I took a bunch of students to Omaha for a Q&A with Warren recently, and I thought you might be interested in the back and forth.Berkshire HathawayWarren Buffett Q&AMay 6, 2005Question: 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.The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.I know more about business and investing today, but my returns have continued to decline since the 50's. Money gets to be an anchor on performance. At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.Q: Since Ben Graham isn't around anymore, what money managers do you respect today? Is there a Ben Graham today?You don't need another Ben Graham. You don't need another Moses. There were only Ten Commandments; we're still waiting for the eleventh (j/k). His investing philosophy is still alive and well. There are disciples of him around, but all we are doing is parroting. I did read Phil Fisher later on, which showed the more qualitative aspects of businesses. Common stocks are part of a business. Markets are there to serve you, not to instruct you. You can often find a couple of companies that are out of line. Find one; get rich. Most people think that what the stock does from day to day contains information, but it doesn't. It isn't just something that wiggles around. The stock market is the best game in the world. You can take advantage of people who have no morals. High prices inside of a year will typically be 100% of the low price. Businesses don't change in value that much. That is simply crazy. There are extreme degrees of fluctuation, and Mr. Market will call out the prices. Wait until he is nutty in one direction or the other. Put in a margin of safety. Don't find a bridge that says no more than 10,000 pounds when you have a 9800 pound vehicle. It isn't a function of IQ, but receptivity of the mind.When investing you don't have to invest in all 10,000 companies available, you just have to find the one that is out of line. Mr. Market is your servant. Mr. Market is your partner and wants to sell the business to you everyday. Some days he is very optimistic and wants a high price, others he is pessimistic and will sell at a low price. You have to use this to your advantage. The market is the greatest game in the world. There is nothing else that can, at times, get this far out of line with reality. For example, land usually only fluctuates within a 15% band. Negotiated transactions are less volatile. Some get this; others don't. Just keep your wits about you and you can make a lot of money in the market.Q: Do you expect the stock market premium to continue to be 6.5% over bonds?I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so. Risk premiums are mostly nonsense. The world isn't calculating risk premiums.Best book prior to Graham was written by Edgar Lawrence Smith in 1924 called Common Stocks as Long Term Investments. It was a study that evaluated how bonds compared to stocks in various decades of the past. There weren't a whole lot of publicly traded companies back then. He thought he knew what he was going to find. He thought that he'd find that bonds outperformed stocks during periods of deflation, and stocks outperformed during inflationary times. But what he found was that stocks outperformed the bonds in nearly all cases. John M. Keynes then enumerated the reasons that this was so. He said that over time you have more capital working for you, and thus dividends would grow higher. This was novel information back then and investors then went crazy and started buying stocks for these higher returns. But then they started to get crazy, and no longer really applied the sound tactics that made the reasons given in the book true. Be careful that when you buy something for a sound reason, make sure that the reason stays sound.If you buy GM, you need to write the price and the respective market valuation. Then write down why you are buying the business. If you can't, then you have no business doing it.Quote from Ben Graham: “You can get in more trouble with a sound premise than an unsound premise because you'll just throw out the unsound premise”. Q: What was your biggest mistake?First off, follow Graham and you'll be fine.My biggest mistakes were errors of omission vs. commission. Berkshire Hathaway was also a big mistake. Sometimes the opportunity costs of keeping money in something (like a lousy textile business) can be a drag on Berkshire's performance. We didn't learn from the previous mistake and bought another textile mill (Womback Mills) 6-7 years after buying Berkshire Hathaway. Meanwhile, I couldn't run the one in New Bedford.Tom Murphy, my friend, bought the newspaper in Fort Worth. The previous ownership of these entities owned NBC as well, but he wanted to divest the NBC affiliate - $30 million to buy, doing $75 million in earnings. It was really a pretty good company, but he wanted to sell it anyway. There wouldn't be many more of it. Network television stations don't require excessive brains to run. They add a lot of money to our bottom lines.We have never lost lots of money in things, except in insurance after 9/11. We don't do the kinds of things that lose you a lot of money. We just might not be finding the “best” opportunities. Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.Side note: Warren once asked Bill Gates, “If you could only hire from one place, where would it be?” Gate's reply was Indian Institute of Technology.Q: Could you comment on your currency position?We have about $21 billion in about 11 foreign currencies. We have $60-70 billion in things that are denominated in US Dollars. We still have a huge US bias. If Martians came down with currency certificates and could choose any currency on earth, I doubt it would be 80% in US Dollars.We are following policies that make me doubt that our currency will not follow a downward spin. We lost $307 million this quarter. The net gain since we started holding foreign currencies in 2002 is $2.1 billion. We have to mark these future contracts to market daily. If we owned bonds instead of sterling forward contracts, it wouldn't fluctuate around so much.Identifying bubbles is fairly easy. You don't know how big they will get and you don't know when they will pop. You don't know when midnight will hit, but when it does, it turns carriages to pumpkins and mice. What markets will do is pretty easy. When they will do it is more difficult. Some people want to stick around for the last dance, and they thought that a bigger fool would be just around the corner tomorrow.When we bought those junk bonds, I didn't know we would make $4 billion in such a short time. It would have been better if it wouldn't have happened so quickly, as we would have gotten a bigger position.Q: When did you know you were rich?I really knew I was rich when I had $10,000. I knew along time ago that I was going to be doing something I loved doing with people that I loved doing it with. In 1958, I had my dad take me out of the will, as I knew I would be rich anyway. I let my two sisters have all the estate.I bet we all in this room live about the same. We eat about the same and sleep about the same. We pretty much drive a car for 10 years. All this stuff doesn't make it any different. I will watch the Super Bowl on a big screen television just like you. We are living the same life. I have two luxuries: I get to do what I want to do every day and I get to travel a lot faster than you. You should do the job you love whether or not you are getting paid for it. Do the job you love. Know that the money you will follow. I travel distances better than you do. The plane is nicer. But that is about the only thing that I do a whole lot different.I didn't know my salary when I went to work for Graham until I got his first paycheck. Do what you love and don't even think about the money. I will take a trip on Paul Allen's Octopus ($400M yacht), but wouldn't want one for myself. A 60 man crew is needed. They could be stealing, sleeping with each other, etc. Professional sports teams are a hassle, especially when you have as much money as him. Fans would complain that you aren't spending enough when the team loses.If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will do fine. You're rich if you are working around people you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.Q: What is your opinion of the prospects for the Kmart/Sears merger? How will Eddie Lambert do at bringing Kmart and Sears together?Nobody knows. Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around? Broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn't really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money.But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.Retailing is like shooting at a moving target. In the past, people didn't like to go excessive distances from the street cars to buy things. People would flock to those retailers that were near by. In 1996 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn't going to be a winner, long-term, in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn't win. So we sold it around 1970. That store isn't there anymore. It isn't good enough that there were smart people running it.It will be interesting to see how Kmart and Sears play out. They already have a lot of real estate, and have let go of a bunch of Sears' management (500 people). They've captured some savings already.We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best. Costco is working on a 10-11% gross margin that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones. Wal-Mart is also a tough competitor because others can't compete at their margins. It's very efficient.If Eddie sees it as impossible, he won't watch it evaporate. Maybe he can combine certain things and increase efficiencies, but he won't be able to compete against Costco's margins.Q: What led you to develop your values and goals at an early age? I was lucky because I knew what I loved at an early age. I was wired in a certain way when I was born, and I was lucky enough to stumble upon some books at a library at a very early age. In 1930, I won the ovarian lottery. If I had been born 2000 years ago, I'd have been somebody's lunch. I couldn't run fast, etc.I was lucky. I had a terrific set of parents. My father was an enormous inspiration for me. The job when you are a parent is to teach them. Be a natural hero. They are learning from you every moment you are around. There is no rewind button. If your parents do what they say and their values match what they teach you, you are lucky. What I observed in the world was consistent with what my parents taught me. That was important. If you are sarcastic, and use it as a teaching tool to kids, they'll never learn to get over it. Those first few years they are very impressionable.Q: Could you discuss your views on estate planning and how you will allocate your wealth to your children?It really reflects my views on how a rich society should behave. If it weren't for this society, I wouldn't be rich. It wasn't all me. Imagine if you were one of a pair of identical twins and a genie came along and allowed you to bid on where you could be born. The money that you bid is how much you had to agree to give back to society, and the one who bids the most gets to be born in the US and the other in Bangladesh. You would bid a lot. It is a huge advantage to be born here.There should be no divine right of the womb. My kids wouldn't go off and do nothing if I give them a lot of money, but if they did, that would be a tragedy. $30 billion will be generated from estate taxes, which will go to help pay for the war in Iraq and other things. If you take away the estate tax, that money will have to come from somewhere else. If not from estate taxes then you inherently get it from poorer citizens. Less than 2% of estates will pay the estate tax. They would still have $50 million left over on average. I think those that get the lucky tickets should pay the most to the common causes of society. I believe in a big redistribution. Wealth is a bunch of claim checks that I can turn in for