Warren Buffett, a renowned hedge fund manager, is known for his successful stock market investing strategies. In 1956, he launched his hedge fund with $105,100 in seed capital, which was referred to as a “partnership” at the time. Interestingly, Buffett took 25% of all returns above 6%.
For instance, in 1958, the S&P 500 Index had a return of 43.4%. If Buffett’s hedge fund had not outperformed the market and instead invested like a closet index fund, he would have earned 9.35% in hedge fund “fees”.
However, in 1958, Buffett’s hedge fund fell short of beating the S&P 500 Index, achieving only a 40.9% return. He pocketed 8.7% of this as “fees”. Despite underperforming the market that year, his investors were not concerned because he had outperformed the market by a significant margin in 1957. In that year, Buffett’s hedge fund returned 10.4%, and he only took 1.1% as “fees”. Meanwhile, the S&P 500 Index experienced a loss of 10.8%, making Buffett’s investors thrilled to beat the market by 20.1%.
Between 1957 and 1966, Buffett’s hedge fund generated an annual return of 23.5% after deducting his annual fees of 5.5%. In comparison, the S&P 500 Index only achieved an average annual compounded return of 9.2% during the same period. An investor who had put $10,000 into Buffett’s hedge fund in 1957 would have seen their capital grow to $103,000 before fees and $64,100 after fees (meaning Buffett earned over $36,000 in fees from this investor).
It’s evident that Warren Buffett’s primary wealth-building strategy is to generate high returns in the range of 20% to 30%. While some investors take risks in the options market to strike it rich, Buffett emphasizes the power of consistent returns and compounding over time. He has been investing and compounding for over 65 years.
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