Warren Buffett breaks down how he would invest if he had to start again with $1 million

Summary

In this insightful script, the speaker, presumably Warren Buffett, shares his strategy for achieving a 50% annual return with a small initial investment. He emphasizes the importance of thorough research, using his experience with the Moody's Transportation manual as an example. Buffett details his method of discovering undervalued securities by immersing himself in the details of small companies, a passion that he believes is essential for success in investing. He encourages finding and pursuing what one's brain is best suited for, whether it be in chess, bridge, or the financial markets, and suggests that the audience is already on the right path by attending the annual meeting.

Takeaways

• 📚 The speaker emphasizes the importance of thorough research, mentioning the example of going through 20,000 pages of the Moody's manual to find investment opportunities.
• 🚂 The speaker recounts his experience with the Green Bay and Western railroad company, highlighting the value of detailed knowledge about niche companies.
• 🔍 He suggests that with a small amount of capital, one could potentially achieve a 50% annual return by identifying undervalued securities through exhaustive research.
• 💡 The speaker believes that passion for the subject matter is crucial, not just the desire for financial gain, drawing a parallel to how biologists or chess players are driven by the love of their field.
• 🧠 He acknowledges the complexity of the human brain and how individuals excel when they engage in areas they are naturally suited for and enjoy.
• 🤝 The story of impressing Charlie by knowing details about obscure companies illustrates the power of deep knowledge and its potential to connect with others.
• 🔑 The speaker implies that opportunity cost plays a role in deciding which investment method to use, suggesting a combination of both deep research and value investing.
• 🎯 The speaker advocates for a targeted approach to finding investments, focusing on small companies that may offer outsized returns.
• 🤔 He encourages a mindset of curiosity and continuous learning, much like how one would approach a game or a puzzle, to find hidden investment gems.
• 🌐 The speaker hints at the need to adapt to modern equivalents of Moody's manuals for current investment research, indicating a willingness to evolve with the times.
• 🎲 Lastly, the speaker suggests that the game of investing should be enjoyable, and that one should be on the right track if they are passionate about the process and attend annual meetings.

Q & A

What was the guaranteed annual return mentioned in the script?

The script mentions a guaranteed annual return of 50%.

What was the initial investment scenario described in the script?

The scenario described is starting again with under $1 million.

What method did the speaker use when he was 20 or 21 to find investment opportunities?

The speaker used to go through the Moody Transportation manual, reading about various railroad companies.

What was the nickname for the Green Bay and Western railroad company?

The Green Bay and Western railroad company was nicknamed 'grab baggage and walk'.

What was unique about the Green Bay and Western's bond and common stock?

The bond of Green Bay and Western was actually the common stock, and their common stock was actually a bond.

What impressed Charlie when the speaker first met him?

Charlie was impressed by the speaker's detailed knowledge of small companies on the west coast, which he thought the speaker would never have heard of.

What is the speaker's approach to investing if he had to start again with a small amount of money?

The speaker would try to know everything about everything small, focusing on finding undervalued securities.

What is the speaker's view on the importance of loving the subject in investing?

The speaker emphasizes that one must be in love with the subject of investing, not just the money, to be successful.

What does the speaker suggest about the human brain and its capabilities?

The speaker suggests that the human brain does its best when you find out what it is really suited for and then focus intensely on that area.

What advice does the speaker give to those interested in achieving high returns in investing?

The speaker advises that one should be passionate about the game of investing, find it exciting to expand their knowledge, and focus on finding undervalued securities.

What does the speaker imply about the attendees of the annual meeting?

The speaker implies that attendees of the annual meeting are likely to be interested in investing and have a passion for the subject beyond just playing games like Bridge or chess.

Outlines

00:00

💼 Investing Strategies for High Returns

The speaker reflects on his confidence in achieving a 50% annual return if starting with under $1 million. He emphasizes the importance of thorough research, akin to going through thousands of pages of Moody's manual, to discover undervalued securities. He shares his experience of finding unique investment opportunities in small companies, such as the Green Bay and Western railroad company, by delving deep into details and being passionate about the subject. The speaker stresses the necessity of a genuine interest and love for the investment process rather than just the money, drawing parallels to how experts in other fields are driven by their passion for discovery.

