How to turn $10k into $30 billion

Berkshire Hathaway’s annual meetings give shareholders the opportunity to pick CEO Warren Buffett’s brain on a wide range of topics.

However, one investor who attended the conference in 1999 cut right to the chase. “Mr. Buffett, how do I make $30 billion?“

Buffett’s best advice for investors is to get started as early as possible. He has a simple metaphor to explain his wealth-building strategy. “We started with a little snowball on top of a very long hill,” he said. “We started at a very early age in rolling the snowball down, and of course, the nature of compound interest is that it behaves like a snowball.”

Indeed, the length of Buffett’s career is a key piece of his enormous wealth. He bought his first stock at the age of 11. He’s now 93 years old and still actively investing. In fact, the majority of Buffett’s wealth was accumulated after he turned 65. In 1999, his net worth was just $30 billion. Today, it’s nearly four times greater at $116 billion.

Staying invested over a long period of time is crucial. Ordinary investors can best harness the power of compounding by starting as early as possible.

Buffett said that if he were starting again today with $10,000, he would focus first on small businesses. “I probably would be focusing on smaller companies because I would be working with smaller sums and there’s more chance that something is overlooked in that arena,” he said at the shareholder meeting.

In his early days, the billionaire investor focused on extremely small companies that would be considered micro-caps here in Australia. He bought a tiny furniture company in Nebraska in 1983 when it was still expanding across state lines. He acquired See’s Candies when it made just $4 million in annual profits in 1972.

These small businesses were overlooked and had more room to grow. That means Buffett had a chance to buy them cheap before conventional institutions found them on their radar.

I like to do just the same. Hub24 had just $350m in FUA and $30m mkt cap when I bought it’s shares in 2013. Now in 2023 it’s a $2.7 billion mkt cap.

USA Small cap stocks are roughly 30% cheaper than large cap ones at the start of the final quarter of 2023, according to analysis by BNP Paribas. They have also historically outperformed large caps, especially after recessions and over longer periods of time, says MSCI.

The same is true of Australia. Even though the overall market in “growth” stocks in late 2023 looks overheated, there are some really interesting small cap opportunities out there, some of which are in the Managed Equity portfolio as little sleepers.

Tom Watson Sr., the founder of IBM (NYSE:IBM), once said, “I’m no genius. I’m smart in spots — but I stay around those spots.” That’s the mantra Buffett has applied to his investing too.

Investing is risky, and Buffett has mitigated that risk by sticking to industries he understands. Much of his portfolio is focused on either simple consumer businesses or financial companies.

Ordinary investors can similarly reduce risk by avoiding stocks in businesses that are too complex to analyze and evaluate. Or by evaluating stocks in industries  where they already have insights from working experience. Find your edge within your circle of competency.

What Warren Buffet has never said, but really underpins the leverage behind the explosion in his wealth, is that he owns a big chunk of Berkshire Hathaway that in essence is an investment manager of other people’s money in return for fees. And in his early days he had no problem charging both asset management fees and 20% performance fees. If you are suddenly given millions then billions to manage and can get away with charging performance fees, then you are on the way to becoming a billionaire.

While no-one should begrudge an investment manager from charging a fair asset management fee, performance fees I believe are commonly abused. I’ve seen a listed ASX example in 2023 where the manager, despite underperforming for 10 years in a row, except for one year, extorted a performance fee as there was no catch up clause. 

In his 1999 AGM address, Buffett advised investing by yourself, in small companies, since these are not on the radar of large fund managers.

I don’t think that was sensible general advice for the vast majority of people out there.

I do share a disdain for many large fund managers globally, although I think Australia is blessed with having an above average number of competent large investment managers. But I believe Buffett over estimated the competence level of the average person to successfully manage their own share portfolio.

Having met thousands of investors in my time, I’ve been amazed at the lack of basic knowledge of so many. For them, a little knowledge is a dangerous thing. They are far better off outsourcing the investing. Even then, they still control the decision to panic and liquidate at the lows. In some ways, I regret the demise of structures like endowment policies that locked people in.

And interestingly, a surprising percentage of the competent investors I’ve met have ended up becoming clients of mine anyway. Perhaps because I present a similar level of competence to them, or simply because they prefer to travel and get on with their lives and pass the paperwork and other burdens of investing on to professionals like me.