2001: If Buffett was investing a small sum today, which approach would he use?

AUDIENCE MEMBER: I’m Michael Zenga from Danvers, Massachusetts. That’s a town whose band Mr. Buffett so generously sent to the Rose Bowl parade last year, so you’re a very popular guy in my town.

Good morning, Mr. Buffett and Mr. Munger.

Mr. Buffett, I wanted to ask you this question last week when I ran into you after Gillette’s annual meeting, but I choked. So now that there’s no pressure, here goes. (Laughter)

In the years from — from my reading — in the years from 1956 through ’69, you achieved the best results of your career quantitatively. Twenty-nine percent annually against only 7 percent for the Dow.

Your approach then was different than now. You looked for lots of undervalued stocks with less attention to competitive advantage or favorable economics and sold them rather quickly.

As your capital base grew, you switched your approach to buying undervalued excellent companies with favorable long-term economics.

My question is, if you were investing a small sum today, which approach would you use?

WARREN BUFFETT: Well, I would use the approach that I think I’m using now of trying to search out businesses that — where I think they’re selling at the lowest price relative to the discounted cash they would produce in the future.

But if I were working with a small amount of money, the universe would be huge compared to the universe of possible ideas I work with now.

You mentioned that ’56 to ’69 was the best period. Actually, my best period was before that. It was from right after I met Ben Graham in 19 — early 1951 — but from the end of 1950 through the next 10 years, actually, returns averaged about 50 percent a year. And I think they were 37 points better than the Dow per year, something like that. But that — I was working with a tiny, tiny, tiny amount of money.

And so, I would pour through volumes of businesses and I would find one or two that I could put $10,000 into or $15,000 into that just were — they were ridiculously cheap. And obviously, as the money increased, the universe of possible ideas started shrinking dramatically.

The times were also better for doing it in that time.

But I think that, if you’re working with a small amount of money, with exactly the same background that Charlie and I have, and same ideas, same whatever ability we have — you know, I think you can make very significant sums.

But you — but as soon as you start getting the money up into the millions — many millions — the curve on expectable results falls off just dramatically. But that’s the nature of it.

You’ve got to — you know, when you get up to things you could put millions of dollars into, you’ve got a lot of competition looking at that. And they’re not looking as I did when I started. When I started, I went through the pages of the manuals page by page.

I mean, I probably went through 20,000 pages in the Moody’s industrial, transportation, banks and finance manuals. And I did it twice. And I actually, you know, looked at every business. I didn’t look very hard at some.

Well, that’s not a practical way to invest tens or hundreds of millions of dollars. So I would say, if you’re working with a small sum of money and you’re really interested in the business and willing to do the work, you can — you will find something.

There’s no question about it in my mind. You will find some things that promise very large returns compared to what we will be able to deliver with large sums of money.

Charlie?

CHARLIE MUNGER: Well, yeah, I think that’s right. A brilliant man who can’t get any money from other people, and is working with a very small sum, probably should work in very obscure stocks searching out unusual mispriced opportunities.

But, you know, you could — it’s such a small world. It may be a way for one person to come up, but it’s a long slog.