Making 50% per year like Buffett (on small sums)

[twacowfca]

Buffet would get 50% return because he has 70 years experience in the stock market. I  believe Ericopoly on this board had a 20 000% return over the last 10 years (about 70% annualized return). You can ask him how he did it.

BeerBaron

That's my RothIRA account with that return (according to Fidelity's calculations).  And to date (as of 8/31/2010) it's 99.19% annualized for a total of 18,465% cumulative since 2/1/2003.  The FFH options had a lot to do with it.  Earlier this year the cumulative return was something like 24,000% but since end of April it has pulled back.

Blended (including my taxable account) it's 61.64% annualized since 2/1/2003 for a total of 3,709% cumulative.  The reason the RothIRA outperformed is that I manage it with a different mentality, due to taxes.  It was also a smaller sum so taking a huge risk on it didn't matter to me.

Another board member who doesn't post anymore (dengyuthenugget) has done 170% annualized since 2005 or so (perhaps it was 2004) -- overall, all accounts combined.  Again, credit the FFH options for quite a bit of that.  

Bravo, Eric.  Good show!

[EdWatchesBoxing]

Eric, that is f**kin awesome! Talk about running hot! I still remember the FFH options talk from the MSN board. I also remember dengyu and I miss his contributions.

[Uccmal]

Think about this for a minute.  If one could do this over 10 years one would grow from 100 k to 5.6 M; another 10 years and 332 M.

It is not doable.  No one has a public record of success picking stocks like this.  Even the 70 year old Warren would make misjudgements and mistakes that would reduce his rate back to 30% over a few years.  In his 50% there are several assumptions I think he has overlooked:
1) He has the intelligence of hundred companies feeding him daily information to help inform his choices today.  Without this back drop he wouldn't have nearly the handle on what the overall economy is doing as he does now.  That would handicap his results.
2) He is assuming that the competition is the same as it was in the 1950s - it isn't
3) Many of the things he did to juice his early results are much more difficult in todays climate due to competition, greater regulation etc.  The Hayden Ahmanson affair comes to mind where his lawyer pal went around Nebraska offering 100 per share.  Today the company would have been required to publicly disclose that they were planning a share buyback and were going private.   
4) Greater investor sophistication leads to fewer of the workout type things he did such as Dempster Mill, Sanborn Map.  Many fewer companies are allowed to get so cheap that they have more cash and securities on the balance sheet than the market value.  I saw one once. 
5) The baseline is higher now than the 50s.  They were coming off of the great depression remnants.  Times were very different.  Buffett rode the wave.  Had he been born in the 1950s rather than in 1930 we may never have heard of him. 

I could go on.  I just think that it would be much harder to do than even Buffett realized when he made the comment.  30% sustained I will believe because it has been done, but not 50%.

[Ballinvarosig Investors]

Although one thing I think (I think) I remember from the Snowball was that he was running at 60% or something prior to his partnership (in the Columbia/Graham-Newman days).

You are correct.

Buffett has compounded returns of 61% from 1951 to 1955. When I was in college working with only a few thousand Dollars, I got close to 50% returns over three years doing odd-lot's, splits, liquidations, tender offers, etc. I personally found that when you even started working with a 5-figure sum, that the return started to decline as a lot of the special situations that I was looking at were only worth a few hundred Dollars a pop. When you move up to a 6-figure sum, the special situation stuff that I look at barely makes a scratch on your return. While I think getting a 50% return on a six-figure sum is possible, I think it requires highly concentrated and selective investing with a good measure of scuttlebutt thrown in.

[Baoxiaodao]

We've had good success trading in and out of situations during the last 15 months where the probability of success is very high and the probability of meaningful loss is very low.  We are up over 100% compounded on these trades, better than with our few core holdings that have also gone up a lot, but are still selling near BV.

 The first trade was one I'm sure other board members made: loading up on FFH in May - June 2009 when it was selling way below it's estimated forward BV -- a no-brainer.  We exited FFH soon after they announced their NYSE delisting that fall for a gain of 30 %+.  The proceeds went into BRK because it was still a bargain, and it appeared to be a 99% probability that they would be added to the S&P500.  After this happened, there was another gain of 20% or so, and we sold BRK.  Then, we did something that was a speculative hedge,  we took about 5% of our cash and bought S&P500 puts because The Fed had been sharply reducing the WSBASE, the high powered part of the money supply.  This worked out nicely with about a 500% gain in the puts when the market took a dive.  We closed out the puts when the WSBASE stabilized.  There were also a couple of other trades we made on misspricing in the options market that resulted in an immaterial loss.

We came out of that volatile period with a gain in the trading funds of 20%+.  Some of these funds then went back into BRK before their inclusion in the Russell indexes: another gain of 8-10%.  Around this time BRE was added because our game theory analysis indicated that Apollo's offer had a very high probability to close. It's up about  10% since our purchase and may pop another 3-6% Monday because Brit announced after the market closed Friday that they will recommend acceptance of the latest sweetened offer.  

The point is that none of this involves finding obscure situations or microcaps that are not feasible for investment of large funds.  Most of what I've described doesn't require esoteric knowledge.  Any good value investor can do it, and many of you do this easy stuff all the time.  

Congrats! This year has been tough for all of us. 100%+ is everything to speak of. Keep it going!

