Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
I started Insider Monkey 12 years ago. From time to time I receive offers from potential buyers who want to purchase the entire business for 2-3 times its annual profits.
It usually takes me a few nanoseconds to reject those offers. What am I going to do? Sell my business for 2-3 times its annual profits and invest the proceeds in the stock market that is trading for 18 times earnings?
The funny thing is that I usually get flooded with these predatory offers when Insider Monkey’s traffic is growing at an annual rate of 50% or more.
Small web businesses must be the cheapest asset class in the US. Stock market investors used to pay 100x revenue for unprofitable software businesses that are growing at 40-50% annual rates, whereas the market values my site at 3 times its profits?
I won’t sell my site but there are thousands of web businesses similar to Insider Monkey and some of their owners sell these businesses for 2-3 times profits.
I recently came across a brand new stock that is in the business of buying growing internet businesses for about 3x profits and using its expertise to boost its traffic, engagement, and revenues.
The best thing about investing in web businesses through this company instead of directly buying them is the diversification.
Interestingly, this NASDAQ company’s entire market cap is less than cash on its balance sheet. I believe as the company locates growing profitable targets and deploys its cash hoard, its revenues and stock price will skyrocket.