Could Buffett Earn 50% Returns in Today’s Market?

Warren Buffett is on record as saying he could earn 50% annual returns today if he were working with much smaller sums of money. Here’s a good blog on his statements on the matter from Valuevista.

Warren Buffett — 50% Returns
Much attention has surrounded reports that Warren Buffett said he could generate 50% returns on small sums of money. Typically, three immediate questions arise:

Did he really say that? Did he really mean it? And, how would he (or me or my favorite money manager) do it?

Looking at the record of his comments, it’s pretty clear that he said it (and repeated it) and he really means it.

Buffett seems to have got the set this ball rolling in 1999. At that year’s BRK shareholder meeting, he was asked:

Shareholder: Recently, at Wharton, Mr. Buffett, you talked about the problems of compounding large sums of money. You were quoted in the local paper as saying that you’re confident that if you were working with a small sum closer to $1 million, you could compounded at a 50% rate. For those of us not saddled with a $100 million problem, could you talk about what types of investments you’d be looking at and where in today’s market, you think significant inefficiencies exist?

Buffett: I may have been very slightly misquoted, but I certainly said something to that effect. I talked about how I polled this group of 60 or so people I get together with every couple of years as to what rate they think they can compound money at if they were investing small sums: $100,000, $1million, $100 million, $1 billion, etc. And I pointed out how the return expectations of the members of this group go very rapidly down the slope.

But it’s true. I could name half a dozen people that I think can compound $1 million at 50% per year — at least they’d have that return expectation — if they needed it. They’d have to give that $1 million their full attention. But they couldn’t compound $100 million or $1 billion at anything remotely like that rate.

There are little tiny areas, as I said, in that Adam Smith interview a few years ago, where if you start with A and you go through and look at everything — and look for small securities in your area of competence where you can understand the business and occasionally find little arbitrage situations or little wrinkles here and there in the market — I think working with a very small sum, there is an opportunity to earn very high returns.But that advantage disappears very rapidly as the money compounds. As the money goes from $1 million to $10 million, I’d say it would fall off dramatically in terms of the expected return — because you find very, very small things you’re almost certain to make high returns on. But you don’t find very big things in that category today.

(continue reading)

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3 thoughts on “Could Buffett Earn 50% Returns in Today’s Market?

  1. market folly

    He could if he wasn't investing billions and instead was investing a million or tens of millions. I always recall quotes from him on the notion that smaller AUM = better for amassing great returns. Not to mention, there's been studies of smaller AUM hedge funds outperforming their larger peers and many attribute it to their ability to be nimble and that their investment scope is much wider. Larger firms can only take x% stake in a company before they start owning a huge chunk of it.

    Good stuff as always! Will be putting it in my weekly linkfest.

    Jay
    @marketfolly

    Reply
  2. sandy

    its not that the small caps are more undervalued but they are more inefficiently priced and that is very well explained in joel greenblatt's book

    Reply
  3. Pingback: Small Stock Investing: The Path to Riches? | GregSpeicher

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