houses, etc. To pass those claim checks down to the next generation is the wrong approach. But for those that think I am perpetuating the welfare state, consider if you are born to a rich parent. You get a whole bunch of stocks right at the beginning of your life, and thus you are sort of on a welfare state of support from your rich parents from the beginning. What's the difference?At $100,000 a year, I can find 10 people to paint my portraits to find the perfect one. I have that kind of money. But that is a waste, as those people could be doing something useful. I feel the same way about my kids and other heirs. They should be doing things that help to contribute to society.Q: What kind of impact will the demographic shift (i.e. baby boomers) have on the United States?We aren't big on demographic trends. It's difficult to translate that information into profitable decisions. It is hard to figure out what businesses will prosper in the future, based on macro trends. See's candy is for anyone and Fruit of the Loom is for people who need underwear today. We want to be right on something that will work right now, not something that might work in the future. I doubt that Wal-Mart spends a lot of time on demographics. They instead focus on where to put the store and what to put on the shelves. I've never found those kinds of stats useful. People were all excited to go into stocks 6 years ago, but it wasn't because of demographic trends.Warren then referred to a recent WSJ article written by Jeremy Siegel that discussed funds flowing out of investments because baby boomers will need to cash in their investments during retirement. He said he respected Siegel, but he doesn't find fund flows data useful.Q: What would Berkshire be like if you hadn't met Charlie Munger?It would be very different, but I could say the same thing about a lot of other people, too. I've had a lot (at least a dozen) of heroes, including my parents. Charlie and I didn't meet until 1959, although he grew up a half a block from where I lived. Charlie was 35 and I was 29. We've been partners ever since. He is very strong-minded, but we've never had an argument that whole time. I've never been let down once. It must be a terrible feeling to be let down by a hero. Hang around people who are better than you all the time. You do pick up the behavior of people who are around you. It will make you a better person. Marry upward. That is the person who is going to have the biggest effect on you. A relationship like that over the decades will do nothing but good.Q: Are investors more or less knowledgeable today compared to ten years ago?There is no doubt that there are far more “investment professionals” and way more IQ in the field, as it didn't use to look that promising. Investment data are available more conveniently and faster today. But the behavior of investors will not be more intelligent than in the past, despite all this. How people react will not change – their psychological makeup stays constant. You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think investors are now acting more intelligently, despite the intelligence. Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.Do you think Ponzi was crazy? The tech and telecom madness that existed just 6 years ago is right up there with the craziest mania's that have ever happened. Huge training in capital management didn't help.Take Long Term Capital Management. They had 100's of millions of their own money, and had all of that experience. The list included Nobel Prize winners. They probably had the highest IQ of any 100 people working together in the country, yet the place still blew up. It went to zero in a matter of days. How can people who are rich and no longer need more money do such foolish things? Q: What effect does large institutional ownership have on stock price volatility?Never has so much been managed by so few that care so much about what happens tomorrow. So much of the world of investing is people who are trying to beat indexes, and they have a willingness and eagerness to make decisions in the next 24 hours. This condition didn't exist years ago. It has created a “hair trigger” effect. An example of this hair trigger effect was Black Monday in '87. The cause was program trading and stop loss orders.Q: What sectors are hurting? Is there a bear market coming?Humans are still made up of the same psychological makeup, and opportunities will always present themselves. All these people have not gotten more rational. They are moved by fear and greed. But I'm never afraid of what I am doing. What are directors thinking [by not repurchasing shares] if the business is selling on a per share basis for one-fourth of what the whole business would sell for? They don't always think rational. I simply don't have that problem.Berkshire owned the Washington Post, the ABC network and Newsweek. It was selling for $100 million based on the stock price. No debt. You could have held an auction, and sold off the companies individually for $500M total, but $100M was the price. In other words they were willing to sell us money that was worth $1 for $0.25. According to efficient markets, the beta was higher when the stock was at $20 than at $37. This is insanity. We bought what was then worth $9 million that is now worth $1.7 billion.Q: How do you feel about divisions of conglomerates trying to horde capital?Berkshire wants the capital in the most logical place. Berkshire is a tax efficient way to move money from business to business, and we can redeploy capital in places that need them. Most of the managers of companies we own are already independently rich. They want to work, but don't have to. They don't horde capital they don't need.Q: How do you feel about the current real estate environment?If you are buying to own a home, that is fine. Otherwise, it seems to be getting into bubble territory. We're not excited about real estate because generally there is not enough return at current prices.Mark
This is one of the best posts I've read. Many thanks.
