanjeev.

 

Although one thing I think (I think) I remember from the Snowball was that he was running at 60% or something prior to his partnership (in the Columbia/Graham-Newman days).

 

 

Yup. He did make returns in that neighborhood during his pre partnership days.  There are cross sections about how his net wealth compounded with exact dollar amounts stated at various times in his biographical literature.  Run these through your compound interest calculator, and this will confirm those returns.

 

However, Buffett and Templeton got started at a favorable time when markets were depressed.  Carnegie benefitted from sweetheart deals when he was a young assistant to an up and coming railroad superintendent.  Without this boost, their returns surely would have been less.  In 1999, WEB said he could definitely make 50% returns on investing smaller sums.  My personal opinion is that he was definite in his statement because he actually had been making those returns around that time on his relatively small personal investing account.  WEB had become a much better investor by 1999 than he had been when he was young.  :)

[Parsad]

When Francis ran his investment club before he started the Chou Funds, I believe he averaged something crazy around 50% a year from 1981 to 1985.  He started the fund with $51K in 1981, and it was $1.7M in 1986 when it converted to the Chou Funds.  Obviously there was new capital coming into there as well, but from what I remember, his returns were out of this world.  Cheers!

[EdWatchesBoxing]

Sanjeev, do you know if Francis was the only one making investment decisions back then?

 

I recall that it was started as a club with his Bell co-workers, which became one of the Chou funds (RRSP or associates, I think).

[ERICOPOLY]

Buffet would get 50% return because he has 70 years experience in the stock market. I  believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.

 

BeerBaron

 

 

That's my RothIRA account with that return (according to Fidelity's calculations).  And to date (as of 8/31/2010) it's 99.19% annualized for a total of 18,465% cumulative since 2/1/2003.  The FFH options had a lot to do with it.  Earlier this year the cumulative return was something like 24,000% but since end of April it has pulled back.

 

Blended (including my taxable account) it's 61.64% annualized since 2/1/2003 for a total of 3,709% cumulative.  The reason the RothIRA outperformed is that I manage it with a different mentality, due to taxes.  It was also a smaller sum so taking a huge risk on it didn't matter to me.

 

Another board member who doesn't post anymore (dengyuthenugget) has done 170% annualized since 2005 or so (perhaps it was 2004) -- overall, all accounts combined.  Again, credit the FFH options for quite a bit of that. 

 

 

[beerbaron]

That's my RothIRA account with that return (according to Fidelity's calculations).  And to date (as of 8/31/2010) it's 99.19% annualized for a total of 18,465% cumulative since 2/1/2003.  The FFH options had a lot to do with it.  Earlier this year the cumulative return was something like 24,000% but since end of April it has pulled back.

 

Blended (including my taxable account) it's 61.64% annualized since 2/1/2003 for a total of 3,709% cumulative.  The reason the RothIRA outperformed is that I manage it with a different mentality, due to taxes.  It was also a smaller sum so taking a huge risk on it didn't matter to me.

 

Another board member who doesn't post anymore (dengyuthenugget) has done 170% annualized since 2005 or so (perhaps it was 2004) -- overall, all accounts combined.  Again, credit the FFH options for quite a bit of that. 

 

Still pretty respectable... I hope that 30% drop does not keep you awake at nights?  :)

 

BeerBaron

[twacowfca]

Buffet would get 50% return because he has 70 years experience in the stock market. I  believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.

 

BeerBaron

 

 

That's my RothIRA account with that return (according to Fidelity's calculations).  And to date (as of 8/31/2010) it's 99.19% annualized for a total of 18,465% cumulative since 2/1/2003.  The FFH options had a lot to do with it.  Earlier this year the cumulative return was something like 24,000% but since end of April it has pulled back.

 

Blended (including my taxable account) it's 61.64% annualized since 2/1/2003 for a total of 3,709% cumulative.  The reason the RothIRA outperformed is that I manage it with a different mentality, due to taxes.  It was also a smaller sum so taking a huge risk on it didn't matter to me.

 

Another board member who doesn't post anymore (dengyuthenugget) has done 170% annualized since 2005 or so (perhaps it was 2004) -- overall, all accounts combined.  Again, credit the FFH options for quite a bit of that.  

 

 

 

 

Bravo, Eric.  Good show!

