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How Might A Small-Cap Warren Buffet Act?Warren Buffett got an early start in the investment world having a paper routebusiness. With this business he was able to save $2000. He took $1200 of his smallfortune and bought a 40 acre farm in which he hired a tenant farmer to run it.Later he and a buddy bought several pinball machines and set them up throughouttown. Another early business venture was buying a old limo and renting it outwhich provided another stream of income. Buffett's first stock purchase came atthe age of 11 years old when he bought 6 shares of Cities services preferred stockfor $38.25 per share, in which 3 shares were for him and 3 for his sister. Thestock initially traded down to $27 per share, when it recovered to $40 per sharethe young Buffett sold only to watch it soar to $202 per share.Today many people follow The Oracle of Omaha... professional value investors,stock holders of Berkshire Hathaway, the media such as Fox Business News,Bloomberg, CNBC even has a Buffett Watch, and on many of these financial blogs.While most of these sources do a very good job at tracking Buffett's every move,announcing all the buys and sells that his Berkshire Holding company makes, manydo not cover what Buffett might be buying if he had much less capital. This is asubject that should entice any investor especially the small investor. The stocksthat Buffet buys now a days for Berkshire are very large companies often in thebillions of dollars. Why does he concentrate on the large companies? Well theunderlying reason is that Berkshire is so large even after the stock indices majorsell off that buying smaller companies is not enough to move the needle. It takeslarger companies to move Berkshires performance.With in the last few years many aspiring Buffeteer's have asked the question: Whatwould Buffett be buying if he had a much smaller equity base to work with. Well hedoes not give out stock tips but he has given out small hints over the years. Wealso can do a little detective work to find out what he would be buying with asmaller equity base than what he manages today. In order to do this we must lookback in time. Back when Buffett was working for Ben Graham at The Graham NewmanPartnership. This was circa 1954-56 and Graham who had managed money through TheGreat Depression was using a little different technique to investing than whatBuffett uses today. Graham was Buffett's teacher, mentor and employer. Back inthis era and through the 1960's Buffett used the techniques of Graham, which werecontrolled investing, arbitrage, and cigar-butt aka NCAV style investing.There are investors today that apply the early style and methods that Buffett andGraham used . One money manager is Mohnish Pabrai who has gotten much mediaattention and has even written a book titled The Dhandho Investor. A lessor known,but a up and comer is Sardar Biglari who manages the Lion Fund and whose holdingsinclude the Western Sizzlin $WEST and Steak n' Shake $SNS in which Biglari & Co.is practicing the art of "Controlled Investing". Eddie Lampert is another examplethat is practicing some of Buffett's earlier investing strategies. For example,Lampert has huge stakes in Sears $SHLD and AutoZone $AZO making up a hugepercentage of his portfolio.So what would Warren Buffett buy today with a smaller equity base, say a fewhundred thousand to a few million. Well the investors universe certainly gets muchlarger. I suspect he would be buying into some of these net net working capitalalso known as special situations. I also think he would be buying into companiesthat have had a track record of 10 plus years trading near or below book valuewith cash on hand and management having a significant stake.Below are some excerpts taken from the 1962 Buffett Partnership letter:
 
I have consistently told partners that it is my expectation and hope (it's alwayshard to tell which is which) that we will do relatively well compared to thegeneral market in down or static markets, but that we may not look so good inadvancing markets. In strongly advancing markets I expect to have real difficultykeeping up with the general market.Our avenues of investment break down into three categories. These categories havedifferent behavior characteristics, and the way our money is divided among themwill have an important effect on our results, relative to the Dow in any givenyear. The actual percentage division among categories is to so degree planned, butto a great extent, accidental, based upon availability facts.The first section consists of generally undervalued securities (herein after "generals") where we have nothing to say about corporate policies and no timetableas to when the undervaluation may correct itself. Over the years, this has beenour largest category of investment, and more money has been made here than ineither of the other categories. We usually have fairly large portions (5% to 10%of our total assets) in each of five or six generals, with smaller positions inanother ten or fifteen.Sometimes these work out very fast; many times they take years. It is difficult atthe time of purchase to know any specific reason why they should appreciate inprice. However, because of this lack of glamour or anything pending which mightcreate immediate favorable market action, they are available at very cheap prices.A lot of value can be obtained for the price paid. This substantial excess ofvalue creates a comfortable margin of safety in each transaction. This individualmargin of safety, coupled with a diversity of commitments creates a mostattractive package of safety and appreciation potential. Over the years our timingof purchases has been considerably better than our timing of sales. We do not gointo these generals with the idea of getting the last nickel, but are usuallyquite content selling out at some intermediate level between our purchase priceand what we regard as fair value to a private owner.The generals tend to behave market-wise very much in sympathy with the Dow. Justbecause something is cheap does not mean it is not going to go down. During abruptdownward movements in the market, this segment may very well go down percentage-wise just as much as the Dow. Over a period of years, I believe the generals willoutperform the Dow, and during sharply advancing years like 1961, this is thesection of our portfolio that turns in the best results. It is, of course, alsothe most vulnerable in the declining market.Our second category consists of "work-outs" (or Arbitrage). These are securitieswhose financial results depend on corporate action rather than supply and demandfactors created by buyers and sellers of securities. (Some current examples havebeen Constellation Energy $CEG or the Rohm-Haas $ROH/Dow Chemical $DOW deal) Inother words, they are securities with a timetable where we can predict withinreasonable error limits, when we will ger how much and what might upset theapplecart. Corporate events such as mergers, liquidations, reorangizations, spin-offs, eventually lead to work-outs. An important source in recent years had beensell-outs in oil producers to major integrated oil companies.The category will produce reasonably stable earnings from year to year, to a largeextent irrespective of the course of the Dow. Obviously, if we operate throughouta year with a large portion of our portfolio in work-outs, we will look extremelygood if it turns out to be a declining year for the Dow or quite bad if it is astrongly advancing year. Over the years, work-outs have produced our secondlargest category. At any given time, we may be in ten to fifteen of these; somejust beginning and others in the late stage of their development believe in using
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