A fine interview. A couple years ago, after WEB touted the Smith book in Fortune, I e-mailed the publicity (I think) department at John Wiley & Sons, mentioning the notice and saying that they might consider asking WEB to write a forward for a reprint. It seemed like an obvious book marketing coup but maybe not, as they showed no interest.There is a humorous anecdote about Smith in chap. 4 of Robert A. Haugen's book _The New Finance_, illustrating his position as one of the founders of value investing. He deserves a place in the pantheon alone with Graham and Fisher. Btw, the Haugen book is one of the best deconstructions of modern finance. He relates that Eugene Fama once called him a criminal at an investment conference. They have done well with Phil Fisher's book and some others like it, so why not the Smith book? Maybe an e-mail campaign from the folks on this board? VS
We go back Dec. 2.That too should be fun and interesting.Mark
Thanks for a great post! One question: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 2002I assume all of these examples are in the distant past. What does "high yield position in 2002" refer to?Thanks!T
Hello Tiddman,"What does "high yield position in 2002" refer to?"The "junk" bonds he sold soon after?regards
What does "high yield position in 2002" refer to?ah yes, i remember it well...http://boards.fool.com/Message.asp?mid=17171351while there's no hard evidence that buffett was buying these particular bonds, he did wind up with some WTEL equity, which would seem to be pretty strong evidence that he'd bought those WCG 10%+ senior notes that were selling for 14ish before they hit the skids. it also wouldn't surprise me if he'd bought Q bonds as well; they were also cheap. there were probably others; i never looked at GX's debt.remember, the great telecommunications glut spurred a truly gargantuan issuance of high-yield paper, of totally unprecedented proportion. in 2001-2002, many of these were going tits-up, and pretty much ALL this paper was priced as if EVERYBODY were going to, and then some.it was a very large-sized opportunity.trp
while there's no hard evidence that buffett was buying these particular bonds, he did wind up with some WTEL equity, which would seem to be pretty strong evidence that he'd bought those WCG 10%+ senior notes that were selling for 14ish before they hit the skids. it also wouldn't surprise me if he'd bought Q bonds as well; they were also cheap. there were probably others; i never looked at GX's debt.Well it came out later that he was also buying Amazon junk bonds, and some other issues.I was just making sure that he didn't find a railroad trading at $30/share with $100/share in cash in 2002 :-).T
At the 2005 Shareholder Meeting, Buffett displayed a slide on junk bonds Search for "The junk bond market is another good example of how quickly things can change"http://www.bankstocks.com/article.asp?type=1&id=9880653===I read Whitney Tilson's 2005 notes, and recall from memory that he documented the original source of the chart Buffett cites (and the Bankstocks.com notes wrongly sources as Berkshire Hathaway). Anyone able to find a link to Tilson's 2005 Shareholder Meeting notes?Thanks
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.I'm not questioning Buffett's character but this makes me go hmmmmm....The Buffett Partnership started with $100,000 in a decent climate in the fifties...and his returns were 10%, 40%, 25%, 22%....in fact, he had one 50+% year in the thirteen years he ran his partnership. I'm only mentioning this because for a second I was feeling guility about 18.7% CAGR.
This has been clarified previously . . . he was talking about pre-Buffett Partnership days, as I understand it.UsuallyReasonable
Without gainsaying (read: without admitting or denying) WEB's ability to earn 50% these days, he must be joking that better information makes it easier to do this. After all, this means that the competition is also better informed, of which there is a heckuva lot more.When Soros & Rogers, Steinhardt, Wilson, et al. were shooting the lights out three decades ago in a more difficult market (and leaving Berkshire in the shade, I think), they did it with better research than everyone else. Everyone else was a much smaller set. Wind them up and set them loose today with WEB's cash and you won't see them profiled in Dow Jones' publications the next decade. It's harder to gain an edge, not easier; and harder still to gain an outsized lead. Unless I'm seriously deluded, which is always possible.
"I'm not questioning Buffett's character but this makes me go hmmmmm....The Buffett Partnership started with $100,000 in a decent climate in the fifties...and his returns were 10%, 40%, 25%, 22%....in fact, he had one 50+% year in the thirteen years he ran his partnership." As someone who has heard WEB actually talk about this, Its very clear what he means.The response usually comes from a Newbie/Wannabe (like me) who asks if he thinks someone starting out could possibly hope for results anything like what he and Charlie experianced. I think he could pretty much brag about a whole lot without having to embellish.....that makes me really go hmmmmmmm when I read the quote above. I mean, do ya think he needs the press??? Maybe he thinks he'll never be the worlds richest man and he needs to dress up his record?...(which He could have been long ago if it was just about the #'s)I could go on, but what would be the point. I mean he ain't perfect but he's got a little more credability than to have to start suck up to college students.... Ya think?When he said it he said he thought he knew at least a dozen or so people who could do it WORKING WITH VERY SMALL SUMS (lets say under 20 million for discussion puposes)Charlie has said the same thing and added that you would want to be looking in obscure stocks (hence WEB's reference to turning over lots of rocks.)The point is , he's simply telling those interested that if you apply yourself, and assuming your not running big $, and you are not under quarterly performance pressure..and YOU CAN DIVORCE YOURSELF FROM THE CROWD...you can and will get rich and do very WELL. As Charlie has said:"The real money is in the waiting"Cheers"ish"
ValueSnark, I actually don't think this conflicts with Buffett's opinion on market inefficiencies. I imagine he would say that information doesn't budge the efficiency needle all that much. Improvements in human temperament would.Careful study of companies capitalized under $1 billion just shows an utterly astounding amount of volatility year to year. I encourage investors to randomly pick a small-cap company, then map out its highs and lows for the last five years. I think it would stun people to see, for example, just how many times America's greatest corporations were cut in half in value en route to rising from a $100 million valuation to a $100 billion valuation. Trace Wal-Mart from its position as a $25 million company in the early 1970s all the way through to today's valuation of $210 billion today. It has gotten sliced down 50-70% numerous times.I don't think Buffett believes that information creates substantially more efficiency. If you give a monkey a dictionary, he'll try to eat or throw it. I think what Buffett is saying here and throughout his career, is that the admixture of impatience, greed, and fear is what creates wide price ranges for someone like him to build a fortune from. It's particularly true with small companies, where stocks routinely get halved. I think Buffett believes that if he could have gotten more information on them a half century ago when he had less capital, he would have found even more great opportunities. I happen to believe he could earn 50% returns, focusing exclusively on companies valued under $1 billion. Which leads me to a question I've never seen asked of Mr. Buffett. Given what he has said repeatedly about the burden of capital and the opportunities in obscure small companies, if he were a young investor with less than $5 million today, would he invest anything meaningful (or anything at all) in a company of the size and scope of Berkshire Hathaway? I don't think he would. It would be interesting to hear.MHirschey, thanks for a terrific post.Tom Gardner
I happen to believe he could earn 50% returns, focusing exclusively on companies valued under $1 billion. I believe that he is even talking about companies smaller than that. He is talking about 25 to 100 million dollar market caps. The smart people with time to look at these really small caps are managing enough money that when they find them, they cannot buy a meaningful amount. So they don't look.
