Many of us are familar with Warren Buffett (Trades, Portfolio)'s confidence in making 50% a year if managing small sums. But less familar to us is how he would go about it because it is rarely discussed.
In a Q&A session with students from the University of Kansas in 2005, Buffett gave a rare specific answer to this question. Below is the dialogue quoted from the transcript that was posted on this link:
Question: According to a BusinessWeek 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?
Buffett: Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts.
It would perhaps even be easier to make that much money in today's environment because information is easier to access. You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3 per share when it was earning $20 per share. I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them. Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100 per share is sitting in cash, high yield position in 2002.
No one will tell you about these ideas; you have to find them. The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire (BRK.A, Financial)(BRK.B, Financial) to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.
I know more about business and investing today, but my returns have continued to decline since the '50s. Money gets to be an anchor on performance. At Berkshire's size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.
