I like Warren Buffett. So does every other investor.
Y’all know the story by now. The dude has been an investor and business owner his whole life. After completing his business degree, he went to work for the ledgendary Ben Graham. Graham shut down his hedge fund, so Buffett went home to Omaha and started his own. These were his returns.
Those are bananas. And slightly crooked.
After 1967, Buffett invested inside of Berkshire Hathaway. He took a company that was a bunch of struggling textile mills along with some excess cash and turned it into the biggest conglomerate in the world. His annual meeting attracts thousands of investors each year, including YOUR BOY, Nelly.
And so on. If you really want to learn everything there is about Buffett, read The Snowball. It’s a fantastic book.
The amazing thing about Buffett is he posted great returns even as his capital base expanded. It’s much harder to invest $1 billion versus $1 million. When you’re running a small portfolio, you can put your money is mispriced small-caps with enough weight that they can really make a difference. That’s not possible with larger sums.
Say you found a company worth $10 million that was undervalued. If you’re running a million dollar portfolio, you can put $50,000 to work and it’ll be a big part of your portfolio. And if you’ve got a billion dollars to play with, buying the whole company would only be a 1% position.
If you believe the best opportunities are in smaller stocks like I do, then you want to stay small. Buffett has said himself life was easier when he had smaller sums of money.
This got me thinking. Was life as an investor in the 1960s easier than it is today? Would Buffett be as good of an investor today as yesteryear? Let’s have a little thought exercise.
It’s harder today
I think most active investors think it’s harder to be an investor today than it was 50 years ago.
First of all, there’s way more competition. Back in the 1950s and 1960s, there just weren’t that many investors. People were concerned about buying houses and cars and whatnot. Life expectancy wasn’t nearly as high as today. Most people had workplace pensions and retirement wasn’t nearly as talked about as today. Hell, we hadn’t even invented 401(k)s or RRSPs.
Secondly, the art of security analysis wasn’t that well understood back then. The stock market was barely a thing. People bought and sold companies based on the story they were able to tell investors, not so much on the fundamentals. Companies didn’t really care about shareholder returns. It was much more of an old boys club than it is today.
Plus, valuations were much cheaper back then. So-called “net-net” stocks–which are companies selling for less than the value of their current assets minus all liabilities–were common. You won’t find many net-nets in 2016.
To sum it up, there’s more investors chasing the same buck in 2016 versus 1956, all with a better understanding of investing. No wonder it was so easy for Buffett. He was playing chess when everyone else was playing checkers.
It’s easier today
Investors have a number of things going for them today that make investing easier.
First let’s talk about the internet. There are thousands of investing blogs out there. Some are great, some are terrible, and most are somewhere in between. We all know where this one is.
There are also podcasts, audio books, message boards, and a million other resources. It’s easy to learn how to invest these days. It’s all free, too.
I guarantee I can learn as much about investing as Buffett did when he was my age. The information is out there. I just have to find it and process it. It’s also much easier to copy the ideas of smart people, which I’ve done from time to time.
You’d think there would be more people cruising the small and micro-cap space, looking for the kinds of bargains Buffett enjoyed. But that’s just not true.
Investors are obsessed with intrinsic value these days, primarily thanks to guys like Warren. They have no interest in a company that’s cheap based on traditional metrics (price-to-sales, price-to-book, price-to-earnings) because they’re all obsessed with capital-lite companies with the ability to grow without using too much capital.
My favorite example might be Amaya (TSX:AYA), the online poker giant. Forget about all of its problems, let’s just talk about growing the online poker business. What does it take for Amaya to grow besides some marketing and a bunch of servers in a basement somewhere? All of its strength is based on the value of its brand.
Meanwhile, companies like Hammond Manufacturing (TSX:HMM.A) are ridonkulously cheap on every measure, and nobody gives a crap about them. It’s an unsexy manufacturer of boring things with small net profit margins.
1960s Buffett was buying Hammond. 2010s Buffett would be buying Amaya. Thus, most of the investing world has no interest in Hammond.
It’s also much easier to seize advantages in other parts of the world. With the right kind of brokerage account, I can buy cheap stocks in places where people don’t even care about stocks in general like South Korea or Hungary or whatever. Sure, there are other issues with that strategy, but the difference in the size of my investing universe versus Buffett’s is massive.
So who’s right?
Overall, I do think it’s harder to invest today than when Buffett was young — at least for active value investors. Index funds have made it much easier for the layman.
But I don’t think it’s as tough as some people think. I’m the first to admit I’m not great at estimating the intrinsic value of some brand. It’s an inexact science at the best of times. I am decent at finding cheap micro-cap stocks with solid balance sheets. Most investors won’t bother joining me, so I like my chances.
As far as I’ve ever been concerned, that’s the secret. If you go where most investors don’t want to go, you’ve got a much better chance of outperforming. That’s what Buffett did.