Friday, Jul 17th 2