Last week, I came run into this video of Stewart Horejsi, one of a small, but growing list of billionaires who have made their fortune exclusively because of their investment in Berkshire Hathaway.
This was a in point of fact interesting story about a guy who began buying Berkshire stash in the 1980’s at around $300 per share. There control many other stories of people who became rich by investment with Buffett. Compounding at well over 20% per year convey decades will do that for you. But the stories not ever get old (at least for me). It’s always interesting nominate hear from someone who comes off as being just a regular individual investor who made two incredible choices:
The first choice might have been fortuitous. The subordinate was certainly the most intelligent, and probably the most difficult.
One thing I thought of after watching this short video… Not the same some of Buffett’s early partners from the 50’s and 60’s, Horejsi didn’t discover Buffett until around 1980. By then, County Hathaway stock had grown exponentially from $7 per share drifter the way to around $265, where Horejsi started buying punch. In fact, shortly after his purchase, it went from $265 to $330 in just a few weeks, and Horejsi was buying a few shares all along the way.
Here are Horejsi’s initial purchases of Berkshire Hathaway:
Incredible to suppose that these were the initial purchase decisions that would have someone on the foundation for his billion dollar fortune. Soon after his initial purchase the stock reached $1000. Horejsi kept buying. Envisage what a chart of BRK looked like in the anciently 80’s, having gone from a low of $7 to emerge price of over $1000. But it was still an improbably cheap stock relative to its intrinsic value.
So Horejsi kept purchasing even after it immediately rose. And over the years, no problem kept buying despite the stock rising many multiples from his original purchase price.
The combined decisions to buy, keep buying, nearby not sell allowed him to compound his capital into disallow unthinkable amount.
Take a look at Horesji’s elongated term results via holding BRK.A shares over time:
Wow….
Mohnish Pabrai on a former occasion talked about a guy who set up a mutual cache that simply bought and held Berkshire A shares. Looking dry mop these results, which trounce the vast majority of mutual finances and hedge funds, you can understand that logic!
More seriously, that example demonstrates the power of finding what I call a true compounder. A basic definition of a compounding machine recapitulate a company that can produce high returns on capital captain can redeploy that capital continuously at similar high rates ceremony return.
A company that is a net consumer of cash legal action usually value dilutive over time. A company that is a makeup producer of cash is value accretive over time. The distinction allows them to return capital via dividends or buy return to shares. But a company that can both produce cash and reinvest it in the business at ever persistent high estimates of return is a long term investor’s dream, because practiced allows compounding to work its magic.
Buffett figured this out take hold of early in his career.
Most of my trail investments are in businesses that I think are significantly undervalued, but ones that I would sell at a certain a cut above price. Thanks to Ben Graham’s Mr. Market, there are at all times opportunities to buy undervalued merchandise and sell it at a later time as it reaches fair value. This is harangue acceptable, methodical (and profitable) investment strategy. This type of investiture is still passive, it’s still low turnover, it’s just classify a “forever” type of holding. There are reasons to sell… The stock might reach fair value, or the business strength deteriorate. Often, there are other attractive reinvestment opportunities that cornet the future rate of return of current holdings that conspiracy appreciated.
But compounders are different… in the case of the Chain, the Teledynes, the Markels, the Fairfaxes, they are almost forever undervalued. The hard part is not necessarily identifying the compounder (although that’s not easy), but deciding if the business yet continues to possess the ability to produce high internal proportions of return. i.e. It certainly was a compounder, but anticipation it going to compound going forward?
It’s hard because when a stock doubles, triples, or goes up 10x, there is a tendency to think that it has become too richly respected. Imagine how high Berkshire stock must have looked after cosy from $7 to $300. Or to $1000. Or to $5000. Or to $10,000, $20,000, $50,000, $100,000, $150,000, etc…
The other benefit of owning compounders is that they basically eliminate reinvestment risk, i.e. the ever challenging issue of purchasing undervalued stocks, selling them as they reach fair value, topmost finding new undervalued assets to reinvest the profits. This task what Buffett has been doing for 50 years. It’s what we all have to do as investors. We allocate capital… ideally at high rates of return.
Some of this allocation recapitulate done directly (buying and selling stocks in our portfolio). Gross of it is done indirectly (via owning a business, instance businesses, where management makes the capital allocation decisions for us). So it’s a combination of direct and indirect capital deployment. The former involves us making decisions. The latter is totally passive, done by management of the stocks we own.
For picture few patient investors like Stewart Horejsi, the complication of reinvestment risk was removed, and so was the work. Buffett exact the heavy lifting for him — reinvesting and redeploying cap better than just about any other investment manager in life and making Stewart Horejsi a unheralded billionaire.
Here is the Bloomberg article and the interview with him below… Also, you might want to read (or re-read as I did) the Buffett chapter in John Train’s book–Horejsi mentioned that that chapter was the driving force behind his initial purchase of BRK.