Warren Buffett Responds to Shai Dardashti’s Question
Former value investing blogger turned private capital manager, Shai Dardashti asked Warren Buffett a very interesting question in a hand delivered letter this past January. Amazingly, Shai received an answer to his great question this week.
In his letter, Shai asks just one question:
At the Q&A I arranged you told me that today (May 23, 2005) you were “85%
Graham and 15% Fisher.”If you were today 20-something years old, again looking to allocate less than $10 million, and free to allocate capital into well over 8,000 opportunities (before even considering anything overseas), would your Latticework of Mental Models primarily be searching for:
a) Situations reminiscent of 1957 – akin to Daehan Flour Mills, or
b) Situations reminiscent of 1987 – akin to Moody’s Corporation?
In response to Shai’s 1,091 word letter that accompanied the question above, he got a to the point, eight word hand written response from Warren Buffett. Mr. Buffett writes:
“Either is fine.”
“[a] Better for small sums.”
“[b] Better for large sums.”
My guess was that Warren Buffett would recommend primarily searching for situations similar in quality to Moody’s Corp (MCO). However, Buffett pretty clearly indicates that for investing small sums, situations reminiscent of 1957 – akin to the Daehan Flour Mills opportunity in South Korea in 2002 are better. Those situations reminiscent of 1957 follow the Graham approach to value investing that focuses on very low PE and/or net assets per share greater than the current trading price. You can view Warren Buffett’s actual response, which is attached to this letter from Shai Dardashti.
I must say, this response from Warren Buffett has me rethinking some of my investment strategies. Is finding a company with a durable competitive advantage selling at a price with a margin of safety not quite as important as I thought? Should I be also looking for deep value opportunities in net-nets and low PE stocks? I’ll be thinking about these questions for quite some time.
Warren shows us once again why he is such a great investment thinker. Good managers consider their own “bite size” in picking stocks. Large managers can’t devote the time to promising opportunities in microcap value; they couldn’t get enough money of their money put to work. For a stock to be badly mispriced, there has to be little information about the stock. That correlates with small tradeable float.
In managing a lot of money, since trading becomes difficult, becoming a pseudo-private equity investor makes sense. Focus on assets that are cheap-ish with good growth prospect due to sustainable competitive advantage, and you have another winning formula.
The dollar alpha to the latter strategy is higher than the former strategy, but not the annual percentage alpha.
Dardashti asked a very important question; Buffett provided a very solid answer; and Merkel made some very insightful explanation. So thank you all for this!