Well, the wait is over. An investor in India named Gurpreet Narang asked Warren Buffett some similar questions in 2011. Below is a transcript of Mr. Narang's questions and Mr. Buffett’s response:
Mr. Narang: “Sir, I read about your investment in Korean stocks for your personal portfolio. My question is: If you’re managing very small amounts of money, like say, $3 million or $10 million, will you still look for the Graham’s approach for low P/E and, you know, wider discount to book value? Will you still look for these kind of situations, if you couldn’t find any franchise stocks?”
Mr. Buffett: “Yeah, if I were working with small sums, I certainly would be much more inclined to look among what you might call classic Graham stocks, very low P/Es and maybe below working capital and all that, although, and I would incidentally, I would do far better percentage-wise if I were working with small sums, uh, there are just way more opportunities. If you’re working with a small sum, uh, you have thousands and thousands of potential opportunities, and when we work with large sums, we just, we have relatively few, uh, possibilities in the investment world that can make a real difference in our net worth. So, you have a huge advantage over me if you’re working with very little money, but there are compensations to that on the other side of the equation.
The, the Korean stocks you mentioned that I looked at 6 or 7 years ago were companies where you could only put a small amount of money in, and I was sort of, re-living my youth. Somebody sent me a Korean, a handbook of Korean stocks and told me that the market was interesting. So, one Sunday afternoon, I did leaf through a couple thousand pages of Korean stocks and I was sort of re-living my youth, I mean, you know, other people look through old Playboy magazines, or something like that. But I, I look through these old manuals of stocks and I bought a number of stocks in small amounts, uh, from companies whose names I couldn’t pronounce. But the stocks as a group were so cheap, that you had to make money out of them. They were Graham-type stocks, and that’s what I would be doing, I would be combing that sort of list. Now, I, if I found a wonderful company that Graham wouldn’t have bought, but I really was convinced about its future, I would have bought that also. Incidentally, I’ve written in the last annual report about Geico, and I bought that stock in 1951 when I had about $10,000. And Geico, I bought, or I looked at, because Benjamin Graham was the Chairman of the company. But Geico was exactly the sort of stock that Graham wouldn’t buy. I mean, it was selling way above book value, and all of that. There was a certain irony in that, but I’m glad I did it.”
Essentially, Warren Buffett would comb the investing landscape of cigar butt/deep value Graham-type stocks for any opportunities and he would be willing to invest in high-quality companies that he could understand.
So, Buffett wouldn’t just buy net-nets/deep value stocks if he were working with less money. And he wouldn’t just buy and hold companies with economic moats and excellent managements. He would do BOTH.
I think the key takeaway from Buffett’s answer is that he would invest in whatever opportunity was the best bargain at the time – be it a net-net or wonderful company.
And even though he doesn’t mention them, I believe Warren Buffett would also be open to investing in special situations as he did in the Buffett Partnership Ltd. Obviously, these specials situations (e.g. tender offers, restructurings, liquidations, spin-offs, etc.) would need to have sufficiently large risk-adjusted returns to entice Buffett.
So for those of us who are seeking superior returns, the path seems fairly clear: Seek broadly for opportunity, research deeply, think critically and then invest wisely. And then do it over and over and over again.