What Buffett Won't Say: Berkshire Annual Meeting

Small investors looking to earn higher investment returns should probably skip the upcoming Berkshire Hathaway annual meeting.

Every year thousands of investors flood Omaha, Nebraska, to listen to the words of the Oracle himself. They not only come from all over the country, the Berkshire Hathaway annual meeting has turned into a global investing conference, drawing an increasing number of investors to the small midwest city from all over the world.

The hope, as always, is that by flocking around what many pundits (myself included) call the greatest investor of all time, they'll grab some key insight into the nature of investing and be able to propel their portfolios that much higher.

This investing pixie dust is not distributed evenly, however. Over the last 50 years Warren Buffett's frame of reference, and resulting strategy, has shifted. Buffett is far from the small hedge fund manager he started out as after leaving Graham-Newman Corp to start his own firm. His tremendous success has meant a tremendous growth in the amount of capital he has to invest. As a result, the strategies and tactics once open to Buffett as an investor have slammed shut.

Nowadays, when Buffett speaks about investing, he's looking at the enterprise from the point of view of a large institutional investor. The advice he gives is congruent with that, and not realizing that fact will trip you up. In fact, I've called following Buffett's advice without thinking critically about the message falling into the Warren Buffett trap. There is a lot of wisdom on offer at the Berkshire Hathaway annual meeting, but if you're a small investor then you have to make sense of his advice and suggestions and pick out what's most applicable to your own situation.

Unfortunately, the advice that Warren Buffett gives at the Berkshire Hathaway annual meeting, among other venues, is mostly geared towards large professional investors and people who will be filling those sorts of roles. He rarely, if ever, talks about the course of action a small private investor like you should take. Still, you can pick out moments when Buffett had directed his comments to small investors, and those moments are incredibly valuable. This clip here from an older Berkshire Hathaway annual meeting is a case in point. https://www.youtube.com/embed/Z2R7sy-77q0

Warren Buffett rarely talks about what a small investor should do with their money if they want to earn great returns. Here Buffett makes it very obvious that the best returns for small investors are not the moat-type companies he's famous for investing in recently. The best use of a small investor's cash is to buy classic Graham, or deep value, stocks like he did years ago.

More recently, in 2015, Buffett gave further insight into what small investors can do to earn great returns on a small amount of capital. These comments didn't come out in his Berkshire Hathaway annual meeting, but in his shareholder letter:

"My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance." - Warren Buffett, Berkshire Hathaway 2014 Shareholder Letter

Deep value stocks in the form of high quality net nets, not fast growing companies with moats, was how Buffett built his empire. It was only when his portfolio got too big that he had to shift his investment strategy to focus on high quality growth companies that he had to hold as longer term investments.

"The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.”

I think that part of the reason so many investors flock to Omaha is because they are really struggling to reap the best returns on their capital, time, and effort. Ironically, by attending the Berkshire Hathaway annual meeting, small investors are being lead down an entirely different path than the one they intended to follow. As a small investor, if you follow him into his current strategy, you're ultimately setting yourself up to earn lower returns over the course of your life.

Last year I wrote 10 Reasons Why I Won't Go to Warren Buffett's Annual Meeting. Buffett has had a huge impact on my own deep value investing, and I've internalized many of the lessons he's been generous enough to offer. Still, there are good reasons why you should think twice about visiting him in Omaha. I guess you could put this article down as number 11.

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Article Author: Evan Bleker