Which leads me to a question I've never seen asked of Mr. Buffett. Given what he has said repeatedly about the burden of capital and the opportunities in obscure small companies, if he were a young investor with less than $5 million today, would he invest anything meaningful (or anything at all) in a company of the size and scope of Berkshire Hathaway? I don't think he would. It would be interesting to hear.That would be an interesting question. Today? Maybe not. But value is value and five years ago at half the market cap, but still far from some undiscovered, uncovered small cap. Why not? All considered and for someone with the ability to size up value. Especially since 5 million dollars isn't the capital burden Buffett deals with today.It would be interesting to hear his thoughts on where he would be looking if he had 5 million and was starting out.I don't think Buffett believes that information creates substantially more efficiency. He says it's temperament that matters most, assuming reasonable intelligence. Certainly see precious little evidence that the flood of information, including that from things like Reg FD, has improved efficiency or the all important temperament of the investor, including the ability to ignore the crowd, that Buffett mentioned.Perhaps because the average investor ignores alot of the information. Perhaps because a little knowledge is a dangerous thing. Either way, temperament is what matters, whether you are fishing in the small, medium or large cap pond. Personally over the long run, don't think the size of the pond matters as much as the inherent temperament and a few learned skills of the fisherman. The average retail investor doesn't use the advantages s/he has and it shows in the results.For example, the experience of Marketocracy.com., that supposedly weeds out the best of the best of tens of thousands of individual investors and the top 50 run the fund. Reverting to the benchmark in no time, for whatever reason.http://funds.marketocracy.com/mof/index.htmlHopefully the young Buffett starting out could have spotted large cap Brk value five years ago. Would be interesting to hear what he would say about that today.
<i<I think Buffett believes that if he could have gotten more information on them a half century ago when he had less capital, he would have found even more great opportunities. I happen to believe he could earn 50% returns, focusing exclusively on companies valued under $1 billion. Tom, what information beyond what was always (and still is) contained in the 10-Ks and -Qs is he referring to? Sell-side analysts' reports? He can get the information he needs faster, as can everyone else, but it's the same old, same old. He can't be referring to regulatory changes (e.g. S-O), as the regulatory playing field is level for everyone. He could always take advantage of volatility, but quotes are available online and have always been in the papers. He seems to be saying that he now has an information advantage that he lacked earlier in his career. I guess the mystery is what information does he mean? VS
I happen to believe he could earn 50% returns, focusing exclusively on companies valued under $1 billion. I believe that he is even talking about companies smaller than that. He is talking about 25 to 100 million dollar market caps. The smart people with time to look at these really small caps are managing enough money that when they find them, they cannot buy a meaningful amount. So they don't look.***************Exactly. General Motors cannot make car models for which the market might only be several thousand copies.
The Buffett Partnership started with $100,000 in a decent climate in the fifties...and his returns were 10%, 40%, 25%, 22%....in fact, he had one 50+% year in the thirteen years he ran his partnership." I've wondered this myself. The 50% figure gets thrown around, but Buffett himself didn't achieve anywhere near that rate. His returns were great but in the 20-30% range even in his salad days. Maybe before his partnership he was doing that, but I doubt he was constrained by the size of his capital when he started with $105,100.Maybe he is talking about being able to find individual issues that provide 50% returns, though he did much better than that on individual investments even much later. GEICO and AXP jumped substantially in the first couple years after he bought the stock for example.Like a lot of things that Buffett says (such as the 20-punch-card rule), I think you need to look at the concept or idea, and not necessarily the specifics...T
Which leads me to a question I've never seen asked of Mr. Buffett. Given what he has said repeatedly about the burden of capital and the opportunities in obscure small companies, if he were a young investor with less than $5 million today, would he invest anything meaningful (or anything at all) in a company of the size and scope of Berkshire Hathaway? I don't think he would. It would be interesting to hear.I think a good follow up question would be to ask him if he was leaving the country for 20 years and would be forced to leave his family's entire net worth in just a single company, which one would he choose at today's prices?
What disturbs me is that I'm getting more from the minutes of the student Q&A sessions than I've been getting from the annual meeting Q&A's in recent years.
