Berkshire Annual meeting - 50% a year?

[fishwithwings]

Does anyone know what he meant by arbitrage but not in the traditional sense. This is in response to the guy who asked him about 50% returns on 1mill. It was one of the last few questions

Some examples would be good.

[CorpRaider]

Could have meant like activism.  Like Sanborne maps or even the initial Berkshire; Sanborn: you have a bag o cash and securities of  $20 a share (for example) and stock is trading at $8.  How about you distribute some $$$ or I clean this place up.

 

If I spoke Japanese I would probably look there and talk to some japanese lawyers and politicians about cleaning up some of the corporate recidivism.  Maybe you get away with it if you were dealing with small fries.

 

Charlie told us, another example would be to do what Li Lu did.

[fishwithwings]

Thanks. Two follow up questions. Wouldn't he just have said activism instead of aribtrage in that case?  What did Liu lu do?

[CorpRaider]

Maybe, but I think he called them "work-outs" back in the p-ship days.  Could be talking about like the jay pritzker deal with CEFs or something.

[AdjustedEarnings]

This 50% thing is back again! This was around almost 20 years ago (Businesweek interview) and people kept on asking WEB about it every chance they got. As far as I know, no one has achieved 50% a year even on small sums since then (if they did, they'd have a large fund by now or at least be famous). I think back then WEB just said 50% to pick a number that would indicate large returns v/s small returns. To think that WEB, CM, or anyone could do 50% for even 5 years in a row without leverage is almost silly, hopeful, and not grounded in reality (given where asset prices and rates are today). It's been 20 years but the 50% refuses to go away! It seems some part of the audience is just awed by that 50% number and wants to achieve it without much practical consideration. What do you guys/girls think?

[Parsad]

This 50% thing is back again! This was around almost 20 years ago (Businesweek interview) and people kept on asking WEB about it every chance they got. As far as I know, no one has achieved 50% a year even on small sums since then (if they did, they'd have a large fund by now or at least be famous). I think back then WEB just said 50% to pick a number that would indicate large returns v/s small returns. To think that WEB, CM, or anyone could do 50% for even 5 years in a row without leverage is almost silly, hopeful, and not grounded in reality (given where asset prices and rates are today). It's been 20 years but the 50% refuses to go away! It seems some part of the audience is just awed by that 50% number and wants to achieve it without much practical consideration. What do you guys/girls think?

 

He was fairly specific now and in the past.  He said if he was managing small sums ($1M), he could achieve 50% annualized returns no problem for a little while.  Once it got closer to 1B, things would start to slow down.  So he was talking about small investors and only achieving that 50% annualized return for say a decade or slightly more...not over 30-50 years or anything. 

 

In the past, he said there were many ways to make the 50%, but today, it would be based on unique arbitrage opportunities and he said he knows of a few ways, but he won't say.  That's when Charlie said or you could do what Li Lu did...create and find opportunities to make money.  Buffett then turned to Charlie and said, Charlie weren't you doing certain real estate deals in your early days which were generating close to 50%?  And Charlie said yes. 

 

So, both of them think gifted (1 in 5,000-10,000) investors could do 50% a year with small sums.  On this message board, we know of 3-4 people who did that over a decade or so.  There are probably another 20 or so who did well over 20%-30% over a decade as well.  Cheers!

[matjone]

When they asked him about it years ago he said the return would go down dramatically as AUM went from 1M - 10M.  I take that to mean to look at things that are too tiny even for a $10M fund.  So look in small stuff, find something way out of line, and bet big, cause you're probably not gonna find them that often.

 

Look at the ethanex bankruptcy Thomas Braziel invested in,  Norilsk Nickel arb at kiddynamite's blog, mexican restaurants (CASA) which was a regular long from oddballstocks blog a few years ago (actually just read the whole oddballstocks blog archive).

[Parsad]

When they asked him about it years ago he said the return would go down dramatically as AUM went from 1M - 10M.  I take that to mean to look at things that are too tiny even for a $10M fund.  So look in small stuff, find something way out of line, and bet big, cause you're probably not gonna find them that often.

