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Thanks oec and vinod...I hope to continue posting when I have something useful to say. I just find it incredibly hard to argue with someone who uses statements like "This is a black and white argument" or "There is no room for debate" or "It is simply a fact that..." or "I am 100% certain that..." I don't believe the world of business is that clear-cut. The unfortunate part is that rick_v is clearly an intelligent person and him and I probably agree on a lot more things than we disagree on, but my efforts to provide another side to what is "common wisdom" in value investing circles was met with personal attacks and "my way or the highway" type arguments. Just to make myself clear, because I feel mine and some other posters' arguments were twisted around in an effort to make things black and white, here's the core of our argument: 1. There are plentiful attractive investment ideas in larger companies. One does not need to restrict themselves to small companies to find highly successful investments. I tried to illustrate this point by going through some of Buffett's most successful investments, a number of which were in well-known, but at the time unloved, companies. This was in response to "Seeking out value in your own plays, specifically plays under $250M is the way to go. As you manage more capital you can look at under $1b companies as well. But to truly generate significant alpha you are gonna have to go there." 2. Investment return expectations can get unreasonably high. I presented the track records of the "greats" to illustrate how difficult it would be to earn 30-50% CAGR on any amount of capital. Unfortunately, this was met with a straw man that "8-9% annually simply won't make you rich." Again, I'm against expecting unheard-of returns, not saying you should accept paltry returns and take up golf. This was in response to "And when I say significant alpha I am not even talking about 20-30% per year." and "People like Prem or Buffet didn't get to where they are by being passive investors looking for 8-9% a year." 3. There is no shame in sticking with a few companies you know well. An incredible amount of wealth has built this way by "amateurs" and professionals alike. I used this point to illustrate that there are no "degree-of-difficulty" points in investing. There are so many paths to heaven here. Because this board is centered around Fairfax, I used that as a good illustration of this concept. This was in response to "But if you are a young and passionate value investor or a fiduciary that has represented your skills to partners, it is completely pathetic to buy and hold BRK or FFH and think you are going to generate any alpha, or get RICH for that matter." Well, fortunately for these pathetic people, a lot of "alpha" has been generated holding Fairfax and it's not a $200B company like BRK yet. And apparently Ruane, Cunniff is a pathetic firm for holding BRK from inception until present day. I think Buffett might disagree with that statement. I did not say the following: 1. You should ape Buffett or Hamblin-Watsa's picks and go home. 2. It is "better" to invest in large companies than small ones. 3. There aren't a plethora of opportunities in unknown companies. 3. It's OK to be lazy and accept paltry returns if you're a professional. At the end of the day, I believe open-mindedness is a big asset if you're an investor. This is not physics, there are few absolutes. I also, probably shooting myself in the foot here, need to say that I'm automatically a little skeptical of someone talking about "out of this world alpha generation" and "value type plays." That just struck me as odd, but as I said above, rick_v has been a solid contributor to the board and he, like me, is not a caricature: he seems to have many great ideas and some ideas I totally disagree with.

I don't know what to tell you rick_v. I'm sorry you've made that decision. I'd appreciate you not saying things like "I am 100% certain you are an academic" when you are 100% wrong. At the end of the day, here was your point: "Seeking out value in your own plays, specifically plays under $250M is the way to go. As you manage more capital you can look at under $1b companies as well. But to truly generate significant alpha you are gonna have to go there. And when I say significant alpha I am not even talking about 20-30% per year, I am talking about finding the 10 baggers, the 5 baggers, the 20 baggers. The ones that can be found with a lot of work, permanent capital, and patience." I made a lot of arguments to the contrary, but you ignored all of them in favor of re-affirming your prior belief. Only micro-cap value can generate your "truly significant alpha." The sad part is that I agree with you about generating ones own ideas (and you'll notice I never said anything to the contrary), but you're too high on your horse to read my posts and respond to them.

Sorry, it seems Sanjeev and I responded at similar times and made many similar points. The only area we seem to disagree on is that small investors should focus on small areas. My only point here is that, while that absolutely may be a fruitful area to look, it is certainly not a prerequisite for excellent performance. Buffett and many others have proven (in my eyes) that larger companies ($500M+) provide hordes of opportunities to patient and shrewd investors.

