Investment PhilosophyShareholder Letters & ReportsSuperinvestorsWarren Buffett

Buffett on How to Think About Stocks

“Investment is most intelligent when it is most businesslike”. – Ben Graham, The Intelligent Investor

This is the time of year that I always look forward to for a variety of reasons. Spring is near in my area of the United States, college basketball tournaments will be captivating audiences around the country, the azaleas will soon be in full bloom at Augusta National Golf Club (the site of my favorite golf major), and my personal favorite: the slew of annual reports and shareholder letters that begin making their way across my desk and into my email box.

Annual Report Time

I receive a lot of reports, but there are a few that I really look forward to reading each year. Last week, I mentioned the Eddie Lampert letter, which is always interesting. Here are a few others that would be #1 or #2 seeds if I were to assemble my own “bracket” of quality shareholder letters:

It’s hard to single out just a few, but the above “Big 4” are certainly four of my favorites. I love the business model that Berkshire, Markel, and Fairfax use–as float can be an incredibly significant source of value creation when used by quality managers with sound business and investing principles. It’s hard not to get excited about quality underwriting that creates permanent low/no cost capital to be invested by quality investment managers. And aside from those three firms, M&T is a bank with a history of top-tier returns on equity–and one of the highest quality banks around. There are many others I anticipate as well: some quite small (here is an excellent series of letters from a tiny, high quality bank), and some quite large (Jamie Dimon’s letters to JP Morgan shareholders are always great).

But the Markel, Fairfax, M&T, and Berkshire letters are always at the top of my list. As an aside, those four firms have managed to compound shareholder value at extremely high rates (15-20% annually) over multi-decade periods, so it’s worth reading about how management thinks.

Of course, Buffett’s letter is most famous, and for good reason–despite the ubiquity of Warren Buffett, he still continues to impart incredibly valuable wisdom every time he speaks/writes to the business and investing community.

There are lots of posts summarizing Buffett’s letter. I won’t bother to add my two cents–as I think the letter itself should be read in full. But I did want to comment on one aspect of the letter I found interesting…

How Buffett Thinks About Stocks

Shortly before the letter was released, Fortune released a “sneak peak” of the letter that contained the section where Buffett describes two personal real estate investments. I often get emailed questions from novice investors who have a desire to learn more about investing and want to understand the conceptual aspects of value investing better. I though that this part of the letter did an excellent job at exemplifying the importance of the some of the key fundamentals of stock investing. Interestingly, Buffett did this by discussing two real estate investments that he did with personal (non-Berkshire) money.

I really recommend reading the full letter, but for beginners interested in developing your own investment philosophy, read the Fortune piece, as it will help you understand the importance of having a long term time horizon as well as the importance of viewing stocks as businesses, and not pieces of paper to be traded back and forth. I actually sent this letter in a note to my own investors, as I think it’s an excellent summary of how I think about the stock market. If you manage your own capital, this is how you should think, and if you hire outside advisers to manage your investments, this is how they should think.

Some (Buffett) Thoughts on Investing

Here are a few snippets of this part of the letter:

The Farm

  • Buffett purchased a Nebraska farm in 1986 for $280,000
  • The earnings from the farm provided him with a 10% annual cash flow return
  • Buffett estimates the farm is now worth 5 times what he paid for it (5.9% CAGR)
  • Earnings have tripled
  • So the estimated 6% annualized appreciation, plus a solid (and growing) annual earnings yield adds up to a superb 28 year investment

The Manhattan Building

  • Buffett (with a few partners) bought a foreclosed retail building in New York near NYU from the Resolution Trust Corp in 1993
  • The property improved occupancy rates as the market recovered and earnings increased, allowing Buffett and his partners to refinance the building, drawing out roughly 150% of what they invested (so they got their initial investment back–and then some–and kept the cash flowing asset)
  • The property now provides annual earnings dividends equaling about 35% of the initial equity investment

From these two relatively simple real estate investments, Buffett made the following points:

Buffett Point 1

Buffett Point 2No advanced spreadsheets, no macro forecasting, no earnings models, just some sound principles, common sense, and conservative analysis. Buffett mentions his philosophy–which is probably oversimplified because of the point he’s trying to drive home, but still worth remembering:

“When Charlie Munger and I buy stocks — which we think of as small portions of businesses — our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings — which is usually the case — we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.”

