The First Million

Ian Cassel Blog, Educational 19 Comments

Getting Started is hard work. Warren Buffett’s right hand man, Charlie Munger is quoted, “The first $100,000 is a bitch”. Warren Buffett made his first $100,000 in the early 1950’s when he was still an individual investor, compounding his capital 50% annually over several years. $100,000 in 1950 is equivalent to about $1 million today. So perhaps Munger’s 2015 version would be, “The first $1 million is a bitch”.

In 1948, Ben Graham through his company Graham-Newman Corporation bought 50% of GEICO for $712,000. By 1972, this investment was worth $400 million, a 562 bagger. The gain in GEICO would contribute more profit to Graham’s partnership than all the gains from all other investments combined. The irony is that Graham rarely invested more than 5% of the firm’s capital in one company, but with GEICO he invested 20% of the firms capital. Graham’s most successful investment ever came when he broke his rules and made an educated concentrated bet.

Warren Buffett, age 20, was introduced to GEICO in 1950 when he was Graham’s student at Columbia Business School. Buffett would soon travel to GEICO head quarters to conduct due diligence on the company. He would talk for hours with Lorimer Davidson (would later become CEO) and gain valuable insight into the business. Less than two days after the meeting with Davidson, Buffett would put 75% of his net worth into GEICO. About two years later he would sell GEICO for a 50% gain. [side note: Buffett would later join GEICO’s board of directors even though he didn’t own the stock. This would change in the 1970’s when he would start buying shares, adding through two decades, and finally in 1995 buying the remaining 49% of GEICO he didn’t own for $2.3 billion.]

Throughout his early 20’s, Buffett would continue allocating capital to only his highest conviction investments. In some cases this meant placing big bets on one, two, or three companies in particular. When reading Warren Buffett’s comments during this time period, he often used phrases like, “I bought as much as I could”. You don’t hear him using phrases like, “I was worried about owning too much”. From 1949 to 1954, he would average ~50% annual returns, growing his capital 10x breaking the $100,000 mark, equivalent to $1 million today.

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. 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.”– Warren Buffett

I talk to a lot of highly intelligent investors and some are just getting started with $2,000 – $5,000 – $20,000. The road to $1 million might seem impossible like it’s ascending straight up Mt. Everest. It is not. All you need to do is find and buy a couple great companies early and you will get there. I think fellow MicroCapClub Member Tom Klein said it best when he tweeted:

MillionTweet

Now we aren’t going to start comparing ourselves to Warren Buffett, but what we can do is analyze how he grew his initial capital from $10,000 to $100,000 in his early twenties. Even Buffett didn’t have it all figured out when he was getting started, and his investment philosophy would evolve over time. When I was managing $25,000 my approach wasn’t nearly as disciplined as it is now. Now unlike Warren I was human and took a few big losses during my early capital building years. Most people reading this will also experience your fair share of loss along the way. It will test your psyche, emotions, and discipline, but there is no greater educator than loss. You will learn by losing and then you will prosper.

Warren Buffett’s greatest asset was (and is) his ability to focus. In his early years he wanted to grow his capital as quickly as possible. He didn’t do that by investing in ten good companies. He did it by finding one, two, three great opportunities and buying as much as he could. He didn’t have position sizing rules. The more he liked something, the more he owned. Even Graham broke his own rules and bellied up to the bar when he saw a great opportunity in GEICO. When I was building my capital base from $10,000 to $100,000 to $500,000 I was at most in three positions. I found the best investments I could find and bought as much as I could. If you want to build capital quickly, only invest in your best ideas. Life is Too Short To Diversify.

When Buffett was in his early 20’s building his capital base to $100,000 he conducted great due diligence, visited companies, and spoke to management. Most wouldn’t be surprised by the first one, but many would be surprised that he went as far as visiting companies and speaking to management. Even though he was investing small amounts he took the initiative to meet management. Your edge is knowing your investments better than most. To know your investments better than most you have to do what most don’t. Most of your competitors for great investments do not talk to management. Talk to management.

