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"

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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.

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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).