Warren Buffett (Trades, Portfolio) has famously said the following statement:

“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.”

I am sure every investor wants to find out how would he make 50% a year guaranteed. A logical starting point is his rates of return as well as portfolio details in the 1950s. Unfortunately there is extremely limited information out there with regards to his return and portfolio composition. Therefore, I was delighted to find the following information from Andrew Kilpatrick’s book “Of Permanent Value.” The following information was contained in a letter Warrren Buffett wrote to Andrew Kilpatrick in 2001. This table shows the details of his investment from 12/31/1950 to 12/31/1951. Let’s take a look:

Ed Note: Be sure to read Warren’s observations toward the end of this article

12/31/50

Buffett & Co. $591.20

Selected Industries (1200@3 1/8) 3,750.00

U.S & International Securities (700 @ 4 1/8) 2,887.50

Parkersburg Rig & Reel ( 200 @13) 2,600.00

Total $9,828.70

Less Loss on Interest in Marshall Wells (12 ½ @198) 25.00

Net Assets $9,803.70

12/31/51

Buffett-Falk & Co. $292.63

Dividends receivable 140.00

Government Employees Insurance (350 @ 37 ½) 13,125.00

Timely Clothes (200@13) 2,600

Baldwin Co. (100@22) 2,200.00

Greif Brothers Cooperage “A” (200@18 ¼) 3,650.00

Des Moines Railway 5’s -1955 (2000@33) 330.00

Thor Corp. (200 @12 ¾) 2,550.00

Total: $24,876.63

Less Bank Loans : $5,000.00

Loss on interest in Cleveland Worsted Mills (25@95) 150.00

Total Deductions : $5,150.00

Net Assets: 19,737.63

Net Increase in Investment Account $9,933.93

Less: Capital Additions 2,500.00

Net Gain from Investments: 7,433.93

Percentage Gain on 12/31/50 Net Assets : 75.8%

Dow-Jones Industrials 12/31/51: 269.23

Dow-Jones Dividends – 1951: 16.34

Total:285.57

Less: Dow-Jones Industrials 12/31/50: 235.41

Gain in Dow-Jones Industrials:50.16

Percentage Gain on 12/31/50 Dow-Jones Industrials 21.3%

Wow! Buffett did kill the Dow in 1951 with a return of a mind-blowing 75.8% versus the Dow’s 21.3%.

Here are a few observations:

1. Buffett put more than half of his net assets in GEICO after he found out that Ben Graham was heavily invested in it and after he spent a few hours with Lorimer Davidson.
2. His next four largest positions such as Thor Corp and Timely Clothes made up 9% to 15% of his portfolio.
3. Together, his five largest holdings accounted for a whopping 97% of his portoflio.
4. Buffett’s 75.8% return is leveraged as he borrowed $5,000 in 1951, probably to finance the Geico purchase.
5. None of the year-end 1950 holdings were included in the year-end 1951 holdings, implying that Buffett flipped them within a year.
6. This doesn’t include his short position in Kaiser-Frazer, which you can find more detailes in Alice Shroeder’s “Snowball.”

I think the following lessons offer some foods for thought:

• Bet big when the odds are extremely in your favor, such as Buffett’s investment in GEICO. But only if you have done enough scuttlebutt work on your own and the investment is within your circle of competence. A related topic, which will require another full article, is the concept of expected return.
• This may sound controversial, but It is okay to use some leverage when the odds are good. Both Buffett and Munger used leverage in their early investment life. Especially when you are still young and have nothing to lose. But his lesson only applies to intelligent investing, not to speculation and gambling alike.
• You don’t have to hold a stock for five to 10 years just to prove you are long-term oriented. Mohnish Pabrai (Trades, Portfolio) once said something like for most of us, the stocks that can make us 50% a year will likely not take that long to get us the results. Of course if you prefer quality and are satisfied with a 10% to 15% annual compounded return, a longer time horizon may work better.

   »» As equity markets continued to consolidate, there were notable moves beneath the surface. (page 2)

»» There are plenty of reasons to be long equities, but one indicator is sending a cautionary signal—margin debt. (page 2)

»» Global Roundup: Surprising results from Canada’s spectrum auction and why corporate bond issuance could increase meaningfully; Analysis of Italy’s leadership change; Why the Sinopec news is about far more than petrol retailing. (page 4)

For the complete Weekly Report as well as Daily Updates CLICK HERE.

Canada’s housing market is at risk of a meaningful correction, Nouriel Roubini said on Monday, though the economist known as “Dr. Doom” for his often gloomy forecasts said he was not predicting a crash.

Roubini also said the value of the Canadian dollar is too strong, noting the challenge that poses to the manufacturing sector, and suggested the Bank of Canada should use more aggressive monetary policy to weaken the loonie.

Roubini, who is credited with predicting the collapse of the housing market in the United States and the ensuing financial crisis, pointed to a number of housing markets that are showing signs of “frothiness, if not an outright bubble,” including Canada, the United Kingdom and parts of China.

While he highlighted the high level of household debt as an area of concern in Canada, he acknowledged there are many differences between Canada’s housing market and the one that collapsed south of the border, including the excessive use of subprime mortgages in the United States and stronger banks in Canada.

