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Warren Buffett continues to impress investors with his foresight and prescient stock-picking skills. How does he do it? Is there a secret behind Buffett's investing style? Buffett is probably asked this question at nearly every annual Berkshire Hathaway meeting since they began decades ago.
We found an old recording of a Q&A session of a Berkshire Hathaway annual meeting, where Buffett was asked about something that's extremely relevant to beginner investors today.
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Buffett's 29% Returns Vs. Just 7% For The Dow
A listener mentioned that Buffett's top performance came in from 1956 through 1969, when he returned 29% annually compared with just 7% for the Dow. He reminded Buffett that back in the day his investing approach was to look at many undervalued stocks with "less attention" to long-term economics and sell them quickly. However, according to the fan, Buffett later changed his approach to investing in undervalued companies with strong businesses and holding on to them for the long term. He asked the Oracle of Omaha his key question:
"If you are investing a small sum today, which approach would you use?"
What Would Buffett Do In Today's Market With A Small Investment?
Here's how Buffett started his response:
"I would use the approach that I think I am using now of trying to search out businesses where I think they are selling at the lowest price relative to the discounted cash that they would produce in the future."
The Benefit Of Having A Small Investment
Buffett said more than once during his response that having a small amount of money to invest expands the "universe" of potential opportunities and "ideas."
Buffett's Performance Was 37 Points Better Than The Dow In A Decade
The audience member mentioned that Buffett's best returns came between 1956 through 1969.
Buffett corrected the listener, saying his best performance was before that.
"From right after I met Ben Graham in early 1951, but from the end of 1950 through the next ten years, actual returns averaged about 50% a year and I think they were 37 points better than the Dow, or something like that."
Buffett's Process of Investing $10,000 – $15,000 In A Company
How was Buffett able to post those returns? He said that at that time he was working with a "tiny, tiny, tiny" amount of money.
"So I would pour through volumes of businesses and I would find one or two that I could put $10,000 or $15,000 into; they were ridiculously cheap."
Buffett said that as the money increased over time, the "universe of possible ideas" started shrinking "dramatically."
He also said that those times were also "better" in terms of investments.
Buffett Says You Can Still Make "Very Significant Sums"
"If you are working with a small amount of money, with exactly the same background that Charlie and I have, the same ideas, same whatever ability we have, you know I think you could make very significant sums."
Buffett repeated that as soon as the money goes into "millions" or "many millions," the curve of returns "falls off" quickly.
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How Did Buffett Find Undervalued Companies?
Buffett also said that when you have opportunities in which you'd put millions, there would be a lot of competition. The billionaire also emphasized the importance of doing hard work.
"When I started, I went through the pages of the manuals, page by page, I might have gone through 20,000 pages in the Moody's industrials, transportation, banks and finance manuals. And I did it twice."
However, Buffett said that this method would not be practical when you are investing millions of dollars.
"You Will Find Some Things"
"If you are working with a small sum of money, and you are really interested in the business and willing to do the work, you will find something. There's no question about it. You will find some things that promise very large returns compared to what we will be able to deliver with large sums of money."
Charlie Munger's Advice: Look For "Obscure" Stocks
After this comment, Buffett requested Charlie Munger to share his thoughts on the topic. Munger agreed with Buffett and said if you have a limited amount of capital, you should be looking at "obscure stocks" and "unusual mispriced" opportunities.
Buffett said that during bull markets some people begin to think that making money in the stock market is easy. He said that he knew some people starting hedge funds while based on their track record and ability they should be "mowing lawns."
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This article Warren Buffett Shares Secrets To Making 'Very Significant Sums' With Small Investment — 'You Will Find Something, There's No Question About It' originally appeared on Benzinga.com