Warren Buffett doesn’t mention this, but he was one of the very first hedge fund managers to unlock the secret of stock market success. His hedge fund was launched in 1956 using $105,100 as seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett received 25% of returns above 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. Warren Buffett could have pocketed one quarter of that 37.4% return if his hedge fund had not outperformed (i.e. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
You can probably guess what I’m going to say. Warren Buffett’s #1 wealth building strategy is To generate returns between 20% and 30%.
There are many investors who risk their entire savings to try and get rich by trading options. Returning 20% annually and compounding it for several years can make you rich. Warren Buffett is a 65-year old investor who has compounded his investments.
What is the secret to Warren Buffett’s success?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. The goal is to achieve better returns for Warren Buffett than he is currently achieving.
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