How You Can Invest Like Buffett

Today’s issue of HX Daily marks our 100th ISSUE! Thank you for your support!

In my three decades as a professional investor, I have had quite a few highs and even seen some lows.

My portfolio manager career began in 1997, and I founded my first fund in 2001. We started that fund when I was twenty-nine years old and launched with just $585,000.

In four short years, we grew that fund to over $1.4 billion in assets, making it (briefly) one of the most significant funds out there. That was one of the highs!

After a few years, I sold that fund to my partners and went out and formed my fund – 360 Global Capital. With my established track record, we had the benefit of launching with a much more significant amount of money ($60 million) and, within a couple of years, were managing $250 million.

That fund was established in the heart of the Global Financial Crisis, and – unlike almost any money managers – we made money throughout that period. In July 2011, we scaled nicely and even launched an exchange-listed European version of the fund. This was another one of the highs…

Little did I know, though, that we would be out of business just a few months later!

Few of you may remember, but in the late summer of 2011, there was a global economic "scare." While the United States had emerged from the Global Financial Crisis, much of Europe was still struggling. Greece was bankrupt, and Spain and Italy were feared to be not far behind.

Another event that also sent shockwaves through the global economy was Japan's 2011 earthquake and tsunami. This began to manifest in disruptions throughout the global economy.

Going into July of that year, our strategy was flat for the year. We were trailing the stock market after several good years of performance.

The stock market had done little but then got hit with a dramatic selloff at the start of August. Here is the chart of the S&P 500 from back then…

You can see in that chart the dramatic selloff that happened. This was one of the highest velocity selloffs in the S&P 500 ever!

"Velocity" means the combination of size and speed.

We had come into July with low exposure but began buying stocks aggressively as the selloff ensued.

We had done our work with our companies and believed that the global disruptions were temporary. Based on our decades of experience, we also thought that the international financial regulators could handle the European situation.

Unfortunately, we were unprepared for the degree (and speed) of the disruption to the global stock markets. We quickly had the most significant drawdown in our strategy ever.

It was not a drawdown that was out of line with what our model anticipated, but factually, it was our worst ever.

Despite the psychological pain of the losses, we were quite confident in our positions.

Our team of five worked upwards of twenty hours a day during those weeks, going out and speaking with our companies and industry contacts. Everything confirmed that we were correct, and the right thing to do would be to hold on to our positions.

Our challenge, however, was not with our positions but rather with our investors.

While we had grown nicely in a couple of years since our launch, we had one large investor that made up about 2/3rds of our $250 million capital. It was a large global financial institution where we had tremendous relationships built across decades.

Unfortunately, the group where our investment was maintained had recently seen a management reorganization. Our prior contacts were still involved, but there was a new head of that group. When he started six months earlier, he had eliminated many of their investments and pared them back to just 30 funds.

We were lucky to be one of that small group and were told we were likely to see considerable growth because of it!

What happened instead was tragic.

During the drawdown in August, they had several other funds that were hit much harder than we were. These funds had losses that, on a dollar basis, were multiple times the size of their entire investment in our fund. One of these funds had lost ten times what they had invested with us.

As the market went lower and the losses grew, the analyst responsible for our investment repeatedly went to the group's new head and pled our case. She pointed out our track record of making money in every real down market and that we gave them better information and transparency than their biggest investments.

She said she had more confidence in us than any other manager they had on their roster. The rest of that group were some of the world's biggest and most well-known managers.

They had a pivotal investment meeting three weeks into the month, and the new head of the group made a decision. He said to the analyst, "These guys might be the best managers we have, but it is our smallest investment. I want us to liquidate and focus on the larger investments.”

With that single decision, my fund would lose our largest investor and 2/3rds of our assets. There are rules about what percentage of a fund an institution can invest in, so this would force out another 15% of our investors. We would lose 85% of our capital within three months.

Now, look back at that chart of the S&P 500. See what happened next?

Had we not had to liquidate, we would have not only returned to breakeven by year-end, but within six months, our holdings would have nicely outperformed the market.

Why do we share this story?

We share it because you, as an individual investor, have an advantage we did not have as an institution. That almost no institution has – the advantage of “permanent capital.”

When you are investing your own money, it is YOUR money.

There will not be some new head of a group making an arbitrary decision to come in and make you sell at the bottom because they don’t want to deal with it.

This allows you to make better decisions, take advantage of volatility, and turn it into a money-making opportunity.

We mentioned Warren Buffett in our title because this has been one of his significant advantages across the decades.

His holding company – Berkshire Hathaway Inc. (NYSE: BRK.B) – owns large insurance companies. These companies take in premiums for claims they may not have to pay for many years. Often decades.

This gives him the same advantage that you have with your capital. The ability to be opportunistic in times of volatility!

Remember this advantage the next time opportunity presents itself…

What is your time frame for the majority of your investments? Please share your thoughts in the comments section online or at [email protected].