Buffett ends this portion of the letter by paying tribute to Graham, and mentioning an interesting example that Graham used in the 1949 edition of the Intelligent Investor. That year, Northern Pacific, a railroad stock, earned $10 per share and traded at $17 (a P/E of 1.7). This company had a market cap of $40 million, and is now part of BNSF (a Berkshire owned railroad, which earns $40 million every 4 days, according to Buffett).

I thought this part of Buffett’s letter was excellent, and I hope you enjoy it and take the time to read it. I’ll leave you with a chart that I never get sick of looking at… Have a great week:

Buffett Results 1

Buffett Results 2

35 thoughts on “Buffett on How to Think About Stocks

  1. John,

    The NYU-proximate real estate purchase and the farm seem to be part of Buffett’s private book of business transactions. It is clear from The Snowball and other texts that Buffett lived off of the proceeds from a separate trading/investment portfolio which allowed him to leave the money invested in his partnerships and eventually BRK completely untouched, free to compound unencumbered.

    Do you have any info on what other kinds of transactions occurred in Buffett’s “side pocket” over the years? It’s really unclear how he supported a growing family, bought a home, etc., without earning income from his partnership investments.

    1. From what I’ve heard, Buffett had a 2 and 20 type of arrangement at Buffett partners and has always received a salary. I don’t think that providing for his family has ever been an issue.

      1. Hi John,
        Buffett started his partnership on May 6th, 1956 with $105,100. (The $100 was his personal money, the rest was from friends and family). He used a few different fee structures over time, but none of them had any management fee, and all of them had a hurdle rate–meaning he didn’t make any money unless his partners made money above a certain hurdle (usually 4-6% annually). The very first partnership had a 4% hurdle rate and a 50% incentive fee (Buffett took half, his partners took the other half of the profits above that hurdle). I think he quickly changed the incentive fee to around 25% for his next few partnerships, and the fee structure varied over time. But you’re right, Buffett was basically already rich when he started this. He had around $174,000 of personal capital by the time he was 26 (about $800,000 or so in today’s dollars). This came mostly from incredible investment returns he made between ages 20 and 26.

        Not sure what you mean by salary. He never received a salary with the partnerships. He only got paid if he did well (which he did of course). He now makes a very modest salary at Berkshire.

        But the main point of the piece is how he thinks about stocks.

    2. Prax:

      Yeah he made some incredible investments in this personal account, which is now over a billion bucks. Some of these investments were disclosed in the first Buffett bio by Roger Lowenstein. That’s a great read. One Buffett friend recalled him (paraphrasing): “making $3 million very quickly” in his early days. He even dabbled in things he never would have done with Berkshire (commodity futures, the Mid-Continent Tab Card, etc…). A friend once suggested he try his hand in real estate, and he (according to Lowenstein’s book) said something like “Why should I do that when it’s so easy to make money in the stock market?”

      But in terms of how he lived, remember this… he was making 50% per year or so for 5 or 6 years prior to starting the partnership. He turned $5000 into about $174,000 in that time, which is around $800K in today’s dollars. He said he had $174K and needed $12k for annual living expenses, so he was basically financially free at 26, because his $174K would easily compound at rates of return much higher than the $12K he needed to take for bills. So he had enough to break off for the $30K Farnam St house, and even could allow Suzie to spend $15K on decorating it (which he viewed as a few million in lost money due to compounding).

      So yeah, he never needed to take any capital from his partnership interest or Berkshire, because he already had a small fortune that was growing at extremely high rates of return. I think I read from Schroeder that his Mid-Continent Tab Card investment compounded at 33% annually for nearly two decades, and that was just a portion of his private investment portfolio.

      1. John Huber,

        Thanks for the reply. I have the Mid-Continent Tab Card case study in my Google Drive and now that I think about it you’re right that it was an investment made in his personal account. I think it was a “start up” and he deemed it too speculative for the partnership portfolios.

        I just wish we knew what else was in there, like we did with the Snowball.

        The Berkshire story is amazing enough, but when you look at how he performed in his personal portfolio, seemingly across a range of investments, I think Buffett’s status as an “example” to aspire to becomes all the more distant. The guy was just in a separate league altogether.

        1. Yeah Buffett is the Tiger Woods, the Michael Jordan, etc… he’s the freak of nature in his field. He’s an absolute superstar. So when he says he can do 50% per year, he means it, and he is right. But just like Woods, Jordan, etc… we shouldn’t expect that we can replicate that. Some of us might come close, but Buffett certainly is in a league of his own. But I think studying Buffett is like studying the greats of any other field. We can certainly improve our own game tremendously by studying his work and reviewing his case studies.

