What Young Warren Buffett Can Teach You About Investing...READ MORE
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| What Young Warren Buffett Can Teach You About Investing | | It was a different time. In the 1950's and 1960's, stocks were just starting to come back into favor as an investment following the 1929 crash and Great Depression. While the era would eventually lead to a mini-bubble that pales in comparison to today, it was also the heyday for a young Warren Buffett. Operating a partnership (akin to a hedge fund today), Buffett was able to beat the returns out of the high-flying market, starting with just a hundred thousand dollars under management.
How did he do it? While most folks today might say "value investing!" there were a few things that were different.
The first was that early Buffett's value investing was heavily dependent on deep financial value. And back in the 1960's, there were still plenty of opportunities to find values where a company would even trade for less than the net value of cash and cash equivalents on its balance sheet. In other words, you could buy an entire business, take out the cash, and immediately reimburse yourself the purchase price—and still own the ongoing business!
Such opportunities are rare today. With more money, more investors, and more efficient ways of finding data, it's easy to see why such opportunities have faded away.
Another early opportunity came from arbitrage. That's simply the term for finding mispriced stocks trading in different markets. A stock trading on the NYSE might have a different, and higher price, on another exchange.
By buying on the lower exchange and selling on the higher one, an investor can make an instant, but incredibly small, profit on each trade. Such opportunities are rare as a pure play, but can exist today during periods of mergers.
Both these strategies are designed to not lose money, a key Buffett metric of investing. And they're designed to make small, but consistent profits time after time. That's how a young Buffett could make large returns. Investors with small sums today can look for small companies that have deep value, and look at arbitrage opportunities during corporate mergers for such market-beating profits.
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