Warren Buffett On How To Grow Small Sums Of Money

i was thinking the other day about how warren buffett is mostly known for his multi-billion dollar investments into companies like apple and bank of america but contrary to popular opinion it wasn't always this way and just like you and me he had to start out quite small too in 1995 he was asked at his annual shareholder meeting what advice he would give to those working with small amounts of money just like he once had to do as well and in this video he gives us his response uh hello um my name is howard love i'm from san francisco thank you very much for this weekend in general and uh this meeting in particular uh recently at a talk at the wharton business school uh mr buffett you indicated that you were talking about the problems of compounding large size which i appreciate and understand but you indicated you're quoted in the local paper as saying that you're confident that if you were working with some closer to a million dollars that you could compound that that at a 50 uh rate for those of us who aren't saddled with the 100 billion dollar problem uh could you talk about uh what types of investments you'd be looking at and where uh in today's market you think significant inefficiencies exist thank you yeah i i think i may have been very slightly misquoted but i certainly said something to the effect but working i think i i talked about this group i get together every two years and how i poll that group as to what they think they could compound money at it with a hundred thousand a million 100 billion a billion and other types of sums and i pointed out how this group of 60 or so people that i get together with every couple years how their expectations of return would go very rapidly down this slope uh it is true i think i i think i can name a half a dozen people that i think could compound uh a million dollars or at least they could earn 50 a year on a million dollars have that as an expectation if they needed it i mean if they'd have to get their full attention to be working on the sum and those people could not compound money 100 million or a billion at anything remotely like that right i mean there there are little tiny areas which if you follow what i said on the screen there on that adam smith's interview a few years ago if you start with a and you go through and you just and you look at everything and you find small securities in your area of competence that you can understand the business i think you can and occasionally find little arbitrage situations or little wrinkles here and there in the market i think working with a very small sum that there is an opportunity to earn very high returns but that that advantage disappears very rapidly as the money compounds because i you know from a million to 10 million i would say it would fall off dramatically because there are little you find very very small things that that you know you can make it you're almost certain to make high returns on but you don't find very big things that in that category today uh i'll leave to you the fun of finding them yourselves i mean terrible to spoil the treasure hunt uh and the truth is i don't look for them anymore every every now and then i'll stumble into something just by accident but but i'm not i'm not in the business of looking for that i'm looking for things that berkshire could put put its money in and and that rules out all of that sort of thing uh charlie well i would agree but i would uh i would also say that what we did 40 or so years ago was in some respects more simple than what you're going to have to do right we had it very easy compared to you it can still be done but uh but it's it's harder now you have to know more i mean just sifting through the manuals until you find something that's selling at two times earnings that won't work for you it'll work and you won't find any yeah so now let's elaborate and talk about some of the key points that warren buffett and charlie munger talked about in this video now the first point here is that warren buffett believes that he knows about six people who could compound one million dollars every single year at a 50 growth rate now this is quite a small amount of people which means that this is probably very difficult but it's also not impossible he also says that those same six people could not compound a hundred million dollars or a billion dollars at that same growth rate this essentially means that it's easier to get a great rate of return when you're working with smaller amounts of money and when you get up to that 10 or 100 million dollar range you're not going to get a great rate of return nearly as easily and this is simply because we have to take the volume of a stock into consideration and what the volume is is the amount of shares that any given security trades in a single day so for example if there's a stock that's worth about two dollars a share and it only trades about a hundred thousand shares a day it means that there is only a total of about two hundred thousand dollars trading hands in that one given security which means that if you want to throw 10 million dollars into that stock it is going to take months to build your full position so the larger sums of money that you have the harder it is to execute on these smaller stock opportunities simply because they do not trade that much volume and there's not that much money changing hands in that one company but again there are great opportunities to grow your money extremely quickly in these small companies and we're gonna get into more detail as to why a little bit later on in this video but moving on to the next point this one is find small securities in your own area of competence and warren buffett also likes to refer to this as your own circle of competence what your area of competence is is simply just an area of the market or an industry that you believe that you are personally very knowledgeable about and this could be because you work in the industry or you just know some more about that overall business model that makes you have a little bit of a competitive advantage over other investors who are looking into space staying within your own circle of competence may also give you opportunities that other investors might miss out simply because you know a little bit more about the industry or a given business in that industry warren buffett himself stays within his circle of competence and this is why we consistently see him invest in oil companies and financial institutions like bank of america by the way warren buffett always recommends staying within your own circle of competence whether you're investing into a small security or a large cap company so this really applies to all investing no matter what you're looking at now moving on to the next point this is to occasionally find wrinkles in the market and what warren buffett means by finding a wrinkle in the market is to simply find a stock that the market is mispricing thus creating a little wrinkle that we can take advantage of and this does happen from time to time and in my own experience i seem to find this a lot more in smaller cap companies after they experience quite large sell-offs these sell-offs cause these smaller companies to sell way below book value and have extremely low financial ratios for example canadian solar is a stock that we've been talking about a lot recently on my channel and the first time that i talked about the stock was back in the beginning of july when the stock was selling for just over 20 dollars a share and when canadian solar was selling at just above 20 a share it was actually selling way below book value and it had a price to earnings ratio of only four yes four and now at the time of recording this video canadian solar is selling for above forty dollars a share which means that i have more than doubled my money on this one stock in just a few months but this is not a stock analysis video so i won't get into the details or anything more about that all i'm trying to say is that there are in fact sometimes these little wrinkles on the market where you can identify them and get stocks for incredibly cheap now finding these little wrinkles does take some time and it can be quite difficult but as warren buffett says if you can find