A lot of investors look to legendary stock picker Warren Buffett for inspiration when it comes to choosing shares to buy. But Buffett controls tens of billions of pounds’ worth of investments. That gives him advantages of scale. If I wanted to invest a more modest sum, such as £1,000, could the wisdom of Buffett still help improve my investment returns?
Buffett on the advantage of small amounts
The answer, I think, is quite surprising – and comes directly from Buffett himself. In an interview in 1999, he noted that the highest rates of returns he had ever achieved in his investing career to that point had been in the 1950s.
There could be a variety of reasons for that, including market conditions in that decade. But Buffett also pointed to the fact that he was managing far smaller funds than in the decades that followed. Here is what he said about his performance relative to the Dow Jones index of leading US shares: “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“.
Buffett actually says, contrary to common perception, that not having a lot of money is a “huge” structural advantage when it comes to investment returns. Why is that the case?
The burden of size
I think the answer can be seen in one of Buffett’s biggest investments today, his holding in Apple. It has been a huge success so far. An investment of $31bn started in 2016 was already worth $120bn at the time of his most recent shareholders’ letter.
But how many companies are big enough to enable an investment of such a huge scale in the first place? In many cases, it would trigger an automatic takeover bid for the whole company. In other cases, a company simply is not big enough to soak up $31bn of investment at any price.
By contrast, with only £1,000 to invest, I could buy a stake in almost any listed company without bringing attention to my investment and affecting the share price. Buffett cannot do that when he spends tens of billions of dollars on a firm’s shares. But, luckily for me, I can. That opens up a far wider universe of shares in which I can practically invest than is the case for Warren Buffett now. That is why he reckons he could do so well investing only $1m compared to the billions of dollars he actually invests.
Putting this Warren Buffett wisdom to work today
What practical application can this insight have for my investing choices?
Sometimes, Warren Buffett’s own investment picks may also make sense for my own portfolio. But with just £1,000 to invest, I would also be able to invest by choosing from a far wider variety of shares than is practical for Buffett. If I hunt for and find winning investment ideas, that could hopefully enable me to achieve the sorts of returns about which even Buffett can only dream!