          I can’t wait for Schroeder’s new book… hopefully she discusses more details about his personal investments.

        1. Thanks Evan. Mostly from the two bios (Schroeder’s book and Lowenstein’s book) along with piecing together little bits of info here and there from Buffett’s talks, lectures to students, letters, etc…

  2. Every post is just great, John. You have a clarity and brevity that is quite uncommon.

    Buffett and Graham are both rather opposed to hard assets (gold, etc) and I was curious as to what your thought process towards those aspects of investing are. From a value perspective, gold is quite the question mark considering there really isn’t any way to value it. It is purely valued by the market in a free-market sense. Do you think that gold is too easily manipulated by macro to ever be considered cheap? Because, hypothetically speaking, if gold were to be valued around production ($1250ish an oz) and there was considerable asset inflation (QE) then it could be viewed as very much a good alternative to bonds, and common stock. This is obviously more of a game-theory assessment, but I guess I have always been curious as to why opportunities like this have just been cast aside. I have thought about this since I watched a Michael Burry interview from 2010, where he discussed this and how he was also buying farmland after 2009. Also, Paulson’s continued bullishness, even through the substantial decline.


    1. Thanks Taylor. I appreciate that.

      As for gold, as well as other commodities, I would agree with Buffett in that it is only worth what others are willing to pay. I have never really understood the fascination with gold. I can more easily understand oil, or wheat, corn, hogs, etc… but gold is interesting. So hard assets can work out well…. buying apartments below replacement cost, buying farmland at cyclical low prices, etc… But it’s a different game from the compounding that Buffett likes. Buffett has always been attracted to compounding machines. He liked the idea of putting a gumball machine at a barber shop, and after doing the initial installation and some modest routine maintenance, it just continued to pay out quarter after quarter. He loved this. I think it was ingrained into his psyche early on. Other investors take more of a trader’s approach, or a liquidator’s approach to investing. They want to buy cheap and sell dear.

      There really isn’t anything wrong with either approach. It all depends on your skill set and your opportunity set.

      And yes, lots of value guys have liked gold. Even Klarman does… he owned a few different miners at one point. I’ve talked about gold before. I’ve never owned the metal, but occasionally the safe and well capitalized producers have traded down to levels that were well below the proven and probable reserves they held in the ground. I don’t particularly like these business models, as they tend to produce mediocre returns on capital over the full cycle, but occasionally they do offer opportunities to buy them well below their net asset values.

  3. I enjoyed reading Prem Watsa’s letter. A common theme among great value investors (including Prem) recently has been the belief that the broad market is overvalued. It seems the common concerns are that the CAPE10 is high, Buffett’s favored measure of Wilshire 5000 market cap to GNP is high, retail margin buying is high, etc. I have increased my cash position recently and will do so more if CAPE continues to rise to high 20s.

    1. Interesting Connelly. Yeah Prem is somewhat unique in that he takes a very defensive position at times based on some macro views. It allowed him to do very well during the credit crisis when many of the CDS positions he had soared. I’m less inclined to take a stance on the overall market, because I just find the timing aspect of investing to be the most difficult. If I had to voice an opinion, I would say the market looks to be fairly to somewhat overvalued (I don’t think we’re in a bubble, or anything like that… although there are signs of froth in certain areas like social media, tech IPO’s, etc… but overall, there are still reasonable values out there). Thanks for sharing those links.

      1. I don’t think any one can time the market. But my plan is to increase leverage a bit beyond 1 (especially when I have other income sources) when the broad market is statistically cheap and decrease leverage by maintaining a cash position of say 20% when the broad market is statistically expensive. That should be consistent with value investing and the empirical data from Shiller.

  4. excellent! i think buffet’s method does not apply to individual investors. buying great business at reasonable price is a very competitive field because i find many fund managers apply this method.

    1. Hi Lei, I think the simplicity of Buffett is what individuals should take away. Buying a farm that produces a 10% earnings yield and owning that farm for 28 years shows the value of long term thinking. I think Buffett was going mainstream with this, trying to reach individuals who play around with their retirement accounts–people that could do much better if they simply understood some basic fundamentals.

