A Fat Wallet is the Enemy of High Investment Returns

Warren Buffett says, “A fat wallet is the enemy of high investment returns.”

Imagine trying to make a 24% simple return for five years on a Billion dollars.  Just to make that return, you would need to make a profit of $1.2 Billion.  This means by the time you get your capital out, you need exits totaling $2.2 Billion.

In this age, many fund managers manage hundreds of millions or billions of dollars.   Part of this is because successful managers attract more funds.   They may start small but get bigger and bigger.

In his book The Big Secret for the Small Investor, Joel Greenblatt talks about this phenomenon.  He also talks about “not playing the same game” as the big guys is the way to win.

Is it plausible that the small group at Canrock is so much smarter than the bigger funds?   We would love to think so but reality is… our competitive advantage is we are small so can do smaller deals and still make a meaningful return.  We do not have to be smarter.

I had the size problem when I was CEO of SYNNEX Canada.  Sales of my divisions were $2 Billion.  I would see opportunities to sell $1 million.  I could not even do it because moving the needle $1 million at a time was just too tough to do.  I needed to focus on the $10 and 20 million opportunities.  This focus on big deals created opportunity for small competitors who could do those small deals.  I know this because only a few years earlier, my company was one of those small companies (I grew from 0 to $350,000,000 in sales so experienced all these sizes).

At Canrock, we invest small amounts in small, light start-ups at fairly low valuations.  This allows us to make exceptional returns.  Even a small exit can create meaningful returns for us.

The advantage of “small” is there are thousands of opportunities.  “Big” funds have many fewer opportunities to put a meaningful amount of cash to work.  “Small” exits can also happen faster.

We like the space we are in.

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