 

Look at the ethanex bankruptcy Thomas Braziel invested in,  Norilsk Nickel arb at kiddynamite's blog, mexican restaurants (CASA) which was a regular long from oddballstocks blog a few years ago (actually just read the whole oddballstocks blog archive).

 

Yes, correct.  Really obscure stuff in the past...at this year's meeting, he did say it would be very specific unique arbitrage opportunities.  He said that opportunities are much lower today to do this than say 10-20-30 years ago.  Cheers!

[ukvalueinvestment]

First, I think that Buffett genuinely meant 50%.  Alice Schroeder has said in the past that he is a very literal person and I don't think he would just make up a "large number".

 

$1mln implies 5-6 positions of $200k each.  Therefore he is investing in nano caps and I think there is a lot of opportunity out there.

 

Look at this: https://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/KYG541351279GBGBXASX1.html

 

I got lucky and piggy backed off the tweets of an activist investor called Richard Bernstein (Crystal Amber) to get into a wonderful risk/reward situation.  But imagine if you had the intensity and brain power of Buffett.  You could definitely find 2-3 totally asymmetric investments every year globally.  Throw a little leverage into the mix and there you go.

 

When he talked about arbitrage situations, I thought he might mean situations where the spread is wide in a takeover, you can leverage into it, and you like the underlying company, so in the few examples where the takeover fails, you are left with a good company.  Kind of what he did recently with Monsanto...

[matjone]

When they asked him about it years ago he said the return would go down dramatically as AUM went from 1M - 10M.  I take that to mean to look at things that are too tiny even for a $10M fund.  So look in small stuff, find something way out of line, and bet big, cause you're probably not gonna find them that often.

 

Look at the ethanex bankruptcy Thomas Braziel invested in,  Norilsk Nickel arb at kiddynamite's blog, mexican restaurants (CASA) which was a regular long from oddballstocks blog a few years ago (actually just read the whole oddballstocks blog archive).

 

Yes, correct.  Really obscure stuff in the past...at this year's meeting, he did say it would be very specific unique arbitrage opportunities.  He said that opportunities are much lower today to do this than say 10-20-30 years ago.  Cheers!

 

That’s interesting to me for a number of reasons:

 

1. In the not too distant past I’ve heard him say it might actually be easier now cause information is easier to access.

2. He seems to have switched his stance a little.  Before when people asked him to speak on this subject he’d talk about finding super cheap small companies and going long the stock.  Now it seems he thinks arbs are more inefficient.

3. I assume that for him to have an opinion in this he must be looking in that area from time to time.  I like the idea that Buffett loves this stuff so much that he’s still taking an occasional peak at these tiny obscure situations, even as an old billionaire philanthropist who has no reason to care.

 

By the way, does anybody me have a transcript or audio/video of this?  Thanks in advance.

[fishwithwings]

When they asked him about it years ago he said the return would go down dramatically as AUM went from 1M - 10M.  I take that to mean to look at things that are too tiny even for a $10M fund.  So look in small stuff, find something way out of line, and bet big, cause you're probably not gonna find them that often.

 

Look at the ethanex bankruptcy Thomas Braziel invested in,  Norilsk Nickel arb at kiddynamite's blog, mexican restaurants (CASA) which was a regular long from oddballstocks blog a few years ago (actually just read the whole oddballstocks blog archive).

 

Yes, correct.  Really obscure stuff in the past...at this year's meeting, he did say it would be very specific unique arbitrage opportunities.  He said that opportunities are much lower today to do this than say 10-20-30 years ago.  Cheers!

 

That’s interesting to me for a number of reasons:

 

1. In the not too distant past I’ve heard him say it might actually be easier now cause information is easier to access.

2. He seems to have switched his stance a little.  Before when people asked him to speak on this subject he’d talk about finding super cheap small companies and going long the stock.  Now it seems he thinks arbs are more inefficient.

3. I assume that for him to have an opinion in this he must be looking in that area from time to time.  I like the idea that Buffett loves this stuff so much that he’s still taking an occasional peak at these tiny obscure situations, even as an old billionaire philanthropist who has no reason to care.

