5 high returners generously responded to my request for information about how they achieved their returns. I have tried my best to synthesize their responses. I learned a lot from this and I hope you all do to.
Average 10yr return 32.4%, (high 52%, low 25%)
-all were non-professionals during most of this period. One of the individuals has since started a fund
-all 5 generated all their returns from stock investing
-most, but not all, were fully invested in the stock market
-returns came largely from midcap stocks or large cap (financials)
-leverage was not used at all in 3 cases and sparingly in 2. When leverage was used it was primarily through leaps or some margin.
I was surprised how similar their stories were. I expected a broad range of approaches to large returns. The primary way these investors achieved such high returns was from concentration. Some concentrated to as little as 4 stocks, some in the 10 range. The major theme, was find something within your circle of competence, at very cheap levels, and go big. They key here is finding something really cheap and then you can take more confidence in your valuation and ride out the volatility you will inevitably face. Obviously this strategy is a double edged sword - you have to be right about both the company and your valuation.
All investors seemed to be very patient with low turnover.
These people are all following the preachings of Munger, be patient, buy what you understand, swing big at the fat pitches, and hold.
I was also surprised that their approaches were fairly steady. I had expected returns to be largely driven by concentration in one outsized winner. However, only two of them told me about one position having an outsized impact on their returns. Without these positions they still said they achieved returns well over 20%. This tells me that the approach is the key takeaway, insist on a very large value discrepancy, and be patient for these opportunities. There style was not so much about trying to hit one big home run.
All the investors had different valuation preferences. Some focused on longer term earnings power, some looked at EV/EBITDA, others Book value and ROE. All looked for deep value though. Sometimes that was a very beaten up stock in a beaten up sector, sometimes it was looking to buy compounders opportunistically, and other times it was a combination of both.
The investorís style was, typically, look to see if large corrections, in parts of the market they understood, created some obvious opportunities. Large parts of their gains were from financials after the GFC. They picked stocks in companies they were confident would survive, at really cheap levels, went big and rarely sold. Examples of this would be FFH in 2006, BAC since the crisis, O&G companies in the last year etc.
This is a good personal reminder for me. Most everyone could recognize the long-term value in BAC (if they survived), lots of people bought (like I did), but almost all of us likely bought too little and sold too soon (like I did).
Other interesting aspects is these people all really enjoy reading and learning about investing. Despite large returns their lifestyles havenít changed much and all spend roughly the same or more time studying companies/investing.
I asked them all if they thought they could achieve similar returns in the next 10 years. They had mixed views on this. Some were reasonably confident they could always find decent opportunities and could achieve similar returns. Others were confident that their rational approach would allow them to continue to beat the market, however we are in a lower return environment and past high returns may not be as easily replicated.
I want to thank the contributors again for their time and knowledge. It was a lot of fun learning their stories. If anyone else wants to contribute please do. If anyone has any further questions please let me know.