I'd like to respond to a few points. First off, as Parsad said, please stop using the word "alpha." It implies you believe in the tooth-fairy known as "beta." Second, let's knock down this straw-man argument that I'm saying a 8-9% return is OK. I'm not. And I never mentioned that investing in BRK at this point would make anyone rich. The devil is in the details. But you have made the point, several times, that one needs to invest in the "0-250M" area to "get rich" and "generate alpha." You also disparaged investors who own Fairfax rather than "working 16-18 hrs a week" to find obscure ideas. The point I made in my original post was that Buffett and many others have, time and time again, found ideas that compound at 25% P.A.+ in very well known companies - $1B+ (some much larger) market capitalizations. I've yet to hear you respond to that, except to call it an "academic argument." I manage money for a living, so I am not making an "academic argument." I also pointed out that the hall-of-fame investors have generated, on various bases of capital, 20-25% P.A. returns, at best, which says to me that telling some up and comer to shoot higher is an exercise in Type-A masturbation. You keep setting up these ridiculous "black and white" arguments that make you sound like Glenn Beck. Here's one: "So for those that are, I Am simply proving and its black and white, there is no room for debate here: buying BRK or FFH and expecting to generate substantial alpha or to get rich or build a unique track record is simply not going to happen." This is absolutely not "black and white," except for the fact that you're leaving open to interpretation the definition of "significant alpha." Is 5% P.A. better than the index significant. You'd be in the top 1% of money managers. Is 10% better significant? You'd be a hall of famer. Is 15% significant? You'd have beat basically every manager I've heard of or studied. These don't seem to content you....does 40% P.A.? That implies turning $1 into $30 over the next ten years. Who is putting those type of numbers up? What do you consider "significant alpha?" Also, regarding Fairfax specifically. What is keeping it from earning investors 20% P.A. over the next decade? That would make it about 6x as large...about $50B. Why is that impossible given his track record? And if you are willing to accept this, what stock market return are you assuming in which 20% P.A. is not "significant alpha?" Let's also go back to this "unique" argument. What the hell does that have to do with anything? What is a "unique" track record? I'm going to invoke my zamboni argument here...there seems to be this fetish with making money off of obscure ideas rather than mainstream ideas. If someone bought Berkshire in the mid-80's, when it was well-known, are they not unique? Maybe not, but they're probably rich. You want 10-baggers? Let's name a couple from the last decade. Autozone. Penn Gaming. Apple. Are these obscure $100M companies? Freddie Mac was a 20-bagger in the 90's...everyone knew about it. It was just evaluated with the wrong lens. Coke was a 10-bagger. Recently, Petrochina was what a 7-bagger in a few years for Warren? What sucky investments! You're also not providing us with any concrete numbers. You've said that 20-30% annually is not good enough. Really? If I were to turn $1 into $15 over the next 10 years, I'd be earning around 30% annually. What a crappy decade! You're telling the young investors on this board that, unless they are mythically successful and work until they drop, they are doomed to be poor and unknown! This is insane. And this company you admire that Warren owns? Fastenal? Its market cap is $8 billion. Not "0-250M." It's a well known company, not obscure, and it wouldn't take a 100-hour work week to discover it. Also, you've pointed out that Fairfax only returned 9% over the last decade. Do us a favor and extend that out a few more years (before 2000) and see what the CAGR comes to...you're choosing a time period that fits your argument. How convenient to forget its 15 or 20 year CAGR. "With regards to providing examples, I have shared more ideas on this board than I am honestly comfortable with. I am 100% confident they will outperform as a basket FFH." You seem to be highly confident in your skills. I would like to see a long term (10 years or more) track record to back that up. I'd love to see these 50% annual returns that seem to be found very easily. And don't ask me for mine...I'm not claiming to be Warren re-incarnate, I'm trying to talk everyone down from their ridiculous return expectations and making themselves feel bad because they're not "working hard enough" as if investing was like plumbing. In fact, I've looked at a lot of guys who attempt those returns and fall flat because they are speculating on crappy little companies with little investment value. I honestly think you're just spitting out platitudes without any critical thinking behind them. Extremely high returns (which I arbitrarily define as anything above 20% P.A. over time) have been generated in a lot of different ways, including buying one boring old company and sitting on it. There are no extra points for the following: working a lot of hours, looking at small stocks, finding a "new idea," having higher turnover, or emulating Buffett's personal portfolio because it's the cool thing to do. And lastly, before I'm executed for heresy, I'm not disparaging these "nook and cranny" ideas. There are plenty of good ones. I want to find the next NAFI trading at 1x earnings just like ya'll. I've even *gasp* owned some small stocks. But I'm against reducing this whole game to some cut and dry argument that buying stocks below X market cap is somehow "better" (financially, intellectually, sexually) than buying larger ones that people might have heard of (not necessarily mega-caps, I'm talking $500M - $30B in size). Go study Lampert's 13F's from the pre-Sears days and tell me he needed micro-caps to generate the returns he generated. PS someone asked about Guerin and unfortunately no, I have no further info. I'm just going off of the comments from Superinvestors of G&Dville and stuff in other generally available material. He may have made some missteps late in his career, no doubt.

Glad I was able to speak what some others seem to be thinking as well. I just think it's a big mistake to get rid of a great company that has a long way to run because you feel you're not being creative or you think you can do a great margin better investing in obscure companies. This reminds me of Peter Lynch's discussion about how pharmaceutical executives feel the compulsion to invest in oil stocks and oil executives in pharmaceutical stocks. Don't mistake me: if you see a no-brainer opportunity in a small company, by all means go for it...just be aware that much of the time, you're getting low valuation but accepting other, just as relevant, risks. Ben Graham used to own a whole host of stocks to hedge against these risks. Seth Klarman is similar. It also helps if you gently remind yourself that you're probably not Warren Buffett and that 15 or 20% annual returns will make anyone with a reasonable pile of capital very wealthy over time. I've observed this board for awhile and it seems a few guys here made a tremendous amount of money with just one boring investment! Fairfax. Are we prepared to tell them that it's a "real shame" they held so much Fairfax? Whether they are less intelligent or creative than someone who does it buying an obscure zamboni manufacturer, I don't really know or care...the end result is the same. To the original poster I quoted, I don't mean to pick on you, and I bet you have a reasoned view for your argument. I just want to present the other side.

