Yes, that's one reason I think Davis makes for a cleaner case study. Buffett is doing a lot of different things and a lot of his early fortune is from performance fees - there is no way to tell exactly how much of his first $25 million was from fees, but it is a lot, and I would guess that $25 million in 1969 probably made him one of the…
Yes, that's one reason I think Davis makes for a cleaner case study. Buffett is doing a lot of different things and a lot of his early fortune is from performance fees - there is no way to tell exactly how much of his first $25 million was from fees, but it is a lot, and I would guess that $25 million in 1969 probably made him one of the thousand richest men in America or something like that.
By contrast, Davis doesn't do any activism, doesn't buy entire companies, never collected performance fees, and he's right up there as one of the 100 or 200 richest Americans. So it was possible to get rich purely through passive investment, we don't have to guess.
I think what you are referring to is something Buffett said in an interview in 1999: "I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
I recall that back in those days he would make trades in his personal account and sometimes he would end up filing 5% ownership because it would be a small company, and I think he was saying that from personal experience - he was probably still racking up huge returns on smaller investments in his PA. But even 1999 was a very different era.
I am not sure how easy it is to find good investments among microcaps anymore, with the growth of private equity - they tend to buy up the decent companies and provide and alternative to going public. But no doubt there are still ways to make money, they are just not as easy to find as they used to be.
For what it's worth, Buffett used to get that question all the time - it looks like someone complied a lot of the answers here (some of which contradict each other, so I don't think it's that accurate):
Do you believe that we'll have significant mispricings again? And if you were 26 today how would you generate the 50% returns that you said you might do with smaller amounts of capital?
Attractive opportunities come from observing human behavior. In 1998, people behaved like frightened cavemen (referring to the Long Term Capital Management meltdown). People make their own opportunities. They will be frozen by fear, excited by greed and it doesn’t matter what their IQ, degrees etc is. Growth of 50% per year is with small capitalization, not large cap. The point is I got rich looking for stock with strong earnings.
The last 50 years weren’t unique. It’s just capitalizing on human behavior. It’s people that make opportunities when others are frozen by fear or excited by greed. Human behavior allows for success if you are able to detach yourself emotionally.
In 1951, I got out of school at 20 years old. At the time there were two publishers of stock information, Moody’s and Standards and Poor’s. I used Moody’s and went through every manual. I recently bought a copy of the 1951 Moody off of Amazon. On page 1433, there’s a stock you could have made some money on. The EPS was $29 and the Price Range was from $3-$21/share. On another page, there is a company that had an EPS of $29.5 and the price range was $27-28, 1x earnings. You can get rich finding things like this, things that aren’t written about.
A couple of years ago I got this investment guide on Korean stocks. I began looking through it. It felt like 1974 all over again. Look here at this company...Dae Han, I don't know how you pronounce it, it’s a flour company. It earned 12,879 won previously. It currently had a book value of 200,000 won and was earning 18,000 won. It had traded as high as 43,000 and as low as 35,000 won. At the time, the current price was 40,000 or 2 times earnings. In 4 hours I had found 20 companies like this.
The point is nobody is going to tell you about these companies. There are no broker reports on Dae Han Flour Company. When you invest like this, you will make money. Sure 1 or 2 companies may turn out to be poor choices, but the others will more than make up for any losses. Not all of them will be good, but some will and those will make you rich. And this didn’t happen in 1932, this was in 2004! These opportunities will be there in the next 30 years. You’ll have streaks where you’ll find some bad companies and a few times where you’ll make money with everything that you do.
The Wall Street analysts are brilliant people; they are better at math, but we know more about human nature.
In your investing life you will have several opportunities and one or two that can’t go wrong. For example, in 1998 the NY fed offered a 30-year treasury bonds yielding less then the 29-½ year treasury bonds by 30 basis points. What happened was LTCM put a trade on at 10 basis points and it was a crowded trade, they were 100% certain to make money but they could not afford any hiccups. I know more about human nature; these were MIT grads, really smart guys, and they almost toppled the system with their highly leveraged trading.
That's really interesting. If I didn't know anything else about Buffett I'd be a bit disappointed by his answers for failing to credit the perfect timing of his birth. But he has spoken at length about this in other places. It's difficult for anyone to argue that "the last 50 years weren't unique" with certainty (they were certainly better than the preceding 50 years), but I do buy his argument that anywhere there are people trading subject to their emotions there will be opportunities for under-valued stocks.
Are you convinced with his examples? What would you say to them if you believe the party's over for value investors?
One reason it was less competitive back then is that was much harder to for a smart person to raise money and bid up the price of really cheap stocks. Buffett was the son of a stockbroker/Congressman and studied under and was endorsed by Graham and even so had to struggle to scrape together money. Davis married into his stake.
