Buffett & Earning 50% Returns

How we can earn the 50% returns Buffett talks about

Warren Buffett has famously stated that if he had less than a million dollars he could achieve 50% returns pretty easily.

Today we’re diving into how.

I originally heard him say it in Berkshire’s 1999 AGM.

I kind of passed it off at the time, thinking ‘it’s been a while since 1999, things have probably changed’.

But then in the 2024 AGM, he said it again.

Okay - now I have no excuses.

This deserves some research.

Many of us don’t have a million dollars, I think it’s only right that we explore this a little further.

We’d be fools to ignore it.

And after spending a day doing some digging, I’ve found three ideas we better take on board if we want to achieve such mouth watering returns.

Let’s waste no time.

Step 1: You’ve gotta Love It

This is the most important step - this is the trait that enables everything.

You really have to love it.

And no - I don’t mean the money. You have to love the process.

Scrolling through pages of stocks, reading annual reports, doing A-Z searches of different indexes; all of this needs to get you excited.

You need to love the intellectual stimulation, the pursuit of inefficiencies, and learning about businesses.

Buffett explains that this passion is a form of creativity, the same as how a painter loves to paint.

It can’t just be for the money; the money that falls on your lap is the bi-product of the passion and hard work.

This idea that you have to love it isn’t advice that just Buffett gives.

It’s a common theme among the most successful investors, they all love the game.

They see the stock market as some big puzzle, and they got very well paid for solving it.

Joel Greenblatt has repeatedly stated that if you’re to get into this industry, you have to love it.

In a talk at Wharton, this is what he said about the importance of loving the challenge of investing.

So, ask yourself - do you really love it?

Do you wake up and think about it?

Do you look forward to rummaging through the mountains of public information?

If you were told you’d receive no pay for the next 3 years, would you still do it anyway?

If you enthusiastically said yes to these - then 50% returns may well be within your grasp.

Step 2: Go Small, and Know It All

If you want to get better returns than everyone else, you need an advantage.

Going small is the best place to get an advantage; it’s where the least amount of people are.

If there are less people looking at it, there’s more chance it’s mispriced.

There’s a beautiful thing about small cap investing - the investors that are best at it make so much money that they can’t invest in small caps anymore, their wallet becomes too fat.

It’s this weird place where the best people naturally kick themselves out of it.

This is why opportunity prevails.

You simply have to be willing to get out there and find it, you have to not only dive into the world of small caps - but you have to know a lot of them.

Buffett went through thousands of pages of Moody’s Manuals to find his inefficiencies - check out this clip:

The only way you’re going to find the big inefficiencies that give you 50% returns is if you’ve turned over all the rocks.

If you don’t know where to start, pick an index, sort it A through Z, and get reading.

Ok, we need passion and we need to go small, but what are we actually going to buy?

Do we need to be old-school Buffett Partnership kind of investors? Or Wonderful businesses at fair prices kind of investors?

Well, maybe both.

Step 3: Buy Cheap (But don’t ignore good)

Buffett says that he’d look for Ben Graham style stocks. But - and it’s a big but - he wouldn’t ignore a great business if he was sure of its prospects.

This is what a lot of people miss.

He goes into it below - it’s a must watch:

From what I read online, there are two different groups of Buffett disciples.

There are the cigar butt investors digging through the micro caps, scuttlebutting there way into gaining an informational advantage.

And then there are the quality investors who seek a wonderful business at a fair price, likely a large cap with a very long history.

They both have the same idol, but they couldn’t be more opposite.

It seems these two groups might benefit from a little mingling.

As he said in the video, he’d buy a bucket of Graham style stocks - but he isn’t stubborn - if he found a wonderful business he’d buy that too.

There’s so much segmentation in investing. Are you Large Cap? Micro cap? Value? Quality? Momentum? None of this makes sense to me.

There is only one type of investor I want to be: an enterprising investor.

Don’t tie yourself to a particular area, buy a net-net and then buy a ‘compounder’. It isn’t blasphemy to be adaptable, even if fellow investors think you’re betraying the strategy. Seek returns wherever they may be.

There Is Always Opportunity

The opportunities are out there right now

Some excellent accounts are digging out obscure names as we speak:

Dirtcheapstocks

The Rational Formula

Noel Wieder

The Mikro Kap

to name a few.

If you’re willing to look hard enough, you’ll find some pretty spectacular stuff out there.

A stock that’s been on my ‘to research’ pile for almost a year now is a tiny business called Westell Technologies.

Debt free, low single-digit PE, way below book value - the whole lot.

Life’s been busy - I never got round to it…

It’s up over 100% so far this year.

The inefficiencies are out there, always.

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Writing this post has excited me.

We are clicks away from these opportunities, there is nothing stopping us from getting the returns right now - it just requires a lot of digging.

All the information we need is public, we don’t need to be in the hustle bustle of London or New York. We don’t need to meet with management, we just need to read, a lot.

It’s all freely available at the click of a finger.

But remember, to get what you want, you need to deserve it.

If you haven’t put in the work, if you haven’t turned over all the rocks, if you haven’t learnt accounting, then you probably don’t deserve it yet.

But if you do the work, those 50% returns are waiting for you.

I don’t know about you, but I’m off to go and turn over some rocks.

I hope you’re also leaving with a little fire in your belly to go and fish out those inefficiencies.

Happy digging.

p.s - Thank you so much for the support recently, the growth has gone beyond what I ever imagined. It means a lot to me.

Sincerely,

The Intellectual Edge