“I’m not predicting a crash, but certainly a meaningful correction could occur and that would be something that could of course dampen the economy that is already growing moderately,” said Roubini, chairman of Roubini Global Economics and an economics professor at New York University’s Stern School of Business.

The Bank of Canada faces the same dilemma as other central banks around the world, which is that policymakers are wary of raising interest rates too soon before economic growth has set in, Roubini said. However, low rates and extraordinarily accommodative monetary policies may eventually lead to asset bubbles, he said in a speech to a Toronto business group.

Roubini said that the Canadian economy overall was doing “OK, not exceptional” and forecast growth of around 2.3 percent to 2.4 percent this year, with a slightly higher pace next year.

“I would say if your currency was 10 percent weaker, that would help manufacturing,” said Roubini.   Continued…

If you follow our blog, then you are definitely familiar with trader Larry Levin, President of Trading Advantage LLC. We have gotten such a great response from some of his past posts that he has agreed to share one more of his favorite trading tips as a special treat to our viewers. Determining the direction of the market can be tricky and just plain confusing at times, but Larry’s expert opinion keeps it simple.

If you like this article, Larry’s also agreed to give you free access to his Weekly Trading Tip.

I have heard that 95% or more of all traders ultimately fail.

Have you ever wondered why?

Most traders will tell you it was the system or method they were using. They’ll also tell you they had a few bad trades they couldn’t recover from. Or their dog chewed through the telephone cord just as their computer crashed, and they couldn’t get out of a losing trade.

Everyone has a different reason, but when you hear enough of them, a pattern begins to develop. I believe most traders fail because they sabotage themselves.

The markets work differently from other investing opportunities. There is probably more freedom in the trading business than any other industry in the world.

You can do what you want, whenever you want to do it. You can trade 1 contract or 100. Buy the market or sell it; it’s up to you. The only thing that holds you back is running out of capital.

Most people are not accustomed to that much freedom.

If you can’t control the market, the only thing you can control is yourself.

Trading is also very different than the things we do on a daily basis. In everyday life we exercise some control over our environment. If a room is too dark we turn the light on. If we want to go somewhere, we jump in the car and turn the key.

In trading you can’t control what the market does.

No matter how much you want the market to go in a certain direction, there is nothing you can do to force that to happen. You can’t turn a key or flip a switch. Hoping, pleading, screaming… nothing will make the market do what you want it to.

Embrace the uncertainty – plan for the best and worst cases

One of the most important things you can do to avoid the mental sabotage is to understand the lack of control you have over the market, and plan for every trade. Now I don’t mean a trading plan like buy a contract and then close the position when the market trades higher. I mean a real plan. That includes specific entry points based on certain market movements or conditions. It means exit strategies for when things go right and for things go really wrong. It means placing limits and stops and keeping your emotions in check. If you have a roadmap for your day, you are less likely to fall into that trap of mental sabotage.

Remember: if you can’t control the market, the only thing you can control is yourself.

Successful traders all understand and embrace this concept. Unsuccessful traders continue to try to make the market conform to their wishes.

Click here to see Larry’s Weekly Trading Tip

Best Trades to you,
Larry Levin
Founder & President- Trading Advantage

Disclaimer: Futures and options trading involves a substantial degree of risk and may not be suitable for all investors. Past performance is not necessarily indicative of future results. Secrets of Traders LLC provides only training and educational information. By accessing any Secrets of Traders or Trading Advantage content, you agree to be bound by the terms of service. Click Here to review the terms of service.

“This week we will review the market conditions and what stock market bulls should be somewhat cautious of at this juncture”  – Lance Roberts

More Good News – Economy Weaker

This past week was filled with more good news for “drug addicted” stock market bulls as a slate of economic data came in much weaker than expected. As I discussed last week, the “bad news is good news” mantra continues to push asset prices as weaker economic data raises hopes that the Federal Reserve won’t pull the “punch bowl” away too soon.

This past week saw the Empire State Manufacturing index drop by 8 points to near contraction levels as the Philadelphia Fed Manufacturing Index plummeted by 15 points to a contraction level of -6.3. The housing market was battered as the NAHB homebuilders index collapsed by 10 points. Mortgage applications drop by 4% last week as is down 17% over the last year. Housing starts slid to just 880k (annual rate) from 1.04 million last month, and existing home sales missed expectations at 4.62 million down from 4.87 million last month.

While the Leading Economic Indicators rose by 0.3% in the latest month the internals were very weak.  More importantly, the coincident to lagging ratio, which is like a book-to-bill for the economy, fell further into recessionary territory.

Of course, all of the weakness is being blamed on the weather.  However, there are two points to be made here.  In many cases the data was weakening well before the cold weather set. Secondly, the data is already “seasonally adjusted” to account for the normal tendency to have inclement weather during the winter months. It is interesting that nobody questioned the “better than expected” data over the last two years as the “seasonal adjustments” boosted the reported data sharply as unseasonably warm winter prevailed?  

This week we will review the market conditions and what stock market bulls should be somewhat cautious of at this juncture.

>> Download This Weeks Issue HERE

About Lance Roberts

Lance Roberts is the General Partner & CEO of STA Wealth Management, Host of the “Streettalk Live” Daily Radio Show (streamed live at www.streettalklive.com), and Chief Editor of the X-Report and the Daily X-Change Blog.
Follow me on Twitter: @streettalklive