Can you beat Warren Buffett at investing and earn 50% annual returns on stock market investing based on Buffett’s strategies? Absolutely.
While he still beats the S&P 500 by several percentage points per year on average, he can’t outperform the market by as much as he used to. But it’s not due to his age; it’s because the size of his portfolio is so large.
According to the June 30, 2019, Berkshire Hathaway Portfolio Tracker, Berkshire Hathaway’s (NYSE: BRK-A) (NYSE: BRK-B) investment portfolio of stocks, bonds and cash totals more than $208 billion.
According to Buffett: “If I had $10,000 to invest, I would focus on smaller companies because there would be a greater chance that something was overlooked in that arena. 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. But you can’t compound $100 million or $1 billion at anything remotely like that rate.”
But he can’t earn the same 50% rate with $100 million or $1 billion, because it’s the smaller, faster-growing companies that typically offer the highest returns.
Small-capitalization stocks can’t help Warren Buffett though. For example, if Buffett invested in a $250 million market cap company and its doubled in value, Berkshire Hathaway’s portfolio would just increase by less than 0.5%.
Considering the amount of research involved, it may not be worth his while. Buffett stays away from small-cap stocks, despite their potential for high returns because he neither wants to cause a run-up in the price of a small-cap stock, nor does he want a controlling stake.
So Buffett has to forego the 50% growers and settle for capital-intensive slower growers that can absorb the investment capital he needs to throw at them.
Buffett’s 50% per year return – can you beat it?
Inspired by Buffett’s claim to be able to get a 50% return in a year, investor and best selling author, Ney Torres is going to try and prove it with what he is calling the “50% a Year Challenge.”
“I’ll start 2 small portfolios. I think the first one can get 50% within the first year with a little leverage. But the second one won’t use leverage at all. And it could take 1 to 3 years to get to the annualized 50%,” said Torres.
Torres is a serial entrepreneur with a dual master’s degree in real estate development and Brokerage Management from Spain’s Polytechnic University and Ecuador’s San Francisco de Quito University. He also has undergraduate degrees in both Finance and Business Administration. Torres has developed and invested in over 500 properties between Ecuador and the United States, in addition to managing other companies in social media.
Torres is currently applying artificial intelligence in trading and value investing.
“I will show you the two accounts and the purpose. So we can discard luck, someone can open 20 portfolios and use leverage and get that result by pure luck. However I won’t tell what I’m buying or selling. Notice that I’m completely aware that the market is crushing which makes it that much more difficult.”
For the challenge Torres will use two accounts (#490764724TDA from thinkorswim and U1459543 from interactive brokers). For the average investor, it’s a real advantage to have smaller sums of money to invest. Thanks to online investing, the proliferation of high performance small cap companies, and the abundance of stocks that can be purchased directly from companies without the need for a broker, such as dividend reinvestment plans (DRIPs) or direct purchase plans, being a small investor has never been easier or more affordable.
AI and trading
“‘Artificial intelligence is to trading what fire was to the cavemen.’ That’s how one industry player described the impact of a disruptive technology on a staid industry. In other (less creative) words, AI is a game changer for the stock market.”
“According to a recent study by U.K. research firm Coalition, electronic trades account for almost 45 percent of revenues in cash equities trading. And while hedge funds are more reluctant when it comes to automation, many of them use AI-powered analysis to get investment ideas and build portfolios.
“When Wall Street statisticians realized they could apply AI to investment trading applications, he explained, “they could effectively crunch millions upon millions of data points in real time and capture information that current statistical models couldn’t.”
The advent of technology means that small investors can still achieve diversification with limited investment dollars.
Best-selling author, investor and entrepreneur, Brian Ainsley Horn, helps professionals leverage their knowledge to gain authority status in their industry. Brian is the co-founder of marketing firm Authority Media Consulting.
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