From the end of 1950 to 1960, Warren Buffett achieved his best investing career results, with his returns averaging approximately 50% a year. His approach then was different than now, as he could operate on a small scale as an individual investor. These returns happened as he had just left Benjamin Graham’s mentorship and was still a pure value investor. He looked for many undervalued stocks with less attention to competitive advantage or favorable economics and sold them quickly as the capital base grew. He now has the blessing of and problem of size, needing to allocate billions of dollars consistently. He switched his approach to buying undervalued excellent companies with favorable long-term economics over his career.
Warren Buffett once explained how his investing has changed with the amount of capital he has now, limiting his options and the universe of potential investments. [1]
Question asked of Buffett:
“If you’re investing a small sum today, which approach would you use?”
Warren Buffett replied:
“Well, I would use the approach that I think I’m using now of trying to search out businesses where I think they’re selling at the lowest price relative to the discounted cash they would produce in the future.”
“I was working with tiny amounts of money so that I would pour through volumes of businesses, and I would find one or two that I could put $10,000 into or $15,000 into that was just ridiculous. They were ridiculously cheap, and obviously, as the money increased, the universe of possible ideas started shrinking dramatically.”
“The times were also better for doing it at that time. But I think if you’re working with a small amount of money with exactly the same background that Charlie and I have and the same idea, same, whatever ability we have.”
“I think you can make very significant sums. Still, as soon as you start getting the money up into the millions, many millions, the curve on expectable results falls off just dramatically. But that’s the nature of it. You’ve got a lot, you know, when you get up the things you can put millions of dollars into, you’ve got a lot of competition looking at that.”
“And they’re not looking as I did when I started. When I started, I went through the pages of the manual page by page; I mean, I probably went through 20,000 pages in Moody’s industrial transportation, banks, and finance manuals, and I did it twice. And I looked at every business. I didn’t look very hard at some; that’s not a practical way to invest tens or hundreds of millions of dollars.”
“So I would say if you’re working with a small sum of money and you’re interested in the business and willing to do the work, you will find something. There’s no question about it. In my mind, you will find some things that promise very large returns compared to what we can deliver with large sums of money, Charlie.”
Charlie Munger continues the response to the question:
“Well, yeah, I think that’s right. A brilliant man who can’t get any money from other people and is working with a very small sum probably should work in very obscure stocks, searching out unusual mispriced opportunities. But, you know, you could; that’s such a small world. It may be a way for one person to come up, but it’s a long slog.”
“Most smart people, unfortunately, in Wall Street figured that they can make a lot more money a lot easier just in one way or another. And getting an override on other people’s money or delivering services in some way that people and the monetization of hope and greed, you know, is a way to make a huge amount of money, and right now.”
“Just takes hedge funds. I mean, I’ve had calls from a couple of friends in the last month that don’t know anything about investing money. They’ve been unsuccessful and everything else. And you know, one of them called me, and he said, well, I’m forming a small hedge fund $125 million he was talking about. The thought that since it was $125 million, maybe we should put in 10 million or something. If you look at this fellow schedule D on his 1040 for the last 20 years, you know, you’d think he ought to be mowing lawns, but he may get $125 million.”
“It’s just astounding to me how willing people are during a bull market just to toss money around because they, you know, they think it’s easy and, and of course, that’s what they felt about Anderson stocks a few years ago. They’re thinking about something else next year too.”
“But the most significant money made, you know, in Wall Street in recent years has not been made by great performance, but it’s been made by great promotion basically, Charlie.”
Charlie continues:
“I would state even more strongly I think the current scene is obscene. There’s too much mania, too much chasing after easy money, and too much misleading sales material about investments. There’s too much on television emphasizing speculation in stocks.”
Warren Buffett is known for his long-term investment strategy and focus on value. If given a small sum of money to invest, he would likely look for companies with strong fundamentals, a history of profitability, a good value for future discounted cash flows, and a solid management team.
The biggest difference for Warren Buffett in investing a small sum of money would be it would open up the universe of all available publicly traded stocks to him, not just the ones with big enough market caps to be meaningful for the Berkshire portfolio. Buffet has said many times that executing his method on small companies would be a huge edge as it’s much more difficult to maintain performance at the size he now operates at due to a lack of liquidity for investments to be as meaningful on his large scale of tens of billions in investable capital.
While it may not be possible for the average investor to replicate Buffett’s investment approach, taking inspiration from his principles and seeking out undervalued, high-quality companies can be a smart way to build a diversified portfolio. Additionally, it’s essential to remember that investing is a long-term game, and patience and discipline are key to success.