05:04

🤝 Welcoming Enthusiasm for Investment

In this paragraph, the speaker acknowledges the dedication of those who attend the annual meeting, suggesting that they are motivated by more than just casual interests like Bridge or chess. He expresses his pleasure in their attendance and encourages them to return the following year, indicating a sense of community and shared passion for investment among the attendees.

Keywords

💡Annual Return

Annual Return refers to the percentage of profit or loss an investment achieves over the course of a year. In the script, the speaker mentions a goal of achieving a 50% annual return, which is a significant benchmark for investors. This concept is central to the discussion as it sets the ambitious target for investment strategies being discussed.

💡Moody's Manual

Moody's Manual is a reference guide that provides detailed information about various companies, typically used by investors for research. The speaker mentions flipping through 20,000 pages of Moody's Manual, indicating a thorough and detailed approach to investment research. This highlights the importance of deep analysis in identifying undervalued securities.

💡Investing Opportunity

Investing Opportunity refers to potential avenues or assets that can yield a profit. The speaker discusses how their investing opportunities have broadened, suggesting a wider range of choices for where to invest. This concept is crucial as it underscores the need for a strategic approach in selecting investments that can meet the high return target.

💡Green Bay and Western Railroad

Green Bay and Western Railroad is an example of a specific company mentioned in the script. The speaker uses this as an example of the kind of lesser-known companies they would research in detail, demonstrating the thoroughness required to find undervalued investments. This example illustrates the speaker's methodical approach to uncovering investment opportunities.

💡Bond

A bond is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (a fixed sum, known as the coupon) and/or to repay the principal at a later date, known as the maturity date. In the script, the speaker mentions a bond that was actually common stock, which is an unusual situation that could lead to investment opportunities.

💡Charlie

Charlie is likely a reference to Charlie Munger, a business magnate and a long-time friend and business partner of Warren Buffett. The speaker mentions impressing Charlie with their knowledge of small companies, indicating the importance of deep knowledge in building credibility and relationships in the investment world.

💡Undervalued Securities

Undervalued Securities are stocks or bonds that are believed to be trading below their intrinsic value. The speaker's strategy involves finding these undervalued securities, which is a key part of achieving high returns. This concept is central to the investment philosophy being discussed in the script.

💡Knowledge

Knowledge, in the context of the script, refers to the deep understanding of various companies and their financials. The speaker emphasizes the importance of knowing everything about everything small, which is a testament to the thorough research required in investment. This highlights the value of expertise in identifying investment opportunities.

💡Love for the Subject

Love for the Subject refers to a genuine interest and passion in the field of investment, rather than just the pursuit of money. The speaker suggests that one must be in love with the subject to be successful, indicating that passion and dedication are crucial for achieving excellence in investment.

💡Opportunity Cost

Opportunity Cost is the loss of potential gain from other alternatives when one alternative is chosen. The speaker mentions opportunity cost as the final arbiter of which method to use, suggesting that investors must consider what they are giving up by choosing one investment over another. This concept is important in making strategic investment decisions.

💡Investment Research

Investment Research involves the analysis of financial information and other data to make informed investment decisions. The speaker's approach to going through extensive manuals and detailed company information exemplifies the depth of research necessary for successful investing. This concept is integral to the overall message of the script, emphasizing the need for comprehensive analysis in investment.

Highlights

Confidence in achieving a 50% annual return with under $1 million starting capital.

Emphasis on the importance of thorough research, akin to flipping through 20,000 pages of Moody's manual.

Personal anecdote of going through the Moody Transportation manual and finding interesting insights.

Discovery of unique investment opportunities in lesser-known companies like the Green Bay and Western railroad company.

The concept of 'grab baggage and walk' as a metaphor for seizing unusual investment opportunities.

The strategy of collecting undervalued securities that could work for small capital but not for many millions.

Impressive knowledge of small companies that impressed Charlie Munger during their first meeting.

