Ideas Behind Buffett’s 1999 “50% Return on US$1 Million” Claim

Back in 1999, the Oracle of Omaha, Warren Buffett, shared with Business Week that he could make a 50-percent return on US$1 million – is this possible? Was there a catch when he said that? Even in 1999 terms, a 50-percent return is phenomenal.

Buffett’s exact words were, “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.”

For answers, we turn to We Study Billionaires – The Investors Podcast (TIP) by hosts Preston Pysh and Stig Brodersen, where they answered questions from their listeners, one of which on Warren Buffett’s 50-percent return on a million dollars claim.

50-percent returns on US$1 million

Buffett said that not having a lot of money is a “huge structural advantage”. Wait, how can not having a lot of money be an advantage at all? What he really meant was if you have a small sum of money, a decent absolute return would give you a huge relative return on your portfolio.

That is because, at that point of time in 1999, he was already a billionaire and Berkshire Hathaway was a multi-billion dollar company. Therefore, earning US$500,000 is a lot easier than earning US$500 million if you think about it.

Also, the TIP hosts pointed out that Buffett did make 60 percent a year back in the 1950s when he was in his twenties and thirties. If we take that into consideration, then yes, he definitely could earn a 50-percent return on US$1 million, even now.

But that was many years back and we have to take into account the amount of growth and transformation the world was undergoing.

Buffett is a business owner, not stock buyer

Therefore, the TIP hosts suggested that instead of thinking of Buffett being like most retail and institutional investors, going out in the stock market and picking stocks, Buffett is really a business owner. What he does, whenever he buys any particular company’s stock, he would be thinking of (hopefully) eventually owning the entire business.

In fact, Berkshire Hathway owns ten and a half Fortune 500 companies now, the half being Kraft as mentioned in his 2015 shareholder letter. This is not forgetting the other businesses he owns currently, most of which were publicly-listed companies he bought and privatised over the years.

This is also why most economists and investment analysts would prefer to refer Buffett as a businessman rather than purely an investor. As the TIP hosts said, it is extremely difficult to beat the market benchmarks in today’s economy, let alone achieving 20-odd percent returns, which is essentially Berkshire Hathaway’s annual return rate to date.

Getting our own portfolio returns

Investing in the next upcoming Amazon or Google stock might not be exactly possible anymore, now that most tech stocks have already ballooned to their current sizes. Also, one can not overlook the risks involved at that point of time when Amazon and Google were not the giants they are now.

Instead of looking in the market for such stocks, one could possibly look at the current market and adopt Buffett’s “business owner” mindset. We should only buy stocks that we would gladly own and privatise like Buffett is doing, and not forgetting that the time we would like to hold those stocks should be forever.