Like a lot of things that Buffett says (such as the 20-punch-card rule), I think you need to look at the concept or idea, and not necessarily the specifics...Tiddman, I couldn't agree more. In fact, someone alluded to the idea that I was infering that Buffett is embellishing or something to that extent, but they clearly misunderstood me. I am a unyielding believer in Buffett's integrity and character so it wasn't even worth a response from me.I think what Buffett may be simply emphasizing is the drag of having way too much capital such as Berkshire has today...or any structure that ends up with way too much money (hence his returns continue to decline). It's why the question Tom proposed is I think a good one that W Tilson originally pondered. Big is definately not necessarily good in this business.Whether or not Buffett really thinks he can achieve 50% or more today on a CAGR basis is great for him. The fact is, he didn't do it when he did manage very little capital. From what I understand, he still refers to the hard copy documents (10'K's, etc) today so I don't know if all this "access" would help him more but I could be wrong. The point for me, however, beyond this is that when I hear one of MY main mentors (Graham and Munger the others) allude to the idea of 50% plus returns I realize that's not a realistic goal for myself (nor do I think it is for the majority of investors)....but, clearly, I need to keep sharpening pencils and aim higher and strive to get better all the time. I just don't think I'll shoot for 50%, despite the idea that he is MY mentor and he thinks he can do it. Point is, just because he might think he can get 50% doesn't mean I should feel bad that I don't think I can achieve that (ever).
T,The 50% and two times earnings examples were from the distant past (1950s), but the high yield position was Buffett's junk bond position in 2002.Buffett had a 30%+ return on an secured Willams issue in 2002, you may recall. At the time, the stock was at .82. Today the stock is pushing 20.Please don't ask why I remember this.... (Bluster before brains had me buying at 5 in mid-July, 2002 and .82 in late July, 2002 and really loading up in October, 2002 below 2. Genius had me selling above 5 less than a year later.):( Mark
Tom,As usual, you ask a really interesting question:Which leads me to a question I've never seen asked of Mr. Buffett. Given what he has said repeatedly about the burden of capital and the opportunities in obscure small companies, if he were a young investor with less than $5 million today, would he invest anything meaningful (or anything at all) in a company of the size and scope of Berkshire Hathaway? I don't think he would. It would be interesting to hear.I believe that Warren mentions the potential for 50% rates of return for the young, dedicated and rational investor in order to inspire younger investors that the potential still exists for market-beating rates of return. Both Warren and Charlie talk about how short-term institutional traders leave lots of opportunities for the smart, dedicated, rational and patient investor. There are more smart people focused on stocks today than ever before, but they do not always act rationally—thus giving the opportunity for outsized returns.Based on my read of the situation, I have every reason to believe that both Warren and Charlie believe they could duplicate earlier results if they had to start over again. Remember, these are confident and independent thinkers. Also remember that it is foolish to believe that Warren would end up with exactly $43.2 billion if he went back to 1950 and re-ran the tape. The present outcome is one point on a distribution of expected returns. For example, I set up a simulation assuming that you have the best of the best manage a portfolio with an average return of 15% with a standard deviation of 20% and let them take over in 1966 with $25 million. The mean or expected outcome to date is $10.1 billion, and the median is $4.5 billion. You would have a 3.74% chance of ending with $43 billion. The upshot: If Buffett started over in 1966 he would have a tough time catching up with Buffett. The record documents the fact that Buffett has been very, very good, and that he has caught some breaks along the way. Good and lucky beats good every time. The catch is, of course, that Buffett earned a 29.5% annual return for 13 years to get to $25 million in 1966. (None of us are going to be Warren Buffett.) Please do not take any of this to be critical of either Warren Buffett or Charlie Munger. I'm not.Finally, like you, I have never heard anyone ask Buffett if a new and eager Buffett would buy Berkshire Hathaway stock. My speculation is that he would not.We know that Buffett asked his dad to take him out of the will, leaving all of that estate to his two sisters. His spoken reason was that he didn't need the money. I believe the unspoken reason was that he didn't want the money. Warren also wanted his dad to know that he was his own man. Neither Warren nor Charlie are contented followers. Both learn from others, but have never worked in harness. The couldn't if they tried.Finally, I'd just like to thank you and your brother for all the good things you have created here at TMF. You could have taken lots of money (hundreds of millions) and ran with a 2000 IPO. That you did not speaks very well of you both.Best wishes,Mark
Buffett just added Bill Gates to the BRK board...Mark
I've wondered this myself. The 50% figure gets thrown around, but Buffett himself didn't achieve anywhere near that rate. His returns were great but in the 20-30% range even in his salad days. Maybe before his partnership he was doing that, but I doubt he was constrained by the size of his capital when he started with $105,100.I think the $105K starting capital is a bit misleading in terms of his capital constraints. He started 1957 with a very small amount of capital in a down market year but was up to around $7 million by 1961, which is $40-$45 million in today's terms. By the end of the partnership he was at almost $600m in today's dollars. There is an enormous difference between running $1 million and running, say, $50 million in today's dollars. If you asked me whether I would consider it more difficult to generate Buffett's 29.5% CAGR given the increase in his capital over the BPL years or 50% CAGR managing only $1m every year for 13 years, I would pick the former.