The importance of passion for the subject matter over just being in love with money.

The comparison of investment research to a biologist's pursuit of knowledge in their field.

The acknowledgment of the complexity of the human brain and its role in excelling in certain areas.

The strategy of focusing intensely on what one's brain is best suited for to achieve success.

The necessity of enjoying the 'game' of investing to be successful in finding undervalued securities.

Encouragement for the audience to continue their pursuit of knowledge and return for the next annual meeting.

The idea that anyone attending the annual meeting is already on the right track in their investment journey.

The value of being in love with the process of finding investment opportunities, not just the outcome.

The notion that expertise in one area does not necessarily translate to success in others, as illustrated by examples of smart people making poor decisions outside their area of expertise.

Transcripts

towards the end of 2018 you mentioned

that you guarantee you could make a 50%

annual return if you had to start again

with under $1 million the question is if

tomorrow you woke up in the body of a of

of P bodyy old P body but that's

fine and your name was now Warren

alakat and you had some money to Inver

on a full-time basis what method or

methods would you use to achieve that

return would it involve flipping through

20,000 pages of Moody's manual or

similar Publications or finding you you

know to find buts or would it be hunting

for great companies at a fair price as

Mr MW or would it be a combination of

both with opportunity cost serving as

the final Arbiter of which method to use

given that your investing opportunity

has now broaden significantly thank you

cop good question I'm glad you came and

the uh the answer would be in my

particular case it would be going

through the 20,000 pages and since we

were talking about railroads you know I

went through the Moody Transportation

manual a couple of times that was 1500

or 2,000 Pages or well probably 1500

pages and I found all kinds of

interesting things when I was 50 or when

when I

was uh 20 or 21 and I don't imagine

there's anybody here that knows about

the Green Bay and Western railroad

company but uh there were hundreds and

hundreds of railroad companies and I

like to read about every one of them the

green band

Western uh in those days everybody had a

nickname for for railroads I mean that

was that was just what Northern Pacific

was the Nipper and you know TB snow

was one of them in the East that used to

go up to Cornell and uh the green band

Western was known as grab baggage and

walk and

gbnw and they had an they had a bond

that was actually the common stock and

they had a common stock that was

actually a bond and you know that that

could lead to unusual things but they

wouldn't lead unusual things that would

work for you with many millions of

dollars but but if you collected a whole

bunch of

those which I set out to do and actually

that's what impressed Charlie when I

first met him because I knew all the

details of all these little companies on

the west coast that he thought I would

never have heard of but but I knew about

the Los Angeles Athletic Club or

whatever it might be and he thought he

was the only one that knew about that

and that that that uh

that became an instant point of

connection so to answer your question uh

I would I would I don't know what the

equivalent of Moody's manuals or

anything would be now but I would I

would try and know everything about

everything small and I would find

something and with a million dollars you

could earn 50% a year but you have to be

in love with the

subject uh you can't just be in love

with the money you really got to just

find it like a you know essentially like

you know people find other things in

other fields cuz they just love looking

for it a biologist looks for something

because they they they want to find

something they and it's built in I don't

know how the human brain works that much

and I don't think anybody understands

too well how the human brain works but

but there's different people that that

uh just find it exciting

to expand their knowledge in a given

area we

uh you know I know Great British players

I know great chess players actually uh

Kasparov came to Al met Mrs B I've had

the luck of of meeting a lot of people

that are unbelievably Smart in their own

Arena and do some unbelievably dumb

things in other areas so all I know is

the human brain is complicated and but

it does its best when you find out what

your brain is really suited for and then

you just uh pound the hell out from that

point and that's what I would be doing

if I if I had a small amount of money

and I wanted to make 50% a year but I

also wanted to just play the game and

you can't do it if you really if you

don't find the the game of Interest

whether it's Bridge or whether you know

whatever it may be chess or this case

finding Securities that are undervalued

but it sounds to me like you're on the

right track I mean anybody that will

come all the way to this annual meeting

has got something in their mind other

than Bridge or chess uh so I'm glad you

came and come again next year