Now I’d like to add a couple more important things ……

If you want to grow your capital quickly you need to find companies that can be multi-baggers. You need to find stocks that can get big. Most investors assume this means taking on more risk. This isn’t the case at all; in fact I would say this is less risky then most value investing strategies. It is just harder to find such companies. You want to find and buy undervalued companies that will get very overvalued. Through the years I’ve found when you find these elements in one stock, it’s a good formula for success:

what-i-look-for-and-why

From Presentation: All Great Companies Started As Small Companies

When you find companies with all of these attributes being led by quality management, it’s usually only a matter of time until institutions start to own them, driving the stock prices up significantly. To be a successful investor, you don’t want to invest where the institutions are, you want to invest where they are going to go.

Extraordinary returns follow extraordinary discipline. Discipline in buying and selling, and maybe the most important one of all, Holding. Don’t bother finding the next multi-bagger if you aren’t going to develop the conviction to hold it. Ben Graham didn’t achieve a 500+ bagger in GEICO because he bought his position in 1948. He achieved a 500+ bagger because he held his position. When you find great companies, develop The Conviction to Hold.

There is no reason you can’t turn $10,000 into $1 million in ten years or less regardless of the macro economy. Learn from Warren Buffett and from others on how they turned small amounts of capital into wealth. Don’t listen to those that have never done it. Never seek advice from people that haven’t done what you are about to do. To do great things you can’t think like everyone else. The first million is a bitch, but you will get there.

You might also find this interesting: Warren Buffett’s Net Worth By Age

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Comments 19

  1. Well said Ian, these takeaways are essential to all young investors looking to achieve exceptional returns, especially when first starting out. I appreciated you tying in so many of your prior articles with great advice as well.

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  2. Ian, I really enjoyed this commentary, and I agree in the points you bring up. In my own circle of influence I can think of so many people that would benefit from the points and examples you cover. Yes the first million is a bitch, history is filled with these stories and I rarely tire of reading them. Of all you bring up in this commentary I would suggest that the most important phrase in my mind’s eye is “educated concentrated bet.” Of the millionaires that I know if you dig down somewhere in their history you will nearly always identify a time period in which they made an “educated concentrated bet.” It can be with stocks but it can just as well be with real estate or a business.

    The popular and often default position for the masses of people is for diversification and safety. I wish more people would benefit from the practice of “educated concentrated bets.” It is sad that the investment industry is so conditioned to preach diversification and to push blue chip and mutual funds almost exclusively. For far to many folks this is a dis-service brought on by the legal department.

    Here’s wishing your readers have a successful “educated concentrated bet” or better yet several over a lifetime.

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      Thanks Jon, I think the public in general is wise to diversify. Most of the general public don’t know how the markets work, what a stock is, let alone how to value them. The key thing is “educated” bet. For those that want more out of their investments and that educate themselves, they can achieve above average returns.

  3. Ian

    As always, great job my friend. I humbly admit my investing philosophies has changed quite a bit since joining MCC. Isn’t it about time you get a book published?

    Tony S

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  4. Hi Ian

    Well articulated thoughts. Your post will give a lot of hope to investors – that its’s doable. Inspiring stuff.

    Buffett said “I don’t want a lot of good ideas. All I need is a few great ideas.”

    You are spot on. Concentrate. Focus.

    It is a treat to read your posts. Thank you.

    Happy Returns
    VJ

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  5. Since GEICO is your example of Buffet’s success, it’s useful, important even, in support of the article’s emphasis on micro-caps, to specify whether or not GEICO was a micro-cap when Buffet entered in 1950. I don’t have this information nor I suspect do any of your readers. I think it’s safe to guess that GEICO wasn’t a micro-cap at the time since Graham paid so much in 1948. If I’m correct, it’s not a good example for your article and even a bit misleading, though I’m sure unintentional.

    Investors can make large % gains with micro-caps. Many here have done so. I have done so. However Buffet is the wrong example to use. I suspect not only did he not make his money in micro-cap stocks; I would be surprised if he ever invested in micro-caps.

    Going one step further, I suspect his high conviction investments were larger companies — mid-caps at the least. This is an important distinction when speaking about management, in particular. I suspect Buffet was interviewing people with much more experience than is found in most micro-cap companies. Therein lies a danger of micro-caps.

    Mind you, I’m not arguing against your premise however it would be more illuminating if you found a similar example who was a micro-cap investor with Buffet’s success.