I'm surprised you all let this go. I'd like to comment on two things, both of which I consider nonsense. 1. It is "very easy" to find securities that will outperform the market. 2. Holding Fairfax is inferior to running around finding these "very easy" securities. I think investors vastly underestimate how good Warren Buffett was at his job back in the 1950's and 1960's when he was buying these niche securities. He's even better now, but obviously runs so much capital that his returns are lower. There seems to be this "Buffett envy" going on in value investing circles whereby investors feel the need to look for little cigar butts similar to what Warren used to - largely influenced by his talks to students and his biography. And yet, I have seen precious few investors who have successfully done it. Beyond the platitude that smaller areas of the market are "inefficient," there are considerable risks. You are usually investing in second rate businesses that destroy value, or at least are not really building any. Often these businesses are run by inexperienced managers and have little advantage over their competitors. Thus, the business risks you assume are big ones, although most investors think a cheap valuation makes up for it. Sometimes, but not always. Take for an example Dempster Mill Mftg - a well known Buffett investment way back when. If you think through the situation, there was a good probability that the investment was not a wise one. It took heroic efforts by a new manager to keep Dempster from going under, and even then, it was not an absolute home run. Yet, most Buffetteers admire these types of investments Warren used to make. But what was Warren's largest partnership investment? American Express, a well known company then and now, not a micro-cap dishwasher manufacturer. He also had a successful investment in Disney, and one in GEICO, again two companies that were well known. What was probably his best stock investment at Berkshire? The Washington Post, not exactly "unknown." Yet we're told that he made all of his great returns back then because he could look small. Well, as with everything in life, the answer is yes and no. I think there is a great myth that you need to look where no-one else is looking and be creative in the investment process. That you should get points for creativity or something. But the very same people propagating this myth are students of Charlie Munger, who once wrote to Wesco shareholders that "We try to profit more from always remembering the obvious then grasping the esoteric." Let's talk about a few more of Warren's home runs. Petrochina, one of the largest companies on the planet. Freddie Mac, one of the largest companies on the planet. Coca-Cola, the most well-known brand on the planet. BYD, one of China's most well-known and well-respected companies. These are investments where, for the first 5-10 years, he made 25%+ compound annual returns. Who are these people not getting rich by consistently generating 25% compound returns? Where is this stock market where 25% annual returns don't generate "alpha"? Why do small investors need to run around looking at micro-caps? *** Let's also look at some other legendary investors. What sort of returns did they achieve and what were they buying? Lou Simpson - 20%+ type returns buying very well known companies. Rick Guerin - 25% type returns investing in a pretty broad range of securities small and large. Ruane, Cunniff - 15% over 40 years investing in large stocks. Eddie Lampert at ESL - you would probably know of almost every company he ever invested in - 30% CAGR for a 15-20 year period. Glenn Greenberg at Chieftain - did 25% for about 20 years, again you'd probably recognize almost every stock he owned. These guys are legends, they're all rich, and they invested in a huge range of securities. Who do we know of that was investing in small securities that no one has heard of? Here's two: Schloss and Graham. Did either of them do 50% compounded? Hell no. They're hall-of-famers with 15-20% returns. Do I need to bring up Charlie's returns? What has he bought over time? So I dispute this notion that investors are somehow doing themselves a disservice by sticking with companies they know well and that others know well. Well-known companies are often just as mispriced as small ones. "To a man with a hammer, everything looks like a nail," says Munger. Yet the Buffetteers seem to only admire one tool for finding cheap stocks (size constraints), when myopia, ignorance, and a host of other biases are just as powerful in creating misvalued securities. To wrap this up a little, I'm not saying there aren't lots of small mispriced stocks. Buffett did very well with them, and there are probably others doing great, too. But recognize two things: 1. Huge CAGR's are really, really hard. 2. You can do extremely well investing in larger companies, great companies, and well-known companies, without a lot of the risks of investing in broken-down nags. This is well proven. So if you rationally evaluate Fairfax and come to the conclusion that you're going to get 15-20%+ CAGR (eminently reasonable given the fact that they are a relatively small player in a gigantic global insurance market and are run by one of the smarter investment teams on the planet), don't worry about how much "alpha" you're not generating by looking elsewhere. Was it a mistake to invest in Berkshire when it had a billion dollar market cap and was well known? I repeat, there are no points for creativity. Don't forget it takes a unique cast of mind to just sit on some great companies and compound at high rates with no taxes, professional investor or not. I'm probably not going to convert anyone who believes strongly that they have to be looking in the dirty alleys for cheap stocks, but if you're on the fence, hopefully this is food for thought.