Warren Buffett: How to Generate 50% Returns with Small Amounts of Money (Recent Interview)

To could earn 50% a year the answer would be, in my particular case, it would be: everything you have ever learned about money is wrong, and you're about to find out why.

In this video, you see there is an old saying that it takes money to make money, meaning that if you want to generate attractive investment returns, you first have to be sitting on a large amount of money. As you're about to hear from Warren Buffett, this isn't actually the case. In fact, when it comes to generating high investment returns, it can actually be a huge advantage to be starting out with relatively small sums of money.

Take a listen to what Buffett had to say when asked how he would generate 50% returns if he was starting out again with a small amount of money. The answer would be, in my particular case, it would be going through the 20,000 pages. And since we were talking about railroads, you know, I went through the Moody's Transportation manual a couple of times. That was 1,500 or 2,000 pages, or well, probably 1,500 pages.

I found all kinds of interesting things when I was 50 or when I was 20 or 21. I don’t imagine there's anybody here that knows about the Green Bay and Western Railroad Company, but there were hundreds and hundreds of railroad companies, and I liked to read about every one of them. The Green Bay and Western, in those days, everybody had a nickname for railroads. I mean, that was just what Northern Pacific was, the Nipper. And you know, Phoebe Snow was one of them in the East that used to go up to Cornell.

The Green Bay and Western was known as grab baggage and walk and GBNW. They had a bond that was actually the common stock, and they had a common stock that was actually a bond. And you know, that could lead to unusual things, but they wouldn't lead to unusual things that would work for you with many millions of dollars.

But if you collected a whole bunch of those, which I set out to do, and actually that's what impressed Charlie when I first met him because I knew all the details of all these little companies on the West Coast that he thought I would never have heard of. But I knew about the Los Angeles Athletic Club or whatever it might be, and he thought he was the only one that knew about that. And that became an instant point of connection.

So to answer your question, I would—I don’t know what the equivalent of Moody’s manuals or anything would be now, but I would try and know everything about everything small. And I would find something, and with a million, you could earn 50% a year. But you have to be in love with the subject. You can't just be in love with the money. You really got to just find it like a—essentially like, you know, people find other things in other fields because they just love looking for it. A biologist looks for something because they want to find something.

I don't know how the human brain works that much, and I don't think anybody understands too well how the brain works. But there are different people that just find it exciting to expand their knowledge in a given area.

I know great bridge players. I know great chess players. Actually, Kasparov came to—met Mrs. B. I've had the luck of meeting a lot of people that are unbelievably smart in their own arena and do some unbelievably dumb things in other areas. So all I know is the human brain is complicated, but it does its best when you find out what your brain is really suited for. Then you just pound the hell out of it from that point.

That's what I would be doing if I had a small amount of money and I wanted to make 50% a year, but I also wanted to just play the game. And you can't do it if you really don't find the game of interest, whether it's bridge or chess or whatever it may be, or the case finding securities that are undervalued.

But it sounds to me like you're on the right track. I mean, anybody will come all the way to this annual meeting has got something in their mind other than bridge or chess. So I'm glad you came, and come again next year.

There are three incredibly important principles from Warren Buffett that you absolutely must follow if you want to generate high returns with small amounts of money. We'll jump into that list shortly, but first, some quick background on Warren Buffett to put his comments from the clip into context.

Buffett is the CEO of Berkshire Hathaway, a conglomerate with a market value of a staggering $900 billion as of the making of this video. When it comes to investing, bigger is not always better. As a portfolio or business, in the case of Berkshire gets larger, so does the dollar amount of an investment that is able to truly move the needle, as Buffett likes to put it.

For the sake of argument, let’s say an investment needs to be 5% of the current value of Berkshire in order for it to be large enough to make a difference. 5% of $900 billion comes out to $45 billion. To put that $45 billion number into perspective, take a look at some well-known companies with market caps of around that size.

There is the clothing brand Adidas, food company Kraft Heinz, owner of namesake brands Kraft and Heinz, as well as Oscar Mayer, Kool-Aid, Lunchables, and Jello. There's also the car manufacturer Hundi, a company that generated $121 billion in revenue in 2023. All of these companies are massive, with each and every move closely scrutinized by professional investors.

Given how well followed these companies are, it is highly unlikely that their stocks will ever be extremely undervalued. This leads into the first item on our list: focus on smaller opportunities. Buffett has frequently described Berkshire's large size as a massive disadvantage to generating high investment returns. To quote Buffett's late business partner Charlie Munger, "It's like being a one-legged man in a kicking contest."

One of the little-known secrets to successful investing is avoiding competition. As a general rule of thumb, the smaller the company, the less the competition from other investors. When Buffett was first starting out, he would lock himself in a windowless and dreary office and go through what were known as Moody's manuals.

