1999: How would Buffett invest if he had a small sum instead of billions?

AUDIENCE MEMBER: Hello. My name is Howard Love. I’m from San Francisco. Thank you very much for this weekend in general and this meeting in particular.

Recently, at a talk at the Wharton Business School, 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 are confident that if you were working with a sum closer to a million dollars, that you could compound that at a 50 percent rate.

For those of us who aren’t saddled with the $100 billion problem — (laughter) — could you talk about what types of investments you’d be looking at and where in today’s market you think significant inefficiencies exist? Thank you.

WARREN BUFFETT: Yeah. I think I may have been very slightly misquoted. But I certainly said something to the effect that working —

I think I talked about this group I get together every two years and how I poll that group as to what they think they can compound money at with a hundred thousand, a million, a hundred million, 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.

It is true. I think I can name a half a dozen people that I think could compound a million dollars — or at least they could earn 50 percent a year on a million dollars — have that as expectation, if they needed it.

I mean, they’d have to give their full attention to be working on the sum. And those people could not compound money, a hundred million or a billion, at anything remotely like that rate.

I mean, 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 look at everything and you find small securities in your area of competence that you can understand the business, I think you — 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 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, in terms of the expectable rate.

Because there are little — you find very small things that, you know, you can make — you are almost certain to make high returns on. But you don’t find very big things in that category today.

I’ll leave to you the fun of finding them yourselves. Terrible to spoil the treasure hunt.

And the truth is, I don’t look for them anymore. Every now and then, I’ll stumble into something just by accident. But I’m not in the business of looking for them. I’m looking for things that Berkshire could put its money in, and that rules out all of that sort of thing.

Charlie?

CHARLIE MUNGER: Well, I would agree. But 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.

WARREN BUFFETT: Right.

CHARLIE MUNGER: We had it very easy, compared to you. It can still be done. But 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.

WARREN BUFFETT: It’ll work. It’s just you won’t find any. (Laughter)

CHARLIE MUNGER: Yeah.