I think the $105K starting capital is a bit misleading in terms of his capital constraints. He started 1957 with a very small amount of capital in a down market year but was up to around $7 million by 1961, which is $40-$45 million in today's terms. By the end of the partnership he was at almost $600m in today's dollars. There is an enormous difference between running $1 million and running, say, $50 million in today's dollars. If you asked me whether I would consider it more difficult to generate Buffett's 29.5% CAGR given the increase in his capital over the BPL years or 50% CAGR managing only $1m every year for 13 years, I would pick the former. I agree, but let's say that he wasn't significantly "capital constrained" until he got above $5M in capital, and say for the sake of discussion that this occured in 1960 (I don't have the numbers in front of me). If what he said is accurate, that he could achieve 50% returns with small amounts of capital, he should have had returnd of around 50% from 1957 to 1960. However, he didn't even come close to that, and never visibly achieved rates of return in the vicinity of 50%.To pick a single year, in 1957 he started with $105,100, and his returns were I believe 10%. One year is not comprehensive, but it supports the point -- this is not a 50% return.I understand conceptually what he is saying -- in today's market, if you have some unheard of but healthy little company trading at 0.1x NAV, you might expect to get a 50-250% return from that in a short time, and if you can fill up a portfolio with those, you might expect total return of 50% or more in a year. If these opportunities are micro-caps with a market cap of $10-20M with daily dollar volume of $10,000, they are not going to be available to you if you are managing more than say $10 million -- figure 2-3% weighting of each stock, that is $200-300K per stock, which would be 20-30 days of trading volume, maybe not possible. I totally agree with this point and have experienced it first hand.My quibble is with this 50% figure. To put it simply, if Buffett tells us that he "did achieve", "could achieve", or "could have achieved" (depending on the source of your quote) 50% returns with small amounts of capital, why didn't he?T
I think that Buffett achieved returns way north of 50% from around 1951-1955. I recall seeing someone break it down here on a thread a while back. I don't have access to "The Making of an American Capitalist" right now, but I think you can pretty much back it out from that. Buffett went from around a $10,000 net worth in 1951 to something like $160,000 in 1955, without earning much more than $10,000 at any point. That implies a pretty hefty return.I recall in the book there are a few pages describing those years. Buffett was pretty eager and brash in the Graham-Newman days. He was going nuts that Graham was too conservative (one of those times he had "more ideas than money") and did a lot of trading in his private account. Lots of stuff like the cocoa-bean arbitrage that is mentioned in the book and also by Buffett himself in the recently posted U of F talk. He probably couldn't put too much to work there, but it was basically a risk-free arbitrage that provided ridiculous annualized returns.Ben
My quibble is with this 50% figure. To put it simply, if Buffett tells us that he "did achieve", "could achieve", or "could have achieved" (depending on the source of your quote) 50% returns with small amounts of capital, why didn't he?My recollection of when he said that originally was that he was pointing out that he knows a lot more now than he knew then so that, ceteris paribus, he would have better returns now (if not capital constrained) than he did then.--B+C
nsw,Actual results in the stock market are merely a point on the distribution of possible outcomes.With an expected return of 15% and a standard deviation of 20% per year, actual results can vary dramatically from the expected outcome "as the game is played over a long period of time."Buffett has done much better than the other inhabitants of "Graham and Doddsville."Skill has played a tremendous part, of course.Luck has played a role too.Mark
Late to the party, as usual . . . HR said: I think the $105K starting capital is a bit misleading in terms of his capital constraints. He started 1957 with a very small amount of capital in a down market year but was up to around $7 million by 1961, which is $40-$45 million in today's terms. By the end of the partnership he was at almost $600m in today's dollars. There is an enormous difference between running $1 million and running, say, $50 million in today's dollars. If you asked me whether I would consider it more difficult to generate Buffett's 29.5% CAGR given the increase in his capital over the BPL years or 50% CAGR managing only $1m every year for 13 years, I would pick the former. HR, I assume you used the inflation rate between 1961 and today to compare $7 mil then to 40-45 today. I have always been dissatisfied (sp?) with using the inflation rate to compare historical investment funds. Another way to compare investable funds is to compound at the rate of return on equities over that time period. Or perhaps the rate of return across all investable assets. I don't have the data, but I'm sure the cagr of the stock market far exceeds the inflation rate. $7 mil in 1961 is a lot bigger than 40-45 mil today. And still another way to look at it is to include not just the equity returns, but also funds added into the market (primarily through IPO's, and more recently to include stock options, etc), but of course stock buybacks and other reductions should be netted out. My basic point is that the best way to relate what Buffett had to contend with re investable assets vs. opportunities, is to put the numbers in direct relation to each other. For example, if Buffett was running $7 mil in 1961, and the total stock market capitalization was $1 bil (I made that up), then he had 0.7%. But if the total stock market capitalization today is $1 tril (again, made up), then the equivalent figure is $7 bil. In summary, $7 mil in 1961 was far, far more significant than $40-45 mil today.