      As for those of us that try to do better than the average of a cross-section of American business results, then we’ll have to give more consideration to certain things. As for the cheap stocks vs quality businesses, I’ve always thought there are two ways to outperform by significant margins. It’s to do the Schloss method and simply own extreme cheap stocks (the kind that “sold for $15 per share with a 6% dividend with $35 per share in net current assets and no debt”… and example Schloss used in a 1972 article). If you buy extremely cheap, and simply sell when that merchandise appreciates, I think you can do well. The question is can you find enough ideas that are that cheap and safe? Quality business investors can do well also, but I think most managers underperform because they own too many stocks. They try to buy 30, or 50, or 100 of these “quality businesses”, and there just aren’t that many that are priced at levels that will allow you to exceed the averages over long periods of time. I’ve always thought those are the two ways to do it… be cheap, safe, and somewhat diversified (but you have to be extremely cheap), or insist on truly the best businesses at really undervalued prices (and this is rare so you have to be concentrated). Most fund managers hug the averages because they own too many businesses of average quality that sell at 10x earnings. They settle for the middle ground, and that won’t work over time.

      It’s very difficult to outperform the averages when your portfolio has 50 stocks or more.

      1. John,

        Playing Devil’s Advocate here a tiny bit, because I think you’re right overall with the tone and intent of Buffett’s letter, a more skeptical reader could read Buffett’s missives as a bit paternalistic and self-serving. That is, someone says, “Wow! Mr. Buffett the billionaire! How did you do it?!”

        And Buffett replies, “Well, that’s easy, you just buy farmland at a 10% earnings yield and hold it. Or you get a sweetheart deal on some NYC real estate teed up for you by your accomplished, knowledgeable friends, etc….”

        And this person replies, “Gee, seems simple enough.” Then a third person listening in points out, “But Mr. Buffett, you didn’t become a billionaire earning 10% a year on farmland, why, in your early years you made $3M quite easily on one deal and were compounding at about 50% on still others, how do you do that?”

        Buffett: “The average investor should be quite happy with 7% per year in an index fund if he just buys periodically and holds on.”

        3rd person: “But we’re not happy with 7%, we want to know how to do 50% a year…”

        Buffett: “Look, a unicorn!!”

        (Everyone becomes distracted.)

        I’m not trying to suggest he is purposefully misleading people or doing something nefarious (I’m just playing DA here, after all) but I do think it’s funny that his examples of “how to invest” don’t really seem representative of how he invested to become a billionaire. They’re seemingly hand-picked to show how a person could do slightly above average with their investments, but nothing more. You’d think the statuette of limitations would be up and some of his early investments would be declassified now and he could tell us more about how he was cranking out 50% per year, or $3M without breaking a sweat. (Yes, I realize he made some deals like that for the partnerships, too, and those were mostly disclosed in Snowball.)

        1. Hi Prax,

          How Mr. Buffett became a multi-billionaire is probably best explained by his use of float over the years.

          How he became a multi-millionaire while employing small money at great rates of return is what many of us want to know.

          When Alice Schroeder mentioned the Mid-Continent Tab Card investment in passing in one of her speeches, I wanted to hear a lot more. She had unparalleled access to WEB’s notes, but “Snowball” was already a hefty read, so the personal investments mostly ended up on the cutting room floor.

          In Alice’s new investment book, I hope hard feelings are put aside, and she shares more new anecdotes about Buffett’s personal investing outside of Berkshire.

          I understand buying and holding a farm or distressed property for the long term makes sense. To get the seed corn to make such long term investments would make for very interesting reading.

          My guess is he took part in Joel Greenblatt-like special situations spelled out in his “Genious’ book. Joel did 50% annualized for a decade at Gotham, so this is the type of investing that moves the needle for smallish money.

          1. Prax and Jim: Good comments. Yes, looking back at Buffett’s early investments (at least disclosed in Snowball)…. many of them were special situations (the Jay Pritzker cocoa bean investment skyrocketed about 5 fold or so very quickly–that’s one example of a special situation investment he made).

            I think it’s interesting to look at when Buffett actually was making 50% per year on his money (between ages 21 and 26 before starting the partnership). There is an article somewhere I recently read that lays out his actual investments… all of them are in the Snowball and can be pieced together. Buffett actually discloses his actual sharecount and yearly P&L in one letter that’s out there…

            I have a slightly different take than the norm on his performance. Many people think he made 50% by buying a bunch of Graham and Dodd cheap stuff and constantly flipping them. It is certainly true that he bought a lot of cigar butts, and his turnover was clearly much higher. But I think even at age 21, he was much different than his mentor (Graham). He understood that a quality business is more valuable. He was much more interested in GEICO than I think even Graham was (who was more interested in it because of the margin of safety–they could have liquidated it if it didn’t work out). Graham wouldn’t have likely bought GEICO as an outside minority common stockholder. He bought it as a partner and became chairman of the board. Buffett saw GEICO as a compounding machine and put 65% of his assets into it.

