Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they werenâ€™t called hedge funds, they were called â€œpartnershipsâ€. Warren Buffett took 25% of all returns in excess of 6 percent.Â
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffettâ€™s hedge fund didnâ€™t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund â€œfeesâ€.Â
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 â€œfeesâ€. His investors didnâ€™t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffettâ€™s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as â€œfeesâ€. S&P 500 Index lost 10.8% in 1957, so Buffettâ€™s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffettâ€™s hedge fund returned 23.5% annually after deducting Warren Buffettâ€™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 Buffettâ€™s hedge fund at the beginning of 1957 see 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).
As you can guess, Warren Buffettâ€™s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffettâ€™s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffettâ€™s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.