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Stocks B / Berkshire Hathaway


Subject:  Re: Buffett/Jayhawk Q&A Date:  7/16/2005  5:52 PM
Author:  scoopshot Number:  106470 of 254533

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.
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