 

By the way, does anybody me have a transcript or audio/video of this?  Thanks in advance.

 

Yeah, he was pretty specific by mentioning arbitrage in an unconventional way. mergers and acquisitions are arbitrage, but in a traditional sense. I wonder if he is talking about investments outside the stock market.

[Parsad]

First, I think that Buffett genuinely meant 50%.  Alice Schroeder has said in the past that he is a very literal person and I don't think he would just make up a "large number".

 

 

 

I've followed Buffett for over 20 years now.  I thought the same as you when he first mentioned 50% annualized with small sums...and I was there when he said it.  But he's been asked this a couple of other times and he's always said yes...50% annualized.  And I heard him as clear as a bell say the same thing again this year with a little more detail.  And he also said essentially that Charlie was doing better than 50% a year in his early days before the Munger Partnership through his real estate investments and deals.  It is a stunning number, but they've both said now on numerous occasions that they could do that pretty easily with very small sums...although harder now than in the past.  Cheers!

[Parsad]

When they asked him about it years ago he said the return would go down dramatically as AUM went from 1M - 10M.  I take that to mean to look at things that are too tiny even for a $10M fund.  So look in small stuff, find something way out of line, and bet big, cause you're probably not gonna find them that often.

 

Look at the ethanex bankruptcy Thomas Braziel invested in,  Norilsk Nickel arb at kiddynamite's blog, mexican restaurants (CASA) which was a regular long from oddballstocks blog a few years ago (actually just read the whole oddballstocks blog archive).

 

Yes, correct.  Really obscure stuff in the past...at this year's meeting, he did say it would be very specific unique arbitrage opportunities.  He said that opportunities are much lower today to do this than say 10-20-30 years ago.  Cheers!

 

That’s interesting to me for a number of reasons:

 

1. In the not too distant past I’ve heard him say it might actually be easier now cause information is easier to access.

2. He seems to have switched his stance a little.  Before when people asked him to speak on this subject he’d talk about finding super cheap small companies and going long the stock.  Now it seems he thinks arbs are more inefficient.

3. I assume that for him to have an opinion in this he must be looking in that area from time to time.  I like the idea that Buffett loves this stuff so much that he’s still taking an occasional peak at these tiny obscure situations, even as an old billionaire philanthropist who has no reason to care.

 

By the way, does anybody me have a transcript or audio/video of this?  Thanks in advance.

 

1.  Yes, easier information, but definitely not easier.  So much competition and the competitors are acting very quickly.  In the old days, you read through numerous guides and reports...you didn't run screens, you had to create the data from everything you read. 

2.  Yes, you are correct.  In the past, he would have done 50% annualized with small sums by targetting small companies.  He cannot do that now, even with small sums...too much competition.

3.  What else is he going to do with his time?  :)  Plus find a few little gem opportunities for the grandkids accounts!

 

Cheers!

[Tim Eriksen]

After the meeting at the Willow Oak event I spoke with a guy who said he was the one who asked the question.  I had skipped out of that part of the meeting so I can't confirm it was him.  He was annoyed that Buffett didn't really answer the question.  The guy said he purposely included arbitrage because he said that Alice Schroeder had told him that Buffett had said to her that he believed he could make 50% annually in treasury arbitrage.

[Orchard]

Of course he won't give a specific answer. It all goes back to the Mozart quote.

[IceCreamMan]

First, I think that Buffett genuinely meant 50%.  Alice Schroeder has said in the past that he is a very literal person and I don't think he would just make up a "large number".

 

 

 

I've followed Buffett for over 20 years now.  I thought the same as you when he first mentioned 50% annualized with small sums...and I was there when he said it.  But he's been asked this a couple of other times and he's always said yes...50% annualized.  And I heard him as clear as a bell say the same thing again this year with a little more detail.  And he also said essentially that Charlie was doing better than 50% a year in his early days before the Munger Partnership through his real estate investments and deals.  It is a stunning number, but they've both said now on numerous occasions that they could do that pretty easily with very small sums...although harder now than in the past.  Cheers!

