How Would Warren Buffett Invest If He Were You

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BigFatPurse held the Value Investing Mastery Course (VIMC) Graduates Gathering on 7 Nov 2015. It was heartened to see majority of the registrants turned up despite the rain. The VIMC has completed its 43rd run and saw 1,400 graduates to date.

VIMC Grad Gathering 2015

The Gathering was important to reiterate why we invest the way we invest.

In the midst of myriad opinions about the best way to invest your money, it is very important to anchor ourselves in sound investment philosophy and not succumb to heresies.

Time and again, I have not found an approach that is more suitable for the retail investor other than what Benjamin Graham’s wisdom have left us with. It was a very good balance between risk taking and reward. In other words, one could not possibly lose every single cent of his capital (without leverage and have proper diversification) and yet achieve more than 10% returns per annum in the long run.

More often than not, you would have to risk every single cent, or even more, if you want to achieve a higher percentage return by taking on leverage. It is a risk I do not think is sensible to take.

Many investors aspire to invest like Warren Buffett. But our take is that Buffett has a large capital and deep knowledge about the world in order to make accurate concentrated bets in a few companies. I am afraid that many investors would fall short and lose a lot of money if they ‘think’ they are investing like Warren Buffett. There is a vast gap in terms of Buffett and the man on the street. And Buffett also have a lot more resources and access that the retail investors do not enjoy.

What if we can strip away majority of Warren Buffett’s wealth to just a few million dollars. Would he still invest the way he does? Or will he do it differently?

We showed a video during the Gathering, which was a recording of Buffett’s reply to this question from his audience. You should watch it in just 3 minutes and I will pick out 3 things that he has said.

Point #1

“If I were working with small sum, I certainly would be much more inclined to look among, what you might call the classic Graham stocks.”

Buffett acknowledged that he would be more likely to invest in Benjamin Graham’s principles of stock picking. These stocks tend to be small companies, in unsexy businesses and may even have problems attached. This is a far cry from the big, glamorous companies with competitive advantage which Buffett was known for investing.

Point #2

“I would be doing far better percentage wise if I am working with small sums, there are just way too many opportunities.”

The reason to use Graham’s approach was because Buffett would be able to get a higher percentage gains, than he would if he stuck with the big companies he usually invest in. There are a lot more small companies he could buy and make money. But he cannot invest in small companies when his capital became much larger.

Point #3

“I bought a large number of stocks in small amounts, in companies whose names I couldn’t pronounce. But the stocks as a group were so cheap, you have to make money out of it, it was Graham’s kind of stocks.”

Graham’s principle was to invest small amounts in many companies. It doesn’t matter what businesses they are in as you do not need to do in depth research. In Buffett’s words, he didn’t even know how to pronounce the names, lest to say what the companies do. Due to the large number of stocks, it no longer matters if a few of these companies eventually go bust, but there will be some winners that would more than cover the losses. As a group, or as a portfolio of stocks, it would be an overall gain for the Graham investor.

Conclusion

I am not sure if you catch the essence of Buffett’s words.

The reason the Graham’s method still works today is due to the fact that majority of the investors do not want to, or are unable to, implement the philosophy. If most people are doing it then we would have lost the opportunities.

Success works in a weird way, it always reward those who are able to do the uncomfortable, consistently. If you are investing in stocks that you feel ‘safe’ and comfortable because many people are invested in it, you might just be doing it wrong.

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Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.
  • It’s amazing that more investors don’t get this. Even value investors have a tough time venturing into the smaller areas of the market. I don’t know if that’s fear or ignorance… or if they just want to invest along side (or be one of them?) investment legends.

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