Fan

[benhacker]

The 50% topic is always interesting.  At $100,000, I beleive, at $1m, it would be hard, but I've seen enough to think it could be done.  Here are some areas where I think you could get the kind of annualized returns *and* you could probably find enough ideas to occupy $1m in capital (maybe)

1) Workouts / Liquidations - there are tons of liquidations out there, not my area of expertise, but I know some who hunt this space.  The highlight for me was watching someone make ~100% in two days on a liquidation situation where the ex-dividend dates were confused.  This was not a normal situation, and it required threatening legal action against an iBank and calling FINRA, but it happened and I watched it in real time (don't ask the stock or more details as I don't want to share) although *I* didn't make the money.    This particular trade was good for on the order of ~$50k though.... and making 6-10% in a month or two is possible in many workouts, but you have to keep finding more to occupy a real portfolio.  Not my area of expertise, but I've seen it done.

2) FDIC / SEC disclosure mismatch - There are situations where FDIC bank reports get released before holdco SEC filings... creating a window of opportunity for enterprising investors.

3) Reverse mergers, going private - This was mentioned above.  Lots of ways to make 5+% in a few names in maybe a month but only on "tiny" dollar amounts.... this was ripe right about SarbOx but is still around today.

4) Others I'm sure.

I think a better way to talk about the 50% commetn is to ask yourself is Buffett's skill worth $500k in the small cap world for a year of work?  I think yes... sounds better as $500k than 505.

[netnet]

One of the reasons I started this thread was to get more ideas about where to look.  Thanks BenHacker for the FDIC SEC mismatch.  I smacked my head on reading that because I have actually gone through FDIC filings, so I should have thought about the mismatch.

On generating ideas--where do people find the best arbitrage and liquidations.  I do a periodic news search, with liquidation, spinoff as the search term;  this is a bit tedious,which is okay, but it is not particularly efficient.

Think about this for a minute.  If one could do this over 10 years one would grow from 100 k to 5.6 M; another 10 years and 332 M.

It is not doable.  No one has a public record of success picking stocks like this.

Sorry, but to paraphrase Taleb, saying there is no black swan does not mean no such exists. In this case the "swan" is compounding small amounts of money, and small amount is a crucial part of the point.   It is unlikely and hard to compound at that rate but not impossible.  Apparently we have our own Ericopoly as evidence.  Furthermore, the point was that above a certain amount say 10m, most agree that it goes from improbable to well nigh impossible.

[ERICOPOLY]

Eric, that is f**kin awesome! Talk about running hot! I still remember the FFH options talk from the MSN board. I also remember dengyu and I miss his contributions.

I first dengyu at Microsoft -- they have an "Investment Club" distribution list there.  I would post there, and he would post sometimes as well.  We started chatting back and forth in email as our investment style seemed to be similar.  That was April 2006, and I mentioned Fairfax and the old MSN Berkshire board to him.  That's when he showed up on that board, and it's right around the time when FFH options got really cheap.  He suggested to me that I should look into the options -- before that I'd never even worked out how puts/calls work.  I would still be wearing an employee badge if it wasn't for him walking me through it.  We would buy some nearly every day and swap stories of what prices we got.  I remember getting an email from him one day stating that at closing he got 50 contracts of the $160 strike 2008 for 80 cents.  Just imagine... the stock broke $300 before that expired.  I had written a jscript file that would compute how much money I would make from my FFH calls at various prices (I had 240 contracts).  We were both supremely confident that we could retire on that trade (he quit at age 25 before the end of 2006, having worked less than 2 yrs).  So the week he quit, we decided to meet in person and went out to lunch.  Pretty funny sitting across the table from someone I'd never seen in person, and here we were both able to quit... and all for a trade that seemed to us highly predictable.  Just laughing and grinning.  Good times.  I stayed on until January 2008, it was harder to let go for me because I'd been "institutionalized" (quoting The Shawshank Redemption after 10 years of being there.  Today he's developing games on his own time -- good for him.

[leftcoast]

Eric, that is f**kin awesome! Talk about running hot! I still remember the FFH options talk from the MSN board. I also remember dengyu and I miss his contributions.

I first dengyu at Microsoft -- they have an "Investment Club" distribution list there.  I would post there, and he would post sometimes as well.  We started chatting back and forth in email as our investment style seemed to be similar.  That was April 2006, and I mentioned Fairfax and the old MSN Berkshire board to him.  That's when he showed up on that board, and it's right around the time when FFH options got really cheap.  He suggested to me that I should look into the options -- before that I'd never even worked out how puts/calls work.  I would still be wearing an employee badge if it wasn't for him walking me through it.  We would buy some nearly every day and swap stories of what prices we got.  I remember getting an email from him one day stating that at closing he got 50 contracts of the $160 strike 2008 for 80 cents.  Just imagine... the stock broke $300 before that expired.  I had written a jscript file that would compute how much money I would make from my FFH calls at various prices (I had 240 contracts).  We were both supremely confident that we could retire on that trade (he quit at age 25 before the end of 2006, having worked less than 2 yrs).  So the week he quit, we decided to meet in person and went out to lunch.  Pretty funny sitting across the table from someone I'd never seen in person, and here we were both able to quit... and all for a trade that seemed to us highly predictable.  Just laughing and grinning.  Good times.  I stayed on until January 2008, it was harder to let go for me because I'd been "institutionalized" (quoting The Shawshank Redemption after 10 years of being there.  Today he's developing games on his own time -- good for him.

That's a great story! I'm at Microsoft now... making games on their time.    I wonder if that investment club is still around.

[jb85]

does anyone know what the call options prices were like for WFC when it was trading around $10 in march 2009?