His examples were fine - I think cheap Korean stocks from that era ended up doing ok - but to put up 30%-50% returns you have to either buy good long-term assets for pennies on the dollar or have a way to buy assets at a lesser discount that you turn into full value fairly quickly and continually re-invest the proceeds into similar situations, as we he did with his workouts.
Certainly there are very undervalued securities all the time - especially so when you witness emotional lows like we saw in 2008-2011 - but today, probably not to the scale that will make you the richest man in America.
I would add that it's almost certainly the best time ever to be someone who understands how to evaluate assets and allocate capital. You don't need to scrounge to start a tiny fund or hope to inherit something, there are lots of high paying jobs out there where you can work as a professional investor or use investing frameworks.
One of my ideas behind this blog is that investing has lots of useful frameworks you can apply to your professional and personal financial life. For example, every middle manager is to some extent allocating capital and making decisions on behalf of their employer. I also had one earlier on how to evaluate a house. This one I would say is about how to think about what professional path to go down - I'm being a little facetious when I saw this is how to become a billionaire, but I think there is an important general idea that you won't be successful today by copying exactly what successful people did a generation ago. Buffett ended up carving a different path from Graham, and successful people today will end up doing something different as well.
That makes total sense. I suppose I am torn between trying to follow the well-trodden path behind Buffett or following the entrepreneurial path and focussing on one particular venture. Having started a few unsuccessful businesses I am leaning towards the former as a way of piggy-backing already successful entrepreneurs and learning from them before one day trying my hand again as an entrepreneur.
I guess it's also a question of temperament and talent, if you are blessed with an exceptionally powerful analytical mind that is primed to consume endless figures and statistics each day, obviously you are more likely to become a successful investor. If Buffett were 25 today, he would probably agree with your argument that he's not going to become the richest man in the world by committing his life to value investment, but it would still be worthwhile for him to do so because he is so exceptionally well-fitted to that career. For the rest of us I guess your idea makes more sense!
Right, I should probably have emphasized more clearly entrepreneurship is the way to go *if you want to maximize your chance of being a billionaire* - it was just a way to highlight how economic forces have shifted the distribution of the richest people people over time. Clearly most people don't care about becoming a billionaire, most people that have the option will take the path that suits their interests, and the ones that are more interested in financial results usually prefer paths with less variance or competition.
Yes, that's one reason I think Davis makes for a cleaner case study. Buffett is doing a lot of different things and a lot of his early fortune is from performance fees - there is no way to tell exactly how much of his first $25 million was from fees, but it is a lot, and I would guess that $25 million in 1969 probably made him one of the thousand richest men in America or something like that.
By contrast, Davis doesn't do any activism, doesn't buy entire companies, never collected performance fees, and he's right up there as one of the 100 or 200 richest Americans. So it was possible to get rich purely through passive investment, we don't have to guess.
I think what you are referring to is something Buffett said in an interview in 1999: "I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
I recall that back in those days he would make trades in his personal account and sometimes he would end up filing 5% ownership because it would be a small company, and I think he was saying that from personal experience - he was probably still racking up huge returns on smaller investments in his PA. But even 1999 was a very different era.
I am not sure how easy it is to find good investments among microcaps anymore, with the growth of private equity - they tend to buy up the decent companies and provide and alternative to going public. But no doubt there are still ways to make money, they are just not as easy to find as they used to be.
For what it's worth, Buffett used to get that question all the time - it looks like someone complied a lot of the answers here (some of which contradict each other, so I don't think it's that accurate):
https://buffettfaq.com/#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
Here is one answer from 2007:
Do you believe that we'll have significant mispricings again? And if you were 26 today how would you generate the 50% returns that you said you might do with smaller amounts of capital?
Attractive opportunities come from observing human behavior. In 1998, people behaved like frightened cavemen (referring to the Long Term Capital Management meltdown). People make their own opportunities. They will be frozen by fear, excited by greed and it doesn’t matter what their IQ, degrees etc is. Growth of 50% per year is with small capitalization, not large cap. The point is I got rich looking for stock with strong earnings.
The last 50 years weren’t unique. It’s just capitalizing on human behavior. It’s people that make opportunities when others are frozen by fear or excited by greed. Human behavior allows for success if you are able to detach yourself emotionally.
In 1951, I got out of school at 20 years old. At the time there were two publishers of stock information, Moody’s and Standards and Poor’s. I used Moody’s and went through every manual. I recently bought a copy of the 1951 Moody off of Amazon. On page 1433, there’s a stock you could have made some money on. The EPS was $29 and the Price Range was from $3-$21/share. On another page, there is a company that had an EPS of $29.5 and the price range was $27-28, 1x earnings. You can get rich finding things like this, things that aren’t written about.
