How Warren Buffett Made 50% Returns During His Partnership Days | Warren Buffett's Investment Strategy Explained
We’re a few weeks away from releasing the February Value Ventures research report. If you’re not familiar, Value Ventures is our premium value investing research service. We cover deeply undervalued, off-the-beaten-path stocks that nobody’s talking about. In fact, in most cases, we’re the only ones researching these stocks. I’m talking about zero sell-side analyst coverage. I’m not trying to sound like a salesman when I say that you won’t find the stocks we cover at Value Ventures anywhere else. We designed it for that reason. Anyways, this month I’m featuring two of my most interesting ideas from one of the cheapest parts of the world. In order for us to generate superior returns, we need to do two things:
- Look where nobody else is looking
- Fish where the fish are
Let’s flesh these ideas out. “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.”…would you say the same thing today?” - Warren BuffettLook Where Nobody Else Is LookingBuffett spent most of his early Partnership days buying and selling undervalued micro-cap stocks. Most times, these stocks had little liquidity and a nonexistent following. These weren’t the kind of companies you’d hear at cocktail parties. Yet it was this strategy, looking in the forgotten corners, that helped Buffett generate 50% annualized returns. Read the above Buffett quote again. Why is he so confident he could generate 50% returns with smaller pools of capital? Here’s his answer (emphasis mine): “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.”That’s what Value Ventures is all about. Turning over a lot of rocks to find little anomalies. We’ve taken Buffett’s approach above and applied to the global investing landscape. There’s over 20,000 international stocks, most of them small-micro caps. It’s in these corners where we find ridiculous ideas. Ideas like the two we’re profiling next month. If everyone’s looking in the US, head elsewhere. Venture outside your own borders. There’s no excuse to not look at other countries’ companies. Tools such as onlinedoctranslator make it easier than ever to read foreign languages. When Buffett invested in South Korean stocks, all he had were the financials. He didn’t read management’s reports. Now you have that power. This idea, looking where nobody else is, lead us at Value Ventures to a country with one of the lowest P/Es on the globe. A country ripe with industrialization, prime investment opportunities and solid political leadership. Fish Where The Fish Are“Now there are various ways to look for value investments, just as there are various places to fish. And the first rule of fishing is to fish where the fish are […] The first rule of value investing is to find some place to fish for value investments where there are a lot of them.“ - Charlie MungerI like to fish. A few years ago my friend and I found a quiet, secluded section of a river behind his house. We spent the next three summers reeling in bass after bass. We couldn’t buy enough bait! Yet over time, word spread about the success we were having at our watering hole. It was only a matter of time before the spot dried up and our streak ran out. Replace “fish” with “cheap stocks” and you’ve described how most value investors feel about US markets. This is lazy thinking. I know. That sounds harsh, but it’s true. Here’s why. Like a fisherman can move down (or up) stream to find more fish, so too can a value investor move to different markets. Heck, you don’t even have to leave the US to find good ideas. Stop searching in the most liquid and most followed spaces of the US markets. A simple climb down the liquidity or market cap ladder reveals dozens (if not hundreds) of companies trading at substantial discounts to intrinsic value. At Value Ventures, we fish where the fish are. We never leave the smallest, darkest, most illiquid spaces because we know that’s where the opportunity is. We know these spots won’t fall victim to over-fishing. We stay small, we stay nimble. A Preview of Our Next Fishing HoleWe’re excited about the current opportunity set in this cheap, under-the-radar fishing hole. And tomorrow, we’re letting you know exactly where that is. In the mean-time, I’ll whet your palate with a few statistics that should get you excited.
- This country ranks as the 2nd best place to invest (as of Feb. 2019)
- This country has a pro-business government and incentives are aligned for business growth
- This country’s GDP grew during 2009 while the rest of Europe crumbled
- This country has an average P/E of 12x
Keep your eyes open for tomorrow’s email!Also, if you’re interested in our Value Ventures research service, then make sure you check out this page to learn more about it. That’s all I got for today. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Tell Your Friends!Do you love Value Hive?Tell your friends about us! The greatest compliment we can receive is a referral (although we do accept Chipotle burrito bowls).Click here to receive The Value Hive Directly To Your Inbox!
