Are Warren Buffett's Best Investing Days Behind Him?

By Markets Fool.com

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In the investing world, no one has a better reputation and track record than Warren Buffett. Many would argue that he's the greatest investor of all time.

That's why it may come as a shock to you that Buffett's best investing days were actually over 60 years ago. Here's why -- and how you can get the same returns as the Buffett of old.

Young Warren absolutely crushed it
Before Berkshire Hathaway becamethe leviathan it is today, Buffett managed a relatively small investment partnership. It was his first venture in managing other people's money, and he proved to be a phenom from the start.

Buffett published an annual letter to his partners way back then, just as he does today. The tone of these letters from the 1950s is remarkably similar to that of his letters today. (You can check them out here.) He has, in essence, preached the same value investing lessons over and over for a half century. In other words, Buffett's fundamental game plan then was the same as it is now.

But back in the days of his first partnership, Buffett was returning 50%-plus per year. That's flat-out incredible, even by the standards of a guy they call "The Oracle."

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In a 2005 talk at the University of Kansas, Buffett said:

The best decade was the 1950s; I was earning 50% plus returns withsmall amounts of capital. I could do the same thing today withsmaller amounts. It would perhaps even be easier to make that muchmoney in today's environment because information is easier to access.

So Buffett himself admits that his best days, in terms of percentage returns, were 60 years ago. But at the same time, that doesn't mean he was necessarily a better investor back in the day. Instead, he says that it all has to do with the size of his portfolio.

What does portfolio size have to do with it?
In the '50s, Buffett was investing a few million dollars on behalf of his partners. That's peanuts compared to the amounts Berkshire Hathaway throws around today. At last count, Berkshire reported over $63 billion in cash and equivalents sitting on the balance sheet. That's not just a different game; it's a whole different universe.

In his unfortunately named book You Can Be A Stock Market Genius, another exceptional value investor, Joel Greenblatt, explains exactly how he returned over 40% annually from 1985 to 2006. His methods are strikingly similar to those used by the young Warren Buffett.

First, both of these investors sought out opportunities that other, bigger investors couldn't touch. For Greenblatt, that meant looking to small-cap stocks, spinoffs, and other special situations. These are not the companies you'll find on the front page of The Wall Street Journal. These companies are the small or midsized businesses that only serve your state or region and whose press releases and media coverage are buried several pages deep in the newspaper.

In that same 2005 speech in Kansas, Buffett explained:

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map -- way off themap. You may find local companies that have nothing wrong with themat all. A company that I found, Western Insurance Securities, wastrading for $3/share when it was earning $20/share!! I tried to buyup as much of it as possible. No one will tell you about thesebusinesses. You have to find them.

The advantage of the smaller investor is choice. Berkshire Hathaway has way too much cash to deploy to bother investing in small companies. That's why Buffett is always looking for "elephants" -- investments that measure in the billions or even tens of billions.The same is true of every other major "player" on Wall Street.

Some more perspective from Buffett:

I know more about business and investing today, but my returns havecontinued to decline since the 50s. Money gets to be an anchor onperformance. At Berkshire's size, there would be no more than 200common stocks in the world that we could invest in if we were runninga mutual fund or some other kind of investment business.

Without the competition from the big players, the market becomes less efficient. A less efficient market means a higher likelihood that stocks will occasionally be undervalued, and that's the margin of safety that drives 40%-50% returns.

Now it's time for you to get to work
Buffett did it. So did Greenblatt. Countless others have found phenomenal success by using these value-based approaches. The hardest part is doing the work.

Between SEC filings, company investor relation pages, and websites like The Motley Fool, you have access to more and higher-quality information than at any point in history. Capitalize on that. Use stock screeners. Think long-term. Do you homework. Turn over as many rocks as you can.

Don't worry if you don't find a winning stock right away -- Greenblatt only seeks to find one or two stocks a month. Getting rich doesn't happen overnight. With hard work, a long-term approach, and some basic value-investing theory, your portfolio could soon start to look a whole lot like Buffett's did in the 1950s. Your next step is to get to work!

The article Are Warren Buffett's Best Investing Days Behind Him? originally appeared on Fool.com.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.