Mar 9, 2017

Size Matters – It’s Hard To Be Large


If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.  – Warren Buffett

Often people tell me that if they had more money investing would be easier. They imagine that with more wealth they could somehow find better deals. Now, living with more money might be easier, I won’t argue with that. But investing is funny in that it actually becomes more difficult the more you have to invest.

Consider the extreme but nonetheless illustrative example of Saudi Arabia. The Kingdom has fallen on hard times with the drop in oil prices. In an effort to “modernize” its economy the country is considering selling its nationalized oil company Aramco. Aramco is theoretically valued at as much as 2 trillion dollars. That’s $2,000,000,000,000 – a lot of zeros.

If Saudi Arabia wanted to invest 5% of this 2 trillion portfolio in U.S. real estate, that would be $100 billion of investments to make. Let’s assume further that Saudi Arabia wanted to do this using publicly traded U.S. Real Estate Investment Trusts (REITS). What kind of deal could it get there? Here are the five largest 5 U.S. REITS*:

To invest that $100 billion, Saudi Arabia would have to buy all of the top two U.S. REITS by market capitalization, and 20% of the third or 50% of all the top 5. A feat which is practically impossible without paying a significant premium to their current prices. In other words, Saudi Arabia’s massive wealth actually means it will have access to less and worse opportunities than smaller market participants like you and me. The point is that, counter intuitively, when it comes to investing, it pays to be small.

*REIT equity market capitalizations approximated as of Q2, 2016

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