Warren Buffett would be jealous of us retail investors. I think he sincerely wishes that his company, Berkshire Hathaway, wasn’t that humongous. Why is that so?
In 1999, he told Business Week that, “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.” When Buffett first started off, he could easily average more than 50% a year.
Furthermore, in a 2005 interview with a group of students at Kansas University, Buffett said that, “Yes, I would still say the same thing today…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…Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.”
From 1965 – 2011, Berkshire Hathaway had a compounded annual return of 19.8% (from the latest annual report). If his company wasn’t a $194 billion company but a much smaller company, he would have higher returns just like when he first started off.
By having a huge company, Buffett’s returns have diminished as he cannot invest in small-cap and illiquid companies unlike retail investors. Furthermore, he cannot sell a company when it’s extremely overvalued as easily as retail investors, as doing so will invite unnecessary scrutiny. Therefore, he has to hold the stocks for almost forever and cannot take profit when the stock market is in euphoria. In a sense, he cannot really afford to be “fearful when others are greedy” and sell out a huge percentage of his holding in an overvalued company.
Now, don’t we have an upperhand over Buffett? If we really follow his principles closely of buying the right business with the right management at the right price, we can at least average 20% per annum compounded returns that Berkshire Hathaway has generated. A big caveat is not to be greedy and throw discipline out of the window when the whole stock market is in euphoria!