What are we reading?

  1. Amazon’s artificial intelligence flywheel (here)
  2. By the numbers, the rise of monopolies (here)
  3. An under-appreciated edge (here)
  4. The ugly scandal that canceled the Nobel prize (here)
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Buffett Partnership — in Today’s context

The initial piece below in italics is adopted from buffettfaq.com

According to a business week 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?

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/share when it was earning $20/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/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 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 50’s. 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.

If you are an investor in a market like India today, would this is applicable to you? What would be the things that would work for you and things that would hinder you…

  • Value investing works everywhere globally however it is the margin of safety that varies across the different region
  • In a country like India, where investor protection is very low, value traps and dubious management are the norm of the day, the statistical bargains  become a whole lot more riskier with the probability of permanent loss of capital increasing
  • The statistical bargains that Buffett talks about relies on two sources of safety — cheapness and concentration like he did in his partnerships. Even with these, it looks tough to create alpha without good investor protection. When one studies the Buffett partnership model carefully, Buffett created alpha through workouts and generals and in some cases, the generals that got  converted into workout e.g. Sanborn maps, Dempster and to some extent Berskhire Hathaway (though history ensured that Berkshire had a different fate) Without the strong investor protection, it is doubtful whether similar situations can be worked out in India
  • Other sources of Margin of Safety like quality, moats, superior business models, management with the backwind of a market like India where alpha has been created over a long period of time might have better probabilities of success. If one were patient and did not worry much about volatility and could handle concentration, the odds of success in the market magnifies several points over. It might be possible to replicate the sort of success Buffett had in India though with different sources of value than he did in the 50’s but it definitely won’t be a walk in the park like Buffett makes it sound.