These books contained details on thousands of different companies. The goal for Buffett was to find a potentially overlooked investment opportunity. As I'm sure you can imagine, this process was incredibly time-consuming. Thankfully for us, we now have the internet. We can automate a lot of tedious work by using a stock screener like this one here.

We simply select the market cap range we want to look at, so in this case, $50 million to $2 billion. We can also select the PE ratio we want. I chose 0 to 15 to filter out any unprofitable companies. This leaves us with a list of about 1,000 stocks to take a look at. These are just stocks traded on US exchanges. The same process can be used to search for potentially overlooked opportunities in other countries as well.

The second principle from Warren Buffett on how to generate high returns with small sums of money can be summed up in a simple one-word: focus. Okay, I know that may not make complete sense right now, but bear with me for just a second.

To demonstrate what I mean when I say focus, let me tell you a quick story about one of Charlie Munger's friends named John Arilaga. John Arilaga was a billionaire real estate developer. With just this information on John, you might think that he owned a ton of different types of property throughout the entire country. Maybe John's real estate portfolio looked something like this: office buildings in New York, Chicago, and Los Angeles; apartment buildings spread throughout the states of Florida and Texas; warehouses and industrial buildings scattered across the entire Midwest United States.

This couldn't be any further from the truth. John Arilaga became a billionaire investing in real estate, all of which was located within a 2-mile radius from the campus of Stanford University in California. In sticking with the theme of this video, John didn't start out with a ton of money to invest. As the story goes, he came from a working-class family, one of five children, and money was tight in the family. John was able to attend Stanford, but only because he got in on a basketball scholarship.

By the time he graduated, he had scrimped together enough money to start investing in real estate, money he earned working six jobs at a time during the offseason for basketball. Over time, John became an expert on this particular area. He knew it better than anyone else, and this provided John with an edge when it came to investing in local real estate.

Over a decades-long period, John Arilaga became a billionaire by focusing intensely on what he knew best—this relatively small real estate market. He didn't stray into venture capital, private equity, or emerging markets. John didn't even invest across town. He stayed close to what he knew and never left his sweet spot.

You can apply this lesson to your own investing. Find where you have an edge and stick to it. Starting out with small amounts of money allows you to focus on something small and niche that wealthy corporations and professional investors might be overlooking.

This leads perfectly into principle number three from Warren Buffett on how to invest small sums of money: focus on your best ideas. As of the making of this video, Buffett's stock portfolio at Berkshire Hathaway is worth over $375 billion and consists of 47 stocks. It's fair to say that Buffett has a pretty diversified stock portfolio. However, that was not always the case. Things were much different back when Buffett was investing small amounts of money.

Let's rewind the clock all the way to the year 1951. Warren Buffett was a 20-year-old college student in New York City studying under his mentor Ben Graham, the father of value investing. Buffett had fallen in love with investing as a student in Graham's class. At some point, Buffett found out that one of Graham's largest holdings was a company by the name of Government Employees Insurance Company, or GEICO for short.

Buffett had never heard of the company and wanted to see what all of the hype was about. Buffett learned that GEICO was headquartered in Washington, D.C., a roughly 4-hour train ride away from New York City. Looking to impress his mentor, early one Saturday morning, Buffett took the train to Washington, D.C. to visit the company.

Buffett walked up to the office door, but to his dismay, it was locked. Buffett didn't realize that not everyone in Washington, D.C. worked seven days a week, like back in his hometown of Omaha, Nebraska. He knocked and knocked until eventually, a janitor let him in. Fortunately for Buffett, there just happened to be an executive of the company in the office working that day.

Impressed by Buffett's determination, the executive spent four hours explaining to a young Warren Buffett how the insurance industry worked and what made GEICO special. Shortly after this meeting, Buffett went on to invest $10,000 into GEICO stock, roughly two-thirds of his entire net worth at the time—money that he had earned from his paper route and various side ventures he had growing up.

Over the next two years, the stock increased by 50%, netting Buffett a tidy profit of $5,000, or over $60,000 in today's money. This represented Buffett's first significant successful investment and would go on to provide the seed capital for Buffett's $100 billion net worth.

There is a very important lesson to take away from the story of Buffett's younger days. Of course, Buffett identified GEICO as a great investment opportunity, but equally as important, he seized this opportunity fully, investing two-thirds of his net worth. He didn't just buy a couple of shares. Buffett has a saying that when it rains gold, put out the bucket, not the thimble.

Great investment opportunities are rare. If you want to generate high investment returns with small sums of money, you have to take full advantage of them when they do come. If you made it this far in the video, it is clear that you are dedicated to learning from investment legends like Warren Buffett. Since that is the case, you'll want to check out this video here because it covers the most important parts of the recent Berkshire Hathaway annual meeting. I can guarantee you don't want to miss out on the wisdom Buffett shared. I'll see you over there.