            If you look at his returns, I think a lot of the turnover and a lot of the cheap stocks didn’t necessarily amount to much. He made a lot of money in certain shorter term investments, but even the cheap stuff like the insurance company he bought for a P/E of less than 1 were higher quality businesses with a history of profits.

            I think he was interested in the compounders at an early age… and although he bought net-nets and cigar butts like Cleveland Worsted Mills, most of the money he made–even early on–was due to a few big winners that were for the most part–great businesses. And his partnership days, much of the same. He owned a lot more stocks, but even he admits that the big money came from just a few.

            Everyone knows about AMEX and Disney in the partnerships, but even in the 50’s, one of his first investments was Commonwealth Bank. And if you read that early partnership letter, you’ll see that Buffett wasn’t interested in it only because it was cheap. He thought that the bank was a high quality bank that was growing intrinsic value over time. I don’t think he was excited about net-nets that were not compounding IV as much as he liked the quality businesses. Everyone talks about Munger having this influence, and that’s true, but I think Buffett understood this early… even back to his gumball machine days in the barber shops.

            As for his advice, he certainly geared it toward the majority. He knows that most of the readers aren’t going to do 50% per year. Most people don’t beat the S&P in their personal accounts, or the accounts that their advisers manage for them. So I think he’s conveying the principles of long term thinking, and how important that is.

            Of course, those of us who desire better returns have his blueprint and his case studies to work on, but it’s up to us to do that work. I think he was just conveying the principles of how to think about stocks, not necessarily replicate his results…

        1. Schroeder mentioned this–I believe on her blog. I think she hinted that she plans to write a book that deals with Buffett’s investment process at some point. But nothing that’s out yet.

      2. Nice reply,

        And I agree. But investors should be able to find enough deep value stocks if they can buy tiny small firms and invest internationally. Net nets definitely are not available to larger retail investors at this market level, however.


        1. Yeah there certainly are plenty of opportunities for smaller investors. And Buffett himself did a lot of cigar butt buying when he was in his early 20’s. But even the cigar butts were run by good managers with shareholders in mind. Quality and capital allocation (management returning cash via dividends or buybacks) was key for Buffett early on. His biggest early winner was GEICO, a high quality growth company that quickly became a 10-bagger (although Buffett sold it to buy an insurance company at 3x earnings).

          But aside from GEICO, Buffett’s other early 1950’s investments for his personal account were things like a bus company that sold at $35 that paid a $50 dividend to shareholder (leaving them with more cash than they invested plus a stub worth $20). Also an insurance company run by one of the richest men in America who was buying back significant stock. Buffett started buying this illiquid stock in the 30’s, and bought all the way up to 100. And this was a high quality company with 20% ROE. And the cocoa bean special situation was a success because Pritzker was engaging in a massive buyback. So Buffett had numerous early investments that might be considered Graham stocks, but they were run by shareholder friendly management that all had a common theme–buying back gobs of stock (or paying huge special dividends). These were no-brainer type special situations. But a few of them were high quality companies.

          He owned hundreds of other cigar butts as he started his partnership, but most of the 30% annual returns came from the businesses that were producing shareholder value. And Buffett sold GEICO, which was a big mistake because even though he replaced it with something trading at 1 times earnings, the GEICO investment would have produced far more value for him. (It’s interesting to think about this… how many of us would pass up a stock with a history of profits and a P/E of 1?) These are the type of stocks that he, Walter Schloss, and Graham were finding in the early 50’s.

          Schloss mentioned a stock in 1972 that traded at $15 and had $35 of liquid net assets with no debt that paid a 6% dividend. Basically a profitable net-net with a nice dividend yield trading for less than 50% of NCAV.

          These types of opportunities more or less dried up over time, forcing Graham into retirement (he wanted to pursue other things anyhow), forcing Schloss to alter his criteria, and forcing Buffett to change his mindset altogether…

          1. “Schloss mentioned a stock in 1972 that traded at $15 and had $35 of liquid net assets with no debt that paid a 6% dividend. Basically a profitable net-net with a nice dividend yield trading for less than 50% of NCAV.”

