How Young Warren Buffett Routinely Beat the Markets

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  • There are plenty of ways to beat the market. Warren Buffett knows them all. For the most part, he’s also tried them all.

    Investors with small sums of money can fare well following the modern equivalent of the strategies a young Buffett used to outperform the go-go market of the 1960’s.

    For example, Buffett often made trades based on arbitrage opportunities. That’s where a stock has one price in one exchange, but a different price in another. Buy in the lower priced and immediately sell in the higher price, and you get an instant profit.

    Today’s fast-trading, information-efficient markets have made such opportunities rare. But when one company announces an acquisition offer for another, there’s usually a low-risk, moderate-return way to use merger arbitrage to your advantage.

    Say company A offers to acquire company B at $50 per share. And say shares move to $48 on the news. There’s a $2 opportunity there to buy shares of company B. As long as the merger goes through, there’s a low-risk way to make a moderate return in a short period of time. Just beware—not all mergers go through.

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  • Another strategy is to follow a deep value investing. Young Buffett looked to buy sizeable stakes in smaller companies that were trading incredibly cheaply. But instead of looking entirely at earnings or profit margins, there would also be an analysis of the company’s cash and cash equivalents. In the 1960’s, it was possible to find many small companies often trading for less than the value of their cash per share!

    While the opportunities aren’t as extreme like that today, markets are mostly focused on large-cap companies. Finding deep value in smaller-cap companies can still lead to plenty of opportunities to outperform the overall stock market.