Commentary: Is it possible for Buffett to get the 50% annualised returns as said by himself?

 

Charlie Munger: "I would agree. I would also say what we did 40 years ago was in some respect more simple than what you have to do. We have it very easy, compared to you. It can still be done, but it is harder now. You have to know more. Just sifting the manual until you have something that is two times earnings. That won't work for you anymore"

Buffett: "It will work if you can find any"

***

There was a question on telegram some time ago with regards to this matter, and I spent about an hour thinking and writing a response.

Question: Buffett says if his portfolio is small, he is sure to able generate 50% return. What is this 50% return method he talk about? How to go about it?

 

Having being somewhat familiar with how Buffett invest during his before and during his partnership years, I guess:

 

-information advantage. He was willing to comb through Moodys and S&P manuals from first page to last, looking for cheap companies (either by book value, such as valuable investment portfolios/bond holding; or cheap by earnings, Western Insurance was one example). Sanborn Maps cost $45 and had $65 in its investment portfolio.

 

-intelligence. Able to see unobvious aspects of an obvious deal. The Rockwood deal was an example of this. Instead of arbitraging for 5.6% gains, he held on to the stock for a gain of 560%.

In the foot notes: it adds:

-(My opinion) He was willing to coat-tail (follow) the successful investors of his time. His ultimate objective was making and compounding wealth. He doesn’t care about the intellectual challenge of investing as much as his mentor, Graham did.

 

-doing the legwork (or getting someone to do it) for very obscure, thinly traded stocks. Example: Dan Monen helped to travel around to help buy National American Fire Insurance (a company that was a fraud until a turnaround by William Ahmanson). It was earning $29 a share and selling for $30. Unfortunately it was thinly held by non-insiders, who are scattered around the countryside. Some of them paid for $100 a share for the now much forgotten stock they have. Dan Monen went around, and by word-of-mouth, accumulating shares and eventually offering up to $100. They eventually hold 10%, versus the Ahmanson’s 70%.

 

-Willingness to concentrate heavily into ideas. He had, after speaking to GEICO future CEO, put ¾ of his net worth into its stock. In the Sanborn Maps idea, he put 1/3 of the partnership money into the idea, and during the American Express crisis, he plough in capital of similar proportions.

 

Quote from “The Snowball” (AXP wasn’t the only idea capital was concentrated on)

-He had a very good spouse in Susie, who attended to his every needs outside his investment work. E.g., besides the kids, Susie took care of Buffett’s dad during his last years.

***

The spouse part was not written in jest-- I believe that women have a huge hand in how men acts, and perhaps vice versa (I can't comment on behalf of women for obvious reasons).

Jan 2023 Portfolio Update

Hinderburg in Adani Colours. Art generated by Dall-E

As of 1st Feb 2023,

STI Index Fund returns 2.93%
Hong Kong Tracker Fund returns 7.84% (wow)
S&P 500 Index Fund returns 4.19%

My portfolio, excluding bonds (Singapore Savings Bonds ("SSB") and 6 months T-Bills) which I invest solely for my mum, returns 7.15% or 4.75% with it.

Performance trails the Hong Kong Tracker Fund, which is expected since it had a terrible, abysmal year. In terms of cost, 44.7% of my funds are invested in HK stocks, 48% in SGX and the remaining in US.

Current market sentiments towards the Chinese recovery remain positive to some what cautious. The main focus so far seems to have shift from the property debt crisis to what America is currently doing.

I do not believe the property crisis is behind us, just because the market prices has recovered some what.  Bond prices for Central China notes are still very much below 50% of face value. The following screenshot taken from Bondsupermart:

We are only 2 months away from the next call...

The current favor of the moment are Artificial Intelligence plays. The acquisition of OpenAI by Microsoft was the catalyst. The writing on the wall is that Google's search could be displaced, and Google's implementation does not impress.

Stocks which took a beating last year staged a strong recovery. IMO, I don't give a rat's ass how they do because they still look overpriced, and I would not change my game just to suit the market's taste. 

I have not purchase any stock this year as yet. I have wrote a modestly priced call for Alibaba at 135 HKD, and for a while that position was in the red. This was due to how volatile and positively charged the market was. Nevertheless, it expired out of the money. 

As most of my HK holdings are not large market cap stocks, an options market does not exist for them. Hence option selling (and buying) is not a big part of my portfolio.

***

Hinderburg Research had released a short report on Adani's Enterprise and its various subsidiaries. Unsurprisingly... the focus in the local papers were the impending stock purchase of the said enterprise by Temasek. Temasek's bad run seems to continue. I believe many would question the amount of due diligence, esp after the FTX incident.

IMO, shortist such as Hinderburg are formidable-- not only are they riding on the prospect of infinite losses, they could be threatened with legal muscle, viewed with skepticism (because of vested interest).

The outcome of this episode should follow the usual playbook: a heavily in-debt company tries to raise funds cheaply by issuing bonds or stocks that have the lowest cost of capital. It seems inevitable that great wealth generated by leverage would eventually face a moment of reckoning.

At the end of the day, the rich would be less well off, but it is always the poor that suffers. Labourers working in these firms face retrenchments. Politicians rarely makes a decision that overrides their self interests, be it to stay in power or to enrich themselves. 

My expectation is that unless someone could prove that political connections are involved, nothing will happen. On the contrary, if political connections were present, I would expect the accused be swiftly put to his/her place, and any previous political relation be severed just like a ballast weighing down an airship.

Till next month.