 

To return 50% a year, are we sure that Buffett is talking about unleveraged securities plays and not leveraged real estate deals? The references in this thread to Munger's real estate deals and the exponential slowing of returns as a function of AUM made me wonder this.

[Poor Charlie]

Buffett has talked a lot about the 1950s as his best decade, so I would use that as a reference.  If you look at his holdings from back then, you’ll notice that most of them were (a) priced under 5x earnings, (b) growing at a decent clip (i.e., 10%) and © trading in some off-the-map market (think of the Atled example he’s talked about a few times).  Also, most of his large investments from back then were coattails—IDS (Murchinson); Western Insurance (Duboc); Philadelphia & Reading (Graham); Geico (Graham); North American Fire (Ahmanson); Rockwood (Pritzker); Crane (Evans); Eltra (Wattles); Getty Oil (Getty). 

 

Could he and Munger still find these situations today?  I think so.  Consider, for instance, the investments Himalaya has made overseas in the last twenty-five years.  Most of these were even cleaner (better business, capital structure, price, etc.) than the investments Buffett was making in the 1950s.  I would rank them up their with Belridge, which Munger often cites as one of the best investment opportunities of his life. 

 

That being said, just because it can be done doesn’t mean that they could do it.  Take Munger’s smaller pools of capital—The Daily Journal and his foundation.  What’s the return on the Daily Journal’s investments over the last five years?  Not 50%.  How about his foundation?  The only large investment he has made in the foundation in the last five years (Hyundai common and preferred) is probably down by 50%.  If it were indeed as easy as Buffett lets on, I think the returns in both these vehicles would’ve been a lot higher.

 

[From my own experience, the single-most important factor to earning high returns is knowing where to look.]

[Jurgis]

Take Munger’s smaller pools of capital—The Daily Journal and his foundation.  What’s the return on the Daily Journal’s investments over the last five years?  Not 50%.  How about his foundation?  The only large investment he has made in the foundation in the last five years (Hyundai common and preferred) is probably down by 50%.  If it were indeed as easy as Buffett lets on, I think the returns in both these vehicles would’ve been a lot higher.

 

I think this is a good observation. I had similar thought when Munger was running Wesco. He always said not to think of Wesco as mini-Berkshire. But since it was so much smaller, he could have fished in smaller (other) ponds and made better returns than BRK. So either he just phoned it in or he really did not want to make effort (perhaps not to appear to be favoring Wesco - and now DJCO - vs Berkshire?) or it's really hard and - at least Munger - can't do even close to 50% in these situations.

[kiwing100]

 

Take Munger’s smaller pools of capital—The Daily Journal and his foundation. 

 

How about his foundation?  The only large investment he has made in the foundation in the last five years (Hyundai common and preferred) is probably down by 50%.

 

 

Poor Charlie

 

1) How did you find out about the Munger foundation's investment in Hyundai?  Is there a list or filing made?

2) Which Hyundai entity is it? (There are quite a few - Hyundai Motors, Hyundai Engineering & Construction, Hyundai Dept Store, Hyundai Fire & Marine, Hyundai Green Food, Hyundai Merchant Marine, Hyundai Heavy, Hyundai Corp, Hyundai Mobis, Hyundai Steel, Hyundai Mipo)

 

Thanks in advance.

[Poor Charlie]

 

Take Munger’s smaller pools of capital—The Daily Journal and his foundation. 

 

How about his foundation?  The only large investment he has made in the foundation in the last five years (Hyundai common and preferred) is probably down by 50%.

 

 

Poor Charlie

 

1) How did you find out about the Munger foundation's investment in Hyundai?  Is there a list or filing made?

2) Which Hyundai entity is it? (There are quite a few - Hyundai Motors, Hyundai Engineering & Construction, Hyundai Dept Store, Hyundai Fire & Marine, Hyundai Green Food, Hyundai Merchant Marine, Hyundai Heavy, Hyundai Corp, Hyundai Mobis, Hyundai Steel, Hyundai Mipo)

 

Thanks in advance.

