“If you keep making 30 to 40 percent per annum for 25 years, you make an awful lot of money even if you start with very little.” - George Soros
“I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that." - Warren Buffett
Most investors are content with simply beating the S & P. Perhaps such thought is justified given the fact that most mutual fund managers and hedge fund managers are unable to consistently do this over any significant length of time. One reason for this is that institutional investors have structural issues that prevent them from obtaining such gains over a significant length of time. Mr. Buffett addresses the structural advantage of being a small investor as follows:
"It's a structural issue...yes, with a small sum like a million dollars, I could make 50% or more a year. The key is rationality. There are always going to be times when humans act irrational and this is time to make your money. I've made a career of cashing in when people act irrational." Warren Buffett
The issue stems from remarks Mr. Buffett made in the June 25, 1999 issue of Business Week:
"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. 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."
When I have made this argument to other investors they simply respond, “it’s impossible.” These same investors argue that the market is inefficient. But not inefficient enough to generate such returns over the long haul. My response is that it makes it difficult but not impossible. We know 20-40% returns can happen as they have. The question is whether these returns can be made year in and year out? The answer is yes. However, such a feat requires a lot of due diligence and discipline.
Although I have not accomplished such feat I have s tudied investors who have accomplished this feat and have seen patterns develop. These patterns are too voluminous to mention them in this article. But a good summary is explained by Michael Steinhardt. There are four things he looked for in an investment: 1) the idea; 2) the consensus view; 3) the variant perception; 4) a trigger event. Steinhardt defined “variant perception” as “a well-founded view that is meaningfully different from the market consensus.” In other words, you are not going to regularly obtain these returns by following the crowd.
Another good resource is Mark Tier’s excellent book, Becoming Rich, which effectively discusses: avoiding losses like the plague, finding a system that matches your personality, concentration not diversification, absolute conviction in the trade before you invest, and having an exit strategy.
I have incorporated these concepts and investment philosophy into my trades. As a result my investment gains have improved dramatically. A year ago I bought shares in Monsanto (MON) which I have subsequently sold a few months ago for a nice profit. This year’s pick is Calgon Carbon Corporation (CCC), which I will cover in my next article.
In closing, consistent and high annual returns are possible. But I didn’t say it would be easy.
“I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that." - Warren Buffett
Most investors are content with simply beating the S & P. Perhaps such thought is justified given the fact that most mutual fund managers and hedge fund managers are unable to consistently do this over any significant length of time. One reason for this is that institutional investors have structural issues that prevent them from obtaining such gains over a significant length of time. Mr. Buffett addresses the structural advantage of being a small investor as follows:
"It's a structural issue...yes, with a small sum like a million dollars, I could make 50% or more a year. The key is rationality. There are always going to be times when humans act irrational and this is time to make your money. I've made a career of cashing in when people act irrational." Warren Buffett
The issue stems from remarks Mr. Buffett made in the June 25, 1999 issue of Business Week:
"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. 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."
When I have made this argument to other investors they simply respond, “it’s impossible.” These same investors argue that the market is inefficient. But not inefficient enough to generate such returns over the long haul. My response is that it makes it difficult but not impossible. We know 20-40% returns can happen as they have. The question is whether these returns can be made year in and year out? The answer is yes. However, such a feat requires a lot of due diligence and discipline.
Although I have not accomplished such feat I have s tudied investors who have accomplished this feat and have seen patterns develop. These patterns are too voluminous to mention them in this article. But a good summary is explained by Michael Steinhardt. There are four things he looked for in an investment: 1) the idea; 2) the consensus view; 3) the variant perception; 4) a trigger event. Steinhardt defined “variant perception” as “a well-founded view that is meaningfully different from the market consensus.” In other words, you are not going to regularly obtain these returns by following the crowd.
Another good resource is Mark Tier’s excellent book, Becoming Rich, which effectively discusses: avoiding losses like the plague, finding a system that matches your personality, concentration not diversification, absolute conviction in the trade before you invest, and having an exit strategy.
I have incorporated these concepts and investment philosophy into my trades. As a result my investment gains have improved dramatically. A year ago I bought shares in Monsanto (MON) which I have subsequently sold a few months ago for a nice profit. This year’s pick is Calgon Carbon Corporation (CCC), which I will cover in my next article.
In closing, consistent and high annual returns are possible. But I didn’t say it would be easy.
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