Yes, size is a big disadvantage. Especially when Berkshire is $500 billion big and the US economy “only” $19 trillion big. Given that Berkshire is ~1/40th of the US economy, that is still impressive to my eyes given the constraints. But yeah, it is unlikely they will have the huge returns of the 1970-1990 period in the future.
Oh yes, they should have heard about it. At least, those who believe in fundamental investing. Ben Graham talked about it first in 1934 in Security Analysis. The book has been re-edited 6 times since. He talked about it in the Intelligent Investor as well. Buffett practiced it at the beginning. Seth Klarman talked about it in his book. Joel Greenblatt as well. In the 1980’s there was as well the Oppenheimer study showing back-tested results of 28% annual. Heck, recently Mihaljevic consecrated a whole chapter to them in his book The manual of ideas. I am sure i can find 15 different books talking about it.
Oh you need much less to start a hedge fund.
And just to be sure, there are other persons practicing it. For instance, the Belgian blog Les Daubasses has been practicing it since 2008 (with other similar strategies), with +978% gains over the period. It’s not like it’s hidden.
Now for the question why institutionals are not doing it, there are several reasons.
- First, there is a size reason: if you want to start a fund, you will soon discover that between compliance and legal costs, infrastructure and process costs and of course paying your employees, it’s not worth to have a fund if you manage less than $50 million of assets. Let’s say you want to invest a 10% position of your fund in a Net Net, you need to invest at least $5 million. EGD is a Net Net, it’s market cap is currently $10 million. Explain me how you are going to buy half the company without making the price jump mutiple times. There is simply not enough liquidity for them in these stocks.
- Alright, let’s say they manage to buy some anyway. if you look at its financial reports, there is a reason the company is cheap: it is making losses, usually since a long time! Most manage don’t like to report to their investors that they are buying consistently money-losing companies, it’s just very uncomfortable. If it works out, they are a genius, if it doesn’t, they are fired. Their career risk is just too high. They are not irrational, they are very rational within their own rules, which is not the same as their investors’ rules.
And just to be clear, as stated in my first post in this topic, i do not advise anybody to follow this strategy. I am just explaining what i am doing and why, not why people should do it. To newcomers, I’d say people are more likely to be successful if they index the market.
And Buffett and Greenblatt say the same: just buy the market.
But, once again, neither Buffett nor Greenblatt are indexing. Thanks for their shareholders.