 

Run a search on any database for the ‘Alfred C Munger Foundation’ (named after his father).  For example:

 

https://projects.propublica.org/nonprofits/organizations/952462103

 

(See page 21 of the 2016 filing)

[wabuffo]

Which Hyundai entity is it? (There are quite a few - Hyundai Motors, Hyundai Engineering & Construction, Hyundai Dept Store, Hyundai Fire & Marine, Hyundai Green Food, Hyundai Merchant Marine, Hyundai Heavy, Hyundai Corp, Hyundai Mobis, Hyundai Steel, Hyundai Mipo)

 

By isolating the quarter-end fair value dollar amounts and comparing the Q-to-Q change in fair values to quarter-end prices (converted to USD), I believe Munger has also purchased Hyundai Motors Preferreds in the DJCO portfolio.  Specifically, the 005389.KS ticker on the South Korean stock exchange.

 

It hasn't been a winner for him, so far.

 

wabuffo

[wabuffo]

To think that WEB, CM, or anyone could do 50% for even 5 years in a row without leverage

 

I don't think WEB explicitly ruled out the use of leverage in that 50% boast.  He has always used leverage - specifically in market-neutral special situations.  Not just at BRK or the Buffett Partnership, but even in his pre-Buffett Partnership days. 

 

wabuffo

[LongHaul]

To think that WEB, CM, or anyone could do 50% for even 5 years in a row without leverage

 

I don't think WEB explicitly ruled out the use of leverage in that 50% boast.  He has always used leverage - specifically in market-neutral special situations.  Not just at BRK or the Buffett Partnership, but even in his pre-Buffett Partnership days. 

 

wabuffo

 

I think 50% for 5 yrs would be very hard for Buffett or Munger today or anyone else for that matter.   

 

When he said that this year I immediately thought the odds were low it could be achieved, right now, over 5 years.

 

The 1950's in the US were the best decade since 1950 for the stock market.  19.3% annually. 

But stocks were really cheap in 1950.  Perhaps he remember that time.

 

http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

 

 

 

 

[spartansaver]

To think that WEB, CM, or anyone could do 50% for even 5 years in a row without leverage

 

I don't think WEB explicitly ruled out the use of leverage in that 50% boast.  He has always used leverage - specifically in market-neutral special situations.  Not just at BRK or the Buffett Partnership, but even in his pre-Buffett Partnership days. 

 

wabuffo

 

I think 50% for 5 yrs would be very hard for Buffett or Munger today or anyone else for that matter.   

 

When he said that this year I immediately thought the odds were low it could be achieved, right now, over 5 years.

 

The 1950's in the US were the best decade since 1950 for the stock market.  19.3% annually. 

But stocks were really cheap in 1950.  Perhaps he remember that time.

 

http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

 

This is W.E.B. we are talking about. The O of O! With the number of situations he's seen throughout his life, he would have the world as his oyster with $1mn. I'm guessing when he was up on stage answering 50% a year, he wasn't daydreaming back to 1950. I would be highly skeptical of anyone else saying 50%, but this is Grandaddy Warren.

[kiwing100]

Which Hyundai entity is it? (There are quite a few - Hyundai Motors, Hyundai Engineering & Construction, Hyundai Dept Store, Hyundai Fire & Marine, Hyundai Green Food, Hyundai Merchant Marine, Hyundai Heavy, Hyundai Corp, Hyundai Mobis, Hyundai Steel, Hyundai Mipo)

 

By isolating the quarter-end fair value dollar amounts and comparing the Q-to-Q change in fair values to quarter-end prices (converted to USD), I believe Munger has also purchased Hyundai Motors Preferreds in the DJCO portfolio.  Specifically, the 005389.KS ticker on the South Korean stock exchange.

 

It hasn't been a winner for him, so far.

 

wabuffo

 

Wabuffo,

 

Thank you for that.  Where can you see 005389.KS in the DJCO portfolio? Is there some filing? 

 

FYI, I looked in the 10K and nothing was mentioned.