Trade Like a Young Warren Buffett, Not Like Berkshire

What would Warren Buffett do if he had the same amount of capital as you?

In the middle of the internet bubble in 1999, Warren Buffett gave an interview to BusinessWeek. Here is what he said:

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

That sounds a bit like bragging, but I read it as a confession. The most successful investor of our time is telling you that the way he invested for most of his career is not how he would invest if he were running your account. He has made the same point many times at the Berkshire Hathaway (BRK.B) annual meeting and to the groups of students who visited him in Omaha. Substantial capital is a handicap, and he has dealt with that issue for many decades.

Despite this obvious problem, many small investors are determined to invest the way Buffett did at Berkshire. They buy a handful of big, famous companies, vow to hold them forever and quote his line about his favorite holding period. They are copying a method he adopted because his success left him no other choice.

What Size Does to You

Think about what happens when you have hundreds of billions of dollars to put to work. A position that doesn’t move the needle isn’t worth the time, and a position that does move the needle has to be enormous. That rules out almost the entire stock market. A small company could double and Berkshire’s shareholders would never notice, even if Berkshire bought all of it. Nothing that size can be bought or sold quickly without pushing the price the wrong way.

Look at Kraft Heinz (KHC). Berkshire owned about 28% of the company for more than a decade while the stock lost more than half its value. When Greg Abel decided to get out this year, Berkshire had to register the shares with regulators just to be able to sell, and the stock slid on the news. A small investor would have been gone years ago with a few clicks.

So Berkshire buys giant companies and entire businesses, and it holds them, because there is nothing else to do with that much money. When there isn’t anything big enough at a sensible price, the cash just piles up. Berkshire is sitting on about $360 billion in cash, and Greg Abel, who took over as CEO at the start of this year, has only begun to put it to work.

That is a sensible approach for Berkshire. It is an illogical one to copy when you are running a small account.

What He Did With Peanuts

The better question to ponder is what Buffett did before he had so much money that it became a handicap.

In the early 1950s he read Moody’s manuals page by page, thousands of pages, looking for companies nobody was paying attention to. He has told students about Western Insurance Securities, a stock that traded as low as $3 a share in a year when the company earned $29 a share, and about National American Insurance, which earned $29 a share while trading around $27 or $28. His advice to them was that you have to find companies that are way off the map, because nobody is going to tell you about them.

He didn’t hold those bargains forever. When a stock reached fair value, he sold it and moved on to the next one. He sold his early stake in Geico, a company he loved, partly to raise money for Western Insurance, because the new idea was cheaper. When he ran his investment partnership, a large share of the money went into what he called workouts. Those were mergers, liquidations and other corporate events where the profit depended on the deal closing, not on what the market did. It is what is now commonly known as arbitrage. The partnership compounded at close to 30% a year before fees from 1957 through 1969, while the Dow managed about 7%.

He never lost the habit of looking for the unknown names. In the mid-2000s he flipped through a broker’s handbook of South Korean stocks and in a few hours found about 20 companies selling at two- or three-times earnings with strong balance sheets. He bought a basket of them with his personal money. That isn’t the patient blue-chip collector people picture. That is a bargain hunter who moves quickly.

Buffett the Trader

That is why I have always thought of the young Buffett as a trader. He wasn’t reading charts or chasing momentum, but his approach had everything I look for in good trading. He found a gap between price and value that the market was missing. He concentrated when the odds were tilted his way. He took his profit when the gap closed and put the money into the next opportunity. Turnover was part of the process.

Success made all of that impossible. Once the money got big enough, there was no way to trade in and out of small, mispriced stocks, so he became the long-term holder of great businesses that everyone knows today. He didn’t give up trading because buy-and-hold was better. He gave it up because it stopped being available to him.

The Hardest Thing in Investing

What makes Buffett great is that he could make that pivot. When his money got too big to keep hunting for small bargains, he taught himself to do the hardest thing in investing, which is finding a business you can hold for decades.

Most people have no idea how rare those businesses are. Hendrik Bessembinder, a finance professor at Arizona State, studied every U.S. stock from 1926 through 2016. About 4% of them accounted for all of the stock market’s gains over Treasury bills, and more than half did worse over their lifetimes than simply holding Treasury bills. Buffett is candid about how few of those winners he found. In his 2022 letter to shareholders he wrote that Berkshire’s results over 58 years came from about a dozen good decisions, roughly one every five years, and that most of his other decisions were no better than so-so.

It takes a certain conceit for a small investor to think he can do what Buffett did. Buffett had decades of experience, access to the people running the companies and the ability to buy entire businesses outright. Most people who buy a famous name and vow to hold it forever aren’t finding the next great compounder. They are hoping. Buffett was a brilliant bargain hunter first and a brilliant long-term owner second, and few investors have ever mastered both.

What It Means for You

If you are running a small account, you have the advantage Buffett lost. You can buy a small company that no institution can touch. You can get in and out without anyone noticing. You can go where the inefficiencies are, and that is almost always in the stocks that are too small, too obscure or too messy for big money to bother with. You can play catalysts, the events that force the market to take a fresh look at a stock, which are the modern version of his workouts.

None of that is easy, and I’m not suggesting anyone expect 50% a year. Buffett read every page of those manuals, and few people are willing to do that kind of digging. Small stocks are volatile, thinly traded and full of traps. If you aren’t going to do the digging, buying a low-cost index fund and holding it is a perfectly good answer.

But if you are going to pick stocks, use the tools that fit your size. The standards Buffett used never changed as his money grew. He wanted a wide gap between price and value, and he waited until he found it. What changed was the hunting ground. With a small account, you still have access to the ground he had to leave behind.

Copying Berkshire’s portfolio means volunteering for Buffett’s handicap. If you want to invest like Buffett, invest like the Buffett who didn’t have very much money.

At the time of publication, DePorre had no position in any security mentioned