    Respectfully,
    George Fowler

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      Most of his early investments were microcaps which is well documented in several publications.

      Graham bought 50% of GEICO in 1948 for $712,000, so in 1948 was valuing the company at $1.4m or ~$14 million in todays dollars. GEICO then went public on the over the counter market. When Buffett entered the stock two years later I’m sure it wasn’t that much bigger, even if it was 5x bigger would still still be considered a nano cap.

  6. Hmmm … reading another article here, I see I was wrong if indeed Buffet invested in Berkshire when it’s market cap was $18M. I can’t delete my post so I offer apologies.

    Kind regards,
    George

  7. Excellent post. The key to multi-fold returns typically comes from holding on for a very long time. You can only hold on, if you know the company very well. You can know the company very well, if you have done your due diligence well (which may include talking to management and also ‘scuttlebutting’). Only then you can concentrate your holdings as well.

    Very nicely articulated.

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  8. Ian,

    Excellent read! As a newer investor and trader, I’m trying to find my niche, thanks for the inspiring read as I try to preserve my capital and keep the winners!

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  9. Great article, Ian, which provides a historical perspective.

    Not at all intending to take the credit away from Buffett or Munger or anybody else, but in their heyday (1950s, 1960s), were companies being tracked by investors as widely and as vigorously, as they are today? In other words, were there far more “low-hanging fruit” in those days, than there are today?

    How were the US markets in those days? Were there so many sell-side analysts, churning on reports on hundreds of companies? Did companies use to hold earnings conference calls or analyst briefings, regularly, the way they do today?

    Can Buffett’s stupendous returns be attributed in part to his “early start” and there being “lesser competition” from other investors? I have not tracked US markets that well, and I might be totally wrong on this. But just a thought that crossed my mind.

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      Thanks Nitiin. In short you are absolutely correct. The amount of information at investors finger tips today versus fifty years ago (even 20 years ago) makes it a lot harder for investors to gain a quantitative edge. If anything it forces investors of today to do more qualitative analysis because you can’t get away with just doing quantitative. I believe one of our members on MCC summed it up really well in this response on our forums: https://twitter.com/iancassel/status/698525776409268224

      This said, I do feel that microcaps represent one of the last truly inefficient markets left. Why? Large, smart money can’t buy microcaps until they are larger. The smaller smart investor has a real edge.

      1. /Large, smart money can’t buy microcaps until they are larger./ Absolutely, Ian. You’ve hit the nail on its head! As Peter Lynch mentioned in “One Up on Wall Street”, promising stocks are overlooked by most fund managers, as their market cap is too low to be considered by their funds. Once these stocks rise in price, so does their market cap, and only then, do big funds invest in them.

        I can recall my own personal experience. As a sell-side analyst in India, I had liked Hawkins Cookers Ltd. way back in 2004, when its market cap was ~INR280mn. But when I sounded a couple of fund managers out, they were not interested due to the “below threshold” market cap. Circa 2016 and whoa! Market cap is INR13.8 billion! It’s a 47-bagger between 2004 and now, in spite of having corrected by nearly 50% off its all-time high.

        Having said that, risks in small caps, particularly in EMs including India, are quite high. Many if not most small caps are potential landmines, and require thorough due diligence on management, business model and financials. One in maybe 20 may turn out to be a multi-bagger. Rest can potentially make an investor a “begger”.

  10. One area in which I was able to do a 5-bagger in last 2 years is companies which produce commodities. My 2 cents on investing in cyclical stocks:
    1. Look for cyclical deep downturn in a commodity.
    2. Find a stock which is leveraged but will not bankrupt even in worst scenario of commodity price.
    3. At bottom and in the turnaround period add aggressively even on margin.
    4. Keep an eye on the commodity price on which the equity is based on daily basis. On any major reversal be prepared to lighten up. Don’t be afraid to get back in if you think uptrend is intact.

    As we know in market no rule always works. Case in point BTU (extreme example) went from $1000 to $10 MT (steel) never recovered for years together.

    Also you need to watch the cycles years and study in depth. For years I lost money in this area, but I managed to finally find an investment at exact bottom of zinc cycle which not only wiped my entire losses but also put me many years ahead.

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