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I'm Michael Zenga from Danvers, Massachusetts. This is the city whose orchestra Mr. Buffett so generously sent to the Rose Bowl Parade last year. So you are a very popular person in my city. Good morning, Mr. Buffett and Mr. Munger. Mr. Buffett, I wanted to ask you this question last week when I met you after the Gillette annual meeting, but I was scared.
Now I have nothing to pressure me, so I'll start. As I read, between 1956 and 1969 you achieved the best quantitative results of your career. 29% annualized versus only 7% for the Dow. Your approach then was different from yours now . You looked for a lot of undervalued stocks, paying less attention to competitive advantage or favorable economics, and sold them pretty quickly.
As your capital grew, you changed your approach to buying undervalued, great companies with favorable long-term economics. My question is: if you were investing a small amount today, what approach would you use? Well, I would use the approach that I think I'm using now: try to look for businesses that I think are selling at the lowest price relative to the discounted cash flows that they will generate in the future.
But if I were working with a small amount of money, that universe would be huge compared to the universe of possible ideas I'm working with now. You mentioned that the period from 1956 to 1969 was the best. Actually, my best period was before. This was right after I met Ben Graham in early 1951, but from late 1950 for the next 10 years the average return was about 50% per year.
And they seemed to be 37 points better than the Dow for the year or something like that. But back then I was working with a tiny, just meager amount of money. So I would flip through the tomes of business descriptions and find one or two that I could invest $10,000 or $15,000 in that were just ridiculously, absolutely ridiculously cheap.
And, obviously, as money became more abundant, the universe of possible ideas began to shrink sharply. Times were better for it then, but I think if you were working with a small amount of money, with the same experience that Charlie and I have, the same ideas and the same abilities, you could make very significant amounts, but once you start dealing with millions, many millions, the expectation curve just drops off dramatically.
That's the nature of these things. A lot of, you know, when you move into things that you can invest millions of dollars in, you have a lot of competitors looking at it, and they don't look at it the same way I did when I started. When I started, I flipped through the reference books page after page.
I mean, I've probably looked through 20,000 pages in Moody's industrial, transportation, banking, and financial directories, and I 've done it twice. And I really, you know, looked at every business. I did n't look at some of them very carefully. Well, that's an impractical way to invest tens or hundreds of millions of dollars.
So I would say if you are working with a small amount of money and you are really interested in the business and willing to work, you will find something, if you are me, I have no doubt about that. You will find things that promise very large profits compared to what we can provide with large sums of money.
Charlie? Well, yes, I think that's right. A brilliant person who can't get money from other people and works with a very small amount of money should probably work with very unknown stocks, looking for unusual undervalued opportunities. But, you know, you could. It's such a small world. This may be a path for one person to rise, but it is long and hard work.
Yes, most smart people, unfortunately, on Wall Street, think they can make a lot more money a lot easier, just, uh, one way or another, and I , uh, get a percentage of other people's money, or, or, uh, providing services in some way so that people...I mean, monetizing hope and greed—that's a way to make a lot of money.
And now it's very...just take hedge funds. I mean, I've had a couple of friends call me in the last month who don't know anything about investing money. They were unsuccessful at everything, and you know, one of them called me the other day and said, "Well, I'm starting a small hedge fund, $125 million." He talked about it.
And it's like the idea that since it's only $125 million, maybe we should invest $10 million or something like that. I mean, if you looked at Schedule D of his 1040 tax return for the past 20 years, you would think he should be mowing his lawns. But he can get his $125 million . I mean, you know, it just amazes me how willingly people throw money away during a bull market because they think it's easy.
And, of course, that's exactly what they felt. And that's how it was with stocks a few years ago. Next year they'll come up with something else. But, uh, the biggest fortunes made, you know, on Wall Street in recent years have been made not through great results, but mostly through great advertising.
Charlie, do you have anything to add? Well , I would say it even more strongly. I think the current situation is indecent. I think there's too much mania around. Too much chasing easy money. There's too much, uh , misleading advertising about investments. There's too much , uh, emphasis on stock speculation on television.
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