A couple of years ago I got this investment guide on Korean stocks. I began looking through it. It felt like 1974 all over again. Look here at this company...Dae Han, I don't know how you pronounce it, it’s a flour company. It earned 12,879 won previously. It currently had a book value of 200,000 won and was earning 18,000 won. It had traded as high as 43,000 and as low as 35,000 won. At the time, the current price was 40,000 or 2 times earnings. In 4 hours I had found 20 companies like this.
The point is nobody is going to tell you about these companies. There are no broker reports on Dae Han Flour Company. When you invest like this, you will make money. Sure 1 or 2 companies may turn out to be poor choices, but the others will more than make up for any losses. Not all of them will be good, but some will and those will make you rich. And this didn’t happen in 1932, this was in 2004! These opportunities will be there in the next 30 years. You’ll have streaks where you’ll find some bad companies and a few times where you’ll make money with everything that you do.
The Wall Street analysts are brilliant people; they are better at math, but we know more about human nature.
In your investing life you will have several opportunities and one or two that can’t go wrong. For example, in 1998 the NY fed offered a 30-year treasury bonds yielding less then the 29-½ year treasury bonds by 30 basis points. What happened was LTCM put a trade on at 10 basis points and it was a crowded trade, they were 100% certain to make money but they could not afford any hiccups. I know more about human nature; these were MIT grads, really smart guys, and they almost toppled the system with their highly leveraged trading.
This was definitely a good time to act.
That's really interesting. If I didn't know anything else about Buffett I'd be a bit disappointed by his answers for failing to credit the perfect timing of his birth. But he has spoken at length about this in other places. It's difficult for anyone to argue that "the last 50 years weren't unique" with certainty (they were certainly better than the preceding 50 years), but I do buy his argument that anywhere there are people trading subject to their emotions there will be opportunities for under-valued stocks.
Are you convinced with his examples? What would you say to them if you believe the party's over for value investors?
One reason it was less competitive back then is that was much harder to for a smart person to raise money and bid up the price of really cheap stocks. Buffett was the son of a stockbroker/Congressman and studied under and was endorsed by Graham and even so had to struggle to scrape together money. Davis married into his stake.
His examples were fine - I think cheap Korean stocks from that era ended up doing ok - but to put up 30%-50% returns you have to either buy good long-term assets for pennies on the dollar or have a way to buy assets at a lesser discount that you turn into full value fairly quickly and continually re-invest the proceeds into similar situations, as we he did with his workouts.
Certainly there are very undervalued securities all the time - especially so when you witness emotional lows like we saw in 2008-2011 - but today, probably not to the scale that will make you the richest man in America.
I would add that it's almost certainly the best time ever to be someone who understands how to evaluate assets and allocate capital. You don't need to scrounge to start a tiny fund or hope to inherit something, there are lots of high paying jobs out there where you can work as a professional investor or use investing frameworks.
One of my ideas behind this blog is that investing has lots of useful frameworks you can apply to your professional and personal financial life. For example, every middle manager is to some extent allocating capital and making decisions on behalf of their employer. I also had one earlier on how to evaluate a house. This one I would say is about how to think about what professional path to go down - I'm being a little facetious when I saw this is how to become a billionaire, but I think there is an important general idea that you won't be successful today by copying exactly what successful people did a generation ago. Buffett ended up carving a different path from Graham, and successful people today will end up doing something different as well.
That makes total sense. I suppose I am torn between trying to follow the well-trodden path behind Buffett or following the entrepreneurial path and focussing on one particular venture. Having started a few unsuccessful businesses I am leaning towards the former as a way of piggy-backing already successful entrepreneurs and learning from them before one day trying my hand again as an entrepreneur.
I guess it's also a question of temperament and talent, if you are blessed with an exceptionally powerful analytical mind that is primed to consume endless figures and statistics each day, obviously you are more likely to become a successful investor. If Buffett were 25 today, he would probably agree with your argument that he's not going to become the richest man in the world by committing his life to value investment, but it would still be worthwhile for him to do so because he is so exceptionally well-fitted to that career. For the rest of us I guess your idea makes more sense!
Right, I should probably have emphasized more clearly entrepreneurship is the way to go *if you want to maximize your chance of being a billionaire* - it was just a way to highlight how economic forces have shifted the distribution of the richest people people over time. Clearly most people don't care about becoming a billionaire, most people that have the option will take the path that suits their interests, and the ones that are more interested in financial results usually prefer paths with less variance or competition.