these wrinkles then they can provide you with some great opportunity to get some high returns alright and moving on to the next point once again and this one is when working with small sums of money there is an opportunity for a high rate of return and we talked about this a little earlier on in the video but now let's talk about specifically why this is there are three main reasons for this the first reason is hedge funds and analysts do not pay attention to smaller securities because they can't invest their large sums of money so like warren buffett they don't even look or pay attention the second reason is this lack of coverage means there's less people aware of these undervalued opportunities which essentially means there is much less competition and the third and final reason is there is not much media attention around these small companies and many people avoid them altogether because they are seen as speculative investments so to summarize there is much less competition in these smaller securities because these large institutions can't even invest in them so they just avoid them altogether and with less eyes looking means that there is potentially more opportunity to find undervalued securities and for those of you who may not know warren buffett actually purchased 100 of the company sees candy for only 25 million back in 1992. and this article right here gives us a little bit of a deeper insight into how this small cap investment played out for warren buffett so right here this says berkshire hathaway bought sees candy for 25 million dollars in 1972. the euro had roughly 30 million dollars in sales and brought in 4.2 million dollars in profit as a result of its size we can't track its results over the decades but 35 years later in 2007 buffett noted sales had risen nearly 13 times to stand at 383 million even more impressive buffett revealed profits were up nearly 20 times and studied 82 million dollars that means berkshire now earns nearly three times the cost of its original investment each year but perhaps what is even more remarkable is that in 2011 buffett said seize has brought in a staggering 1.65 billion dollars in total profits since he bought it 40 years ago and this right here is exactly what i am talking about warren buffett saw an opportunity with a company that was only worth about 25 million dollars and he did not let this small market capitalization or the fact that this was just a small company deter him from seeing a great opportunity and he ended up buying the entire company and now as it says right here in the article berkshire earns nearly three times the original cost of its investment every single year so this has played out wonderfully for berkshire and for warren buffett also when these smaller companies go on to become a billion dollar companies or multi-billion dollar companies then these institutions can start investing in them and start paying attention to them and when these institutions start getting involved then there is more media coverage more analyst coverage and all around more eyes on a stock which means that the valuation goes up when more people start getting involved but now let's move on to the next point and the next point is warren buffett does not even pay attention to smaller companies anymore like he doesn't even look and this is simply because berkshire hathaway is working with so much money now so even if they found a smaller company that seems to be a great opportunity it wouldn't even be worth their time to throw money in it berkshire hathaway simply focuses on the multi-billion dollar industry now because this is where they can actually deploy a significant amount of berkshire hathaway's capital and again this is why there is so much more opportunity in these smaller securities it's because these large hedge funds aren't even paying attention and they're not even looking alright and moving on to the last point here and this one is actually from charlie munger when he said it was easier to find these opportunities 40 years ago this is simply because 40 years ago how they found their stocks was by flipping through books and reading manuals and i'm sure that 40 years ago not too many people were doing this and since there wasn't that many people doing it it means that there wasn't a lot of competition to find these undervalued smaller securities so again it all comes down to competition and how many people are actually looking for these opportunities in today's world pretty much anyone with a stock trading platform has access to what we call stock market screeners what these screeners allow you to do is put in the specific information that you're looking for in a new investment and these screeners will screen the entire stock market and allow you to find stocks within your range very very quickly and efficiently so essentially now that everyone has access to just screen the entire market within a few seconds it's getting harder and harder to find undervalued securities but they are still out there and here on my channel i do my best to find these undervalued securities and these little wrinkles in the market and let my full audience know when i find them and what the opportunity could potentially be but now let's just quickly wrap up and summarize the video and the first point that i want to make here is i personally believe that a lot of investors today think that these smaller cap companies are way too speculative to even pay attention to and in reality they're not these smaller companies are simply just smaller businesses that are overlooked by wall street because institutional investors cannot put their money in them but there are still great and wonderful businesses in small cap land i mean we all saw for ourselves that warren buffett bought c's candy for only 25 million dollars and you can see how great that investment turned out for him so personally i believe that if we apply all of the same investing principles to these smaller companies then we can potentially find some great opportunities so don't write off these smaller cap companies as pure speculation without doing additional digging into the actual company the management and applying all of these great investment principles that you would apply to looking into any other investment now obviously not all small cap stocks are going to be great companies and as i said you still want to apply all of the same great investing principles that you would apply to looking at a larger cap investment but to summarize everything these small cap opportunities come from them being overlooked by institutional investors and investors in general from thinking that they're just too speculative even though they are truly wonderful businesses but that's pretty much gonna wrap up the video and as i said earlier on i do my best on my channel to provide everyone with these small cap opportunities and these little wrinkles in the market when i find them so if you would like to stick around and stay up to date with some of these smaller cap opportunities that i do end up finding in the market then please consider subscribing to my channel also if you enjoyed this video or you found it helpful in some way then please remember to leave a like on it leaving a like on the video really helps on my channel and i really appreciate it and with all that being said let me know what you guys think down in the comment section below do you guys think small caps are too speculative to get involved with or do you think that there could potentially be some great opportunity in small cap land let me know in the comment section below and i really hope to see you all again in my next one

Channel: Daniel Pronk

Views: 1,230,783

Rating: 4.9215546 out of 5

Keywords: daniel, investing, stock market, learn, how to, calgary, buy, sell, Daniel Pronk, Learn To Invest, Investing Basics, Beginner, Investing for beginners, Warren Buffett, Warren Buffett Small Account, Warren buffett Small Sums Money, How to invest, How to invest small account, How to grow small account, Great gains warren buffett, Warren buffett advice, Warren Buffett Financial Advice, Investment advice, investment advice Warren Buffett, Investing tips, Buffett tips, Warren Tips

Id: 2Qq8GZjmHqw

Length: 15min 9sec (909 seconds)

Published: Wed Oct 21 2020