Saturday, 13 June 2015

Warren Buffett’s Greatest Competition

There’s no disputing that Warren Buffett is the best investor of all time. His net worth speaks for itself. In fact, there is only one person in history worthy of comparison.

That person is young Warren Buffett.
Young Warren Buffett Public Speaking
Let’s take a look at the numbers Buffett achieved in the 1950s and 1960s compared to his performance thereafter.
From 1957 to 1969, Buffett achieved an average return of 29.5% and a cumulative return of 2794.9%!
In this timeframe, the Dow had a negative return in 5 out 12 years. Buffett had a positive return in all 12 years, with his most successful year, 1968, reaching a remarkable 58.8%. That beat the Dow by more than 50 percentage points.
This was the pinnacle of Buffett utilizing the strategies of Benjamin Graham and investing in net net stocks. He focused on the best possible NCAV investments, such as Western Insurance Securities Company, and often chose fairly concentrated portfolios. Once he found the stocks, he simply puffed the cigar and celebrated his victories.
Back then, finding these valuable, cheap companies was difficult. Young Warren Buffett had to do his own research and put in relentless man-hours. He spent months combing through Moody's stock manuals to find a handful of available net nets. Today, you can find a good selection of high-quality international net net stocks by signing up for free net net stock picks or, even better, opting for full access to Net Net Hunter.
For comparison, between the years of 1965 and 2014 when Warren Buffett became a behemoth, Berkshire achieved a compounded annual return of 19.4%, over 10% less than the best years of his investment life. And, these numbers were heavily boosted by the returns young Warren Buffett achieved in the late 1960s. During this timespan, he also had a few negative years and a few more in which the S&P 500 outperformed his portfolio.
A return of 19.4% annually is nothing to sneeze at. Most investors do worse. Still, 84-year-old billionaire Warren Buffett wouldn’t last a round in the ring with his agile, quick-footed 30-year-old self. At a Berkshire Hathaway annual meeting, he admitted it:
"Yeah, if I were working with small sums, I certainly would be much more inclined to look among what you might call classic Graham stocks, very low PEs and maybe below working capital and all that. Although -- and incidentally I would do far better percentage wise if I were working with small sums -- there are just way more opportunities. If you're working with a small sum you have thousands and thousands of potential opportunities and when we work with large sums, we just -- we have relatively few possibilities in the investment world which can make a real difference in our net worth. So, you have a huge advantage over me if you're working with very little money." – Warren Buffett
You have thousands and thousands of potential opportunities that Buffett does not! By being able to invest in net net stocks, classic Graham stocks, you have a huge advantage over the Oracle of Omaha.

Following Benjamin Graham and a Young Warren Buffett

So, this brings us back to the beginning. A young Warren Buffett risked everything and hopped on a train to Washington D.C. to work for Benjamin Graham, the father of value investing.
In 1954, he accepted a job at Graham’s partnership for a starting salary of $12,000 a year. Under Graham’s tutelage, he fine-tuned his ability to spot promising net net stocks, as opposed to merely cheap stocks.
Both are obviously value stocks, but cheap stocks can be any stock where the current price is lower than the underlying intrinsic value. Net net stocks are valued purely on their net current assets. That’s cash, accounts receivable, and inventory minus total liabilities, preferred shares, and various off-balance sheet liabilities. Working capital. This is better known as the NCAV, or Net Current Asset Value.
If the stock price was 2/3 of the NCAV, Graham would buy. When the stock price returned to the full NCAV, Graham would sell. Assuming he found a good net net stock, his downside is protected by the discount to net liquid assets, providing a huge margin of safety. It’s such a solid strategy that you, as a small investor, don’t really have to know a thing about the industry. By comparison, Buffett went into textiles in a major way and lost his shirt.
There have been multiple studies that show Graham’s strategy consistently shows returns of a basket of net net stocks in the 20-35% range. From 1970 to 1983, an investor could have earned an average return of 29.4% by purchasing stocks that fulfilled Graham’s requirements and holding them for at least a year.
Buffett himself, using Graham’s strategy, stated that he would see returns within a 2-year timeframe 70 to 80% of the time. He would take a puff and sell instead of collecting boxes of cigars and waiting for them to appreciate in value.
Despite the simplicity of his approach, it seems most investors ignore the stocks that Graham would have most coveted. Investors nowadays want to invest as if they’re billionaires, choosing a wide range of large cap stocks and holding on to them until retirement, death, or the next big market crash.
Going against the market takes conviction and faith in your approach, something both Graham and Buffett had in spades. Smart value investors don’t brag about owning Apple or Google. They talk about small wholesale electronics factories and unknown retail companies. They are excited about international microcap stocks in Japan or Australia.
If you’ve read this far, you’re not Warren Buffett, the immobile billionaire. You’re young Warren Buffett, the wide-eyed investor hopping on a train heading toward immeasurable wealth.

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