How Buffett Would Earn 50%+ Returns
People won't tell you about these opportunities [1]. You must go to where markets are inefficient. Bombed out industries, hyper-illiquid companies[2], and obscure markets [3] are where you live.
If there is no public information, become an investigative analyst and find some[4]. The smaller you are, the better advantage you have to find great opportunities [5].
Start with the A's [6]. After finding an inefficient area of the market, read everything. Go through every security one-by-one. Be prepared to look at thousands of pages..."turning over rocks", before you find an obvious investment [7].
Load up on sure things. Concentration, if you know the situation well enough, is your friend. Don't get married to any one company; recycle your capital frequently. Gravitate capital towards your best opportunities. Owning just six stocks is often the sweet spot [8]. Occasionally, load up on a big opportunity with little downside [9].
Use strategic leverage in "Work-outs." Avoid borrowing more than 25% of your net worth [10]. When you do borrow, only do it against arbitrage or event-driven situations with high predictability—never against the general market. This is to boost your returns, not generate them.
Hunt for absurd valuations. Buy companies at wildly cheap "net-net" valuations—selling for less than their liquidation values, or P/E ratios below 3x [11, 12]
Work-outs are underrated. Buy after corporate events are announced. Protect your downside. Capture the spreads and look for catalysts [13].
§References & Buffett Quotes
[1] On the silence of the market:
"No one will tell you about these businesses. You have to find them." — Student Visit, 2005
[2] On illiquidity (Western Insurance):
"I found Western Insurance in Fort Scott, Kansas... I ran an ad in the Fort Scott paper to buy that stock." — Columbia Talk, 1993
[3] On obscure markets (Korea):
"A couple of years ago I got this investment guide on Korean stocks... It felt like 1974 all over again." — Student Visit, 2007
[4] On investigative work (GEICO):
"I went down to Washington on a Saturday... I pounded on the door... finally a janitor came... [Lorimer Davidson] answered my questions for four hours." — Various biographies / Annual Meeting comments
[5] On the structural advantage:
"It’s a huge structural advantage not to have a lot of money... Your universe expands – there are thousands of times as many options if you’re investing $10,000 rather than $100 billion." — BusinessWeek, 1999 / Annual Meeting, 2007
[6] On where to start:
"Start with the A’s." — Adam Smith Interview, 1993
[7] On the volume of research required:
"You have to turn over a lot of rocks to find those little anomalies... I went through [Moody's Manuals] page by page." — Student Visit, 2005 / Columbia Talk, 1993
[8] On concentration:
"We would hold the half-dozen stocks we liked best... Keep it in the few you know." — Annual Meeting, 2009
[9] On betting big:
"With less capital, I could have put all my money into the most attractive issues and really creamed it." — Student Visit, 2005
[10] On leverage limits:
Buffett strictly limited borrowing to 25% of the partnership's net worth, noting he would never borrow against "Generals" (stocks dependent on market behavior). — Partnership Letters (Historical Context)
[11] On liquidation value (Union Street Railway):
"I found the Union Street Railway... selling at about $30 and, as I remember, had $100 a share in cash and no liabilities." — Columbia Talk, 1993
[12] On low multiples (Daehan Flour):
"[Daehan Flour] was earning 18,000 won... the current price was 40,000 or 2 times earnings. In 4 hours I had found 20 companies like this." — Student Visit, 2007
[13] On special situations (Work-outs):
"We found very mispriced bonds... You could make big returns but had to be of small size. I’d look in small stocks or specialized bonds." — Annual Meeting, 2008