“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. 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.” Warren Buffett Businessweek interview 1999.
Warren Buffett is known today as the Oracle of Omaha and Chairman of conglomerate Berkshire Hathaway, as well as being considered the greatest investor to have ever lived. But it wasn’t always this way. Buffett built his fortune from scratch, starting at the bottom and working his way up to the $80 billion fortune he has today.
Compounding has been at the core of Buffett’s strategy. He realized at a young age that the only way to get rich was to generate steady returns year after year, with no significant losses and over time, wealth would create more wealth.
And in the first few years of his money management career, Buffett was able to achieve staggering returns on his money. Returns of 50% or more p.a. were not uncommon:
“The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital.” -- Source
And the key to these high returns; hidden value small-cap stocks:
“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.” -- Source
How To Match Warren Buffett's 50% Per Year
Most private investors are managing less than $1 million or $10 million, but yet most investors are not achieving a return of 50% or more.
In fact, according to research from DALBAR most equity investors underperform the S&P 500 by approximately 60% or more over the long term.
The problem is that most investors don’t look under the rocks. To generate market-beating returns, you have to invest in stocks that beat the market, and not be afraid to concentrate your bets.
To be able to withstand the concentration required to make 50% or more p.a. You will need to understand the correct definition of risk. Buffett wasn’t afraid to put almost all of his wealth into GEICO in his early 20s because he believed the chance of the business wiping out all of his capital was zero.
Buffett has been so successful as an investor is his focus. When evaluating Coca-Cola, his most famous investment, he analyzed the reports of the business dating back 100 years.
Sometimes such detailed analysis is not possible, which is why Buffett has a “too hard” pile.
If you cannot understand a business, what makes it tick and what the potential risks are to its survival, you are only increasing your level of risk.
Arguably, it is easier to invest in small caps for this reason as they are much easier to analyze and you can understand the company you are buying without having to make certain assumptions.
When’ve you done all the legwork, it’s easier to make high stakes investments. As Buffett has said:
“An investor should act as though he had a lifetime decision card with just twenty punches on it."
So, if you want to make 50% p.a. the guidelines are simple: 1) Invest in undervalued small caps, 2) Do as much research as possible to reduce risk and 3) Invest in the opportunity as if you could only make 20 investments in your life.
One final word. To be able to achieve Buffett-like returns, you are going to have to put in the extra work. There are no shortcuts.
Buffett’s single-minded focus on stocks has helped him achieve the returns he has today, if you don’t put in the research, Buffett-like returns are impossible.
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