I could make 50% per year

[DesertCat]

[ QUOTE ]
I really dont think this is that bold a statement. The problem is I dont think there are any smart professinal investors that would spend their day managing 1 mill.

[/ QUOTE ]

Totally agree. But I think it's an inspirational quote if you are a relatively small investor who seeks to follow in his footsteps (value investing), it makes you think about what your goals should be (Of course if you can't work at it full time, you need to set the bar a bit lower).

One of the reasons I posted this, was that it had caused me quite a bit of soul searching. My returns last year were disappointing. I knew they were going to be most of the second half of the year, but only today did I sit down and calculate my end returns (I've been afraid to). The fact that I fell so short of what I think is an achievable goal is pretty distressing. It's depressing much money I feel I left on the table. And I know the cause of my under-performance. I simply didn't work hard, I essentially coasted after a strong first quarter.

One end result is that I've quit playing poker. Last year I had difficulty juggling my "job" and the time I spent playing. Inevitably, what should have been my first priorities, always got deferred so I could get to the casino that day. I decided to quit on Thursday, and I actually feel very liberated and excited by what this year may bring. I believe it's impossible to achieve anything special in life without working at it. For a while I tried fooling myself that that I was so good I was an exception.

There is my confession. I'm a big lazy fat fraud who poops his pants (and played too much poker).

[dc_publius]

I am not quite sure why everyove loves Buffett. I looked at the performance of Bershire over the past 20 years, and remember being not impressed. Most of the gains come from one or two stocks. (Someone correct me) I guess one could say that picking that one or two stocks is why he is good, and I suck, but to me this is an issue of diversification and taking on bigger risk for bigger returns.

I haven't calculated my investment returns, but it's close to 50% not because I'm awesome, but because I'm not diversified and I have a big stake in FXI. My biggest problem is pulling the trigger, I need to invest more and maybe go back to daytrading and swing trading. 5.5% risk free savings accounts are OK, but will not get me to where I want to be in 10 years. I was a finance major, so not having a standard portfolio is especially embarassing. That's my confession. (I also should've put more time into this than poker.)

[Magic_Man]

[ QUOTE ]
Warren Buffett: "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."

Nice writeup about a college kids visit with Warren Buffett.

Boy do I feel like I've been slacking off. I didn't do anything close to 50% last year!

[/ QUOTE ]

Motley fool quotes this about every month and claims that he specifically said that he could earn 50% only if he was working with a small amount of money. They claim that he would plan to invest mostly in small-cap stocks where the market is more likely to be inefficient.

[technologic]

from what i understand, what he seems to be indicating is that he makes money off market inefficiencies, and betting off of people's fear.

wouldn't it be harder to get sick returns nowadays, because all the information about companies and such are so much more transparent? ie wouldn't it be a lot easier to get 50% returns in his hayday than it is now? or are there still lots of opportunities available (and will be indefinitely)?

[DesertCat]

[ QUOTE ]
I am not quite sure why everyove loves Buffett. I looked at the performance of Bershire over the past 20 years, and remember being not impressed. Most of the gains come from one or two stocks. (Someone correct me) I guess one could say that picking that one or two stocks is why he is good, and I suck, but to me this is an issue of diversification and taking on bigger risk for bigger returns.


[/ QUOTE ]

Well, they love him because he's probably the greatest investor of all time. He started with a newspaper route and essentially using the proceeds, his intellect, and OPM turned it into $45B just from investing in the stock market. We all can't invent DOS, or the Macintosh, but we all invest in the stock market, so he's shown what is possible.

And if you think he's done it taking excess risk, think again. He's done it being fairly conservatively, as I said before he's wasn't using margin debt to juice returns. For example, Berkshire Hathaway has only had 1 losing year out of 41 (using book value). His partnership had zero down years out of 12. The annualized return for the partnership was 31.6% (before fees), and Berkshire's 41 year performance is 21.5% (after all fees and taxes). When you combine the annualized returns with the extremely low variance, that's an amazing demonstration of skill at work.

Much of Berkshire's performance has been done while it's been pretty large, my guess is that Berkshire's net worth broke a billion dollars around 1980. Net worth increased 48% in 1998, making Berkshire worth around $75B. The bigger the portfolio, the harder it is to find outsized returns. Over the last 7 years since then his returns have been mediocre, but he's still been beating the S&P.

And Buffett believes a focused portfolio (the fewer holdings the better) offers better returns and lower risks. Essentially his quote is from Mark Twain "put all your eggs in a single basket, and watch that basket!". The reasoning is it's much safer to have a portfolio of your best 5 stocks bought at a large discount to their true value and that you know very well, than 50 random stocks you know a little bit about and that you bought at market price.

Remember, that's how a value investor thinks. If you are a trader, you can ignore that advice. Your diversification needs are much different and someone like Mr. Now will give you better advice.

And I think Berkshire has been far too large over the last 20 years for his portfolio to be very focused, and I doubt single stock picks had too much influence on his returns. Much of his returns these days comes from buying companies outright, and capturing their cash flows. There simply aren't many public companies large enough for him to be a 5% shareholder in.

Of course, the point of this thread is that size reduces returns, so much that Buffett believes 50% per year is reasonable for small (million dollar) portfolios run by an effective value investor. Buffett's job now is to beat guys like Bill Miller and the S&P index, and I think he's been doing both handily. But I doubt he'll ever see 20% returns on a regular basis again.

[DesertCat]

[ QUOTE ]
from what i understand, what he seems to be indicating is that he makes money off market inefficiencies, and betting off of people's fear.

[/ QUOTE ]

He's saying that the market is less efficient in microcap and small cap stocks, than it is in big cap stocks. Fear, Greed, all those things that lead to inefficiencies, are more pronounced with tiny market cap companies. The skill of analyzing the value of those companies is more useful and gives you a bigger +EV edge.


[ QUOTE ]

wouldn't it be harder to get sick returns nowadays, because all the information about companies and such are so much more transparent? ie wouldn't it be a lot easier to get 50% returns in his hayday than it is now? or are there still lots of opportunities available (and will be indefinitely)?

[/ QUOTE ]

I don't think much as changed, ISF explains it pretty well. If you are a professional who can crush the market with $1M, you aren't likely to have $1M very long. You'll not only grow that $1M fast, but you'll also add clients. Pretty soon you'll be running $100M, and those little opportunities will be too small for you.

I think that creates a constant cycle of regeneration that keeps only a limited amount of professional full time money in the microcap areas. The "winners" move up to higher limits, essentially.

I sometimes wonder if some quant fund will come up with some programs that can scalp small profits from hundreds of little value opportunities, like they do with trading algorithms. But making a value decision is still an imprecise art that requires making a judgment from accumulated experience. It would be very difficult to program a computer to do it. It's probably too much work for too little reward in the microcap arena.

[pig4bill]

[ QUOTE ]
from what i understand, what he seems to be indicating is that he makes money off market inefficiencies, and betting off of people's fear.

wouldn't it be harder to get sick returns nowadays, because all the information about companies and such are so much more transparent? ie wouldn't it be a lot easier to get 50% returns in his hayday than it is now? or are there still lots of opportunities available (and will be indefinitely)?

[/ QUOTE ]

It was easier in the go-go 90's, when you could make 40 points in one day on one stock, but talented and skilled traders can still make good money today.

As for information being transparent these days, nothing could be further from the truth. The amount of deception and misdirection in the markets these days make the WSOP look like a kiddie game. The internet and the information age have made it so much easier and faster to get false information and rumors out. Knowing how the game works, I could make millions if I didn't mind being a criminal.

[Thremp]

pig4bill,

Non-extradition countries FTW.