nsw,The simulation I described was based upon the backdrop of U.S. equity returns, and reasonable expections concerning adoption of a fundamental approach.Over the last 100 years, the U.S. stock market has returned about 10% per year with a standard deviation of 20%. Read the Intelligent Investor, and note the returns of the disciples of "Graham and Doddsville." Based on that record, it's fair to assume that a diligent, patient and prudent value investor might have a higher expected return, say 15%.That's where I got the expected return of 15% and a S.D. of 20%.My only point is that Buffett's results are at the far upper tail of what one might have expected from such an approach. Buffett has been very, very good. He has also benefited from some good luck. Charlie says they got lucky on the Buffalo News, for example. I agree.Mark
I was one of the KU students who made the trek to Omaha. While addressing the 50% return question, Mr. Buffett launched into a lecture about when he was young.... and he would pour through Moodys Utility Company ratings looking for the obvious mis-priced companies with price/book ratio's under 1...and he said anyone willing to do the work will find these opportunities....and he said he would drive to small towns looking for blocks of these shares.... Mr. Buffett is a special man, one in a million, or $40something billion to be exact.I'm not sure he would buy BRK today - it has been one of my worst performers the last two years. I try to make up the yield difference by taking a shareholder discount at Borsheims and Nebraska Furniture Mart during the shareholder weekend.One issue Mr. Buffett pointed out about the burden of capital is that to buy meaningful chunks becomes a disclosure problem - once he discloses his ownership, the price is no longer dear. This is particularly a problem in some foreign markets where the reporting threshold is lower.It will be interesting to see how BRK does. For me, 4 B shares is the most I will allocate of my small portfolio. Mr. Buffett has already warned - expect lower returns. As the BRK gatekeeper, he knows best. But the long-term shareholders can't complain. I'm looking for 50% returns - and I may have found one in NBIX - a real sleeper thats returned 40% in a few months.
Mr. Buffett has already warned - expect lower returnsTo put this in context, there has hardly been a year in Mr. Buffett's career where he didn't warn this. The Buffett Partnership Letter of 1964, reflecting on 1963's performance, began this annual tradition when the partnerships had assets of $17 million. It has been a fixture ever since.-Mike
I think that the children's meeting with W. buffet was a great idea and I'm sure they learned information that will be appreciated in the future. GOOD SHOW
At $100,000 a year, I can find 10 people to paint my portraits to find the perfect one. I have that kind of money. But that is a waste, as those people could be doing something useful. I feel the same way about my kids and other heirs. They should be doing things that help to contribute to society.I had to adjust my breathing after I read this. Is he referring to artists when he says "those people could be doing something useful"? As one of "those people," I believe I am following his earlier advice "Do the job you love."I would wager that each of those 10 artists would think they were doing something useful. Art feeds everyone's soul. Getting paid for it feeds your family.WendolynBlissful owner of much art and no Berkshire Hathaway
He is saying that having 10 artists highly paid to make a portraits of him so that he could pick the best one is a foolish use of resources. I believe he assumes that no one else would be interested in the pictures besides a vain version of WEB, and thus he would be subsidizing throwaway work. Does it really make sense to have 10 of them made to get the best one? That's 10% efficiency. Sounds like something medieval royalty or communists would do.If Buffet wanted a portrait (which I think he is implying that he does NOT) he could have 1 guy do it and the other 9 artists could be painting something that someone cared about. Or maybe 5 of them could and the others could do something else and be amateur artists. His point is that he wants capital funds to direct work to where it best benefits society. I don't think it was a shot at art.
Geez Solsar, your message is quite cynical. I find it strange someone chooses to insult people they don't know and that they know nothing about. But I guess you paid your MF fee (Motley Fool) and can do with it as you like. But for the record - W Buffett is an investors hero and if you were there, you would realize he is even more. Yes, the students (not children) will benefit, but so will the multitudes of people that hear the story. Truthfully, MHirschey should be the one thanked. He put this thing together. Ebay has priced time with Buffett, but let me tell you this was priceless. Thanks Hirschey you are a great teacher, we all benefit.
That's very good. Some of you may be interested in Buffet Q&A at University of Tennessee College of Business Administration.
As always...WB insights are cinsistently insightful. Great reading.
Let's give solsar, a new and first time poster here, some latitude for error and not automatically assume that the comment was intended to be cynical or insulting. Maybe solsar really thought it was children who met with WEB, or maybe solsar is elderly and refers to everyone under 35 as children. (I had a boss like that once, who was probably in his 60s at the time, a really nice guy, who cheerily greeted all his employees ( who were ages 18-32) every morning with, "Good morning, children!" )
I stand corrected, with an apology to solsar. The original message said I took some students....technically solsar is correct - he has no idea that I am an ancient student....life goes on.
This is really a great post.I wish some background information about this meeting be posted some where in this thread so that newbies like me better appreciate the context.I guess this meeting is some thing similar to what Warren described in his 2004 annual report.Coming to D Gardner's unanswered question, I concur with the group. You don't want to invest in BRK for market beating returns in mid term!thanks for the great post! Its very good education reading many experienced minds at one placeBima
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