            Interestingly, one of my current holdings is nearly exactly like this: trading at just above 50% of NCAV, a PE just above 6, improving bottom line, no debt, and a dividend yield of 9 or 10%. It certainly pays to invest in other friendly first world markets.

            From what I’ve read, Dempster Mills definitely didn’t have shareholder friendly management. I think in general you can find shareholder friendly management in NCAV stocks today, and the returns are still great. There’s a lot of crap out there in net net stocks, though, which is why I like to invest in only high quality NCAV stocks — stocks that show a solid balance sheet and have other great qualitative aspects to them such as buybacks or insider buys.


          2. Interesting Evan. Yeah I think a basket of those will work out very well. Keep up the great work!

    1. Hi Jake… see a few of the comments above for specific examples. A big investment for him was GEICO, which he owned very early, and invested 75% of his net worth into. He also owned other quality insurers at very cheap prices, along with many special situations and cigar butts.

  5. John,

    Sorry to interrupt. You mentioned that Buffett was already rich by the time he was 26. He made some pretty fascinating returns during the age of 20-26.

    What were the investments that allowed him to compound at such high rates of return?

    1. I actually have a post coming that references a few of his early investments. One of course was GEICO, where he more than doubled his money in a 12-18 month or so span and had 65% of his portfolio in. He sold GEICO to buy a company called Western Insurance, which was trading as low as 1 times earnings at various points (and actually went from $1 to $95 from 1949 to 1955… I think Buffett bought in 1953 when it was trading between 12 and 20).

      There were a few others that are discussed in Snowball and the other bio. Definitely check out Snowball. It’s an incredible book.

        1. Hi Evan, Interesting thoughts on your net nets. Thanks for the comment. I’m not sure what bio you’re referring to…

      1. Yeah it’s interesting. I’ve studied his results and his early investments. I think there is a little bit of a slight misinterpretation that he ONLY invested in cheap asset “Graham” type investments. In fact, one of his earliest investments was GEICO and he put 65% of his portfolio into it. GEICO was a growth stock, and although Graham bought it as a control situation, Graham never would have typically owned such a stock–especially after its rapid rise. And he mentioned at one of the BRK meetings that most of his 33% annual returns came from just a few ideas despite owning some 400 securities over the course of the partnerships: AMEX was one, Disney was another–these were large investments in great companies at incredibly great prices–the ideal investment. He took big positions and the investments compounded over a period of years. He owned many cheap stocks also, and on balance they did well but didn’t have the same level of impact that the big investments did. I have a post coming on a small community bank that was one of his earliest investments. And I think you can tell by reading his early letters that even in the late 50’s he was concerned about the quality of a business. He bought the bank at a Ben Graham price but he was happy holding it as it was compounding value at a rate of 8-10% per year. So he bought it at a big discount to value and that value was growing at a moderate but consistent pace. He said (paraphrasing): “We made the investment at 50 and the intrinsic value is 125. I’m not sure if it will take 2 years or 10 years for the stock price to reach fair value, but the good news is that if it takes 10, the value will likely be around 250”. I think that is a key thing that should be considered when weighting the probability of the success of a prospective investment idea: is the value growing or shrinking? If it’s shrinking, I think the probability of success is much lower than many realize.

        So what I think Buffett is saying is that he would have much greater opportunity and flexibility to look at all kinds of opportunities. He said he would look at both big and small stocks, both quality franchise type and cheap Graham type investments. He would be looking at everything.

        Basically, value investing can be boiled down to buying something for much less than what its worth. It’s an art, and it doesn’t necessarily have to be compartmentalized into specific rigid categories.

        That’s my take at least… I think being small gives investors a HUGE advantage. They can look at all market caps (large and small) and all different types of ideas. There are probably more bargains among the tiny stocks, but there are also significant bargains occasionally even in the large caps.

        Many ways to skin the investment cat!

        1. I’m really looking forward to that post.

          “…he mentioned at one of the BRK meetings that most of his 33% annual returns came from just a few ideas despite owning some 400 securities over the course of the partnerships: AMEX was one, Disney was another–these were large investments in great companies at incredibly great prices–the ideal investment.”

          Yeah, I think quality is pretty important and buying at a steep discount makes for the best returns. In my own portfolio the high quality situations have definitely moved the portfolio’s value by leaps and bounds so I can definitely see what you’re saying.

          I’m sure you’ve probably seen this but, in case you haven’t, here’s another example of the types of stocks he looked at:

          Insanely cheap, profitable, and growing. Definitely something I’d love to buy. You might be right that these are the perfect investments. 😀

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