[EdWatchesBoxing]

Eric, that is f**kin awesome! Talk about running hot! I still remember the FFH options talk from the MSN board. I also remember dengyu and I miss his contributions.

[Uccmal]

Think about this for a minute.  If one could do this over 10 years one would grow from 100 k to 5.6 M; another 10 years and 332 M.

 

It is not doable.  No one has a public record of success picking stocks like this.  Even the 70 year old Warren would make misjudgements and mistakes that would reduce his rate back to 30% over a few years.  In his 50% there are several assumptions I think he has overlooked:

1) He has the intelligence of hundred companies feeding him daily information to help inform his choices today.  Without this back drop he wouldn't have nearly the handle on what the overall economy is doing as he does now.  That would handicap his results.

2) He is assuming that the competition is the same as it was in the 1950s - it isn't

3) Many of the things he did to juice his early results are much more difficult in todays climate due to competition, greater regulation etc.  The Hayden Ahmanson affair comes to mind where his lawyer pal went around Nebraska offering 100 per share.  Today the company would have been required to publicly disclose that they were planning a share buyback and were going private.   

4) Greater investor sophistication leads to fewer of the workout type things he did such as Dempster Mill, Sanborn Map.  Many fewer companies are allowed to get so cheap that they have more cash and securities on the balance sheet than the market value.  I saw one once. 

5) The baseline is higher now than the 50s.  They were coming off of the great depression remnants.  Times were very different.  Buffett rode the wave.  Had he been born in the 1950s rather than in 1930 we may never have heard of him. 

 

I could go on.  I just think that it would be much harder to do than even Buffett realized when he made the comment.  30% sustained I will believe because it has been done, but not 50%.

[Ballinvarosig Investors]

Although one thing I think (I think) I remember from the Snowball was that he was running at 60% or something prior to his partnership (in the Columbia/Graham-Newman days).

You are correct.

 

Buffett has compounded returns of 61% from 1951 to 1955. When I was in college working with only a few thousand Dollars, I got close to 50% returns over three years doing odd-lot's, splits, liquidations, tender offers, etc. I personally found that when you even started working with a 5-figure sum, that the return started to decline as a lot of the special situations that I was looking at were only worth a few hundred Dollars a pop. When you move up to a 6-figure sum, the special situation stuff that I look at barely makes a scratch on your return. While I think getting a 50% return on a six-figure sum is possible, I think it requires highly concentrated and selective investing with a good measure of scuttlebutt thrown in.

[Baoxiaodao]

We've had good success trading in and out of situations during the last 15 months where the probability of success is very high and the probability of meaningful loss is very low.  We are up over 100% compounded on these trades, better than with our few core holdings that have also gone up a lot, but are still selling near BV.

 

The first trade was one I'm sure other board members made: loading up on FFH in May - June 2009 when it was selling way below it's estimated forward BV -- a no-brainer.  We exited FFH soon after they announced their NYSE delisting that fall for a gain of 30 %+.  The proceeds went into BRK because it was still a bargain, and it appeared to be a 99% probability that they would be added to the S&P500.  After this happened, there was another gain of 20% or so, and we sold BRK.  Then, we did something that was a speculative hedge,  we took about 5% of our cash and bought S&P500 puts because The Fed had been sharply reducing the WSBASE, the high powered part of the money supply.  This worked out nicely with about a 500% gain in the puts when the market took a dive.  We closed out the puts when the WSBASE stabilized.  There were also a couple of other trades we made on misspricing in the options market that resulted in an immaterial loss.

 

We came out of that volatile period with a gain in the trading funds of 20%+.  Some of these funds then went back into BRK before their inclusion in the Russell indexes: another gain of 8-10%.  Around this time BRE was added because our game theory analysis indicated that Apollo's offer had a very high probability to close. It's up about  10% since our purchase and may pop another 3-6% Monday because Brit announced after the market closed Friday that they will recommend acceptance of the latest sweetened offer.  

 

The point is that none of this involves finding obscure situations or microcaps that are not feasible for investment of large funds.  Most of what I've described doesn't require esoteric knowledge.  Any good value investor can do it, and many of you do this easy stuff all the time.  :)

 

Congrats! This year has been tough for all of us. 100%+ is everything to speak of. Keep it going!

 

Fan