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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

Two Ways to Beat the Oracle of Omaha

Focusing on smaller caps and expanding the hunting ground overseas may help generate a guru-beating result

Legendary investor Warren Buffett (Trades, Portfolio) is highly respected for his long-standing, enviable track record of superior investment returns earned at Berkshire Hathaway (and Buffett Partnership, previously). However, for the past decade, the results of his investing vehicle have been a bit lackluster compared to the S&P 500 benchmark.

We see several reasons for the "lost decade" for Mr. Buffett, with the size disadvantage and the longest uninterrupted bull run in history being the two primary ones. Admittedly, both Mr. Buffett and his right-hand man, Charlie Munger (Trades, Portfolio), have been consistently trying to adapt themselves to the dynamic business world when it comes to the game of value investing. Nevertheless, for most of those who are interested in pursuing the Berkshire approach, we believe there are a couple of ways to get higher returns.

Our rationale here is to expand your hunting ground while still remaining within your circle of competence. Indeed, as a long-term investor, everyone can look for businesses earning super-normal returns on capital, economic moats, secular growth opportunities and able and honest management. However, such wonderful businesses are indeed a rare species, even setting aside the valuation consideration at the time of establishing a position.

Peter Lynch once said, "the person that turns over the most rocks wins the game." There are quite a few "rocks" that would not be large enough to become meaningful for a sizable portfolio to turn over. It is the small- and mid-cap stocks that lie underneath those rocks. Actually, today's Berkshire needs elephant-sized targets to move the needle on its performance dashboard. Mega-cap stocks like Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) are typically efficient in terms of pricing thanks to the massive publicity that they receive. On the contrary, smaller businesses tend to get neglected and are less often owned by money managers with substantial funding. However, this does not mean any trade-off on quality. Some firms like $1.3 billion market-cap Atrion (ATRI) and $9 billion market-cap Graco (GGG) take advantage of their market niches to build a solid economic moat and produce profitable growth for decades.

As with the size advantage, we think that some investors can also explore the geographic dimension to widen their search zone. The investments and acquisitions at Berkshire have been overweighting on U.S. businesses. While we agree that the American tailwind is likely to sustain for the long run, we do acknowledge that a global perspective plays an increasingly significant role in today's business world.

Also, with the help of the Internet, researching and investing internationally has never been easier. For example, the Nordic regions are home to many of the world's renowned high-quality names with high returns and sound corporate governance, such as Denmark-based Novo Nordisk (OCSE:NOVO B), a global leader of treating diabetes, obesity and other chronic diseases. Additionally, over the Daily Journal (NASDAQ:DJCO) annual meeting last week, it was interesting to hear Mr. Munger explicitly point out that the strongest companies are not in the U.S. but in China. "I'm invested in them, and you're not," he said.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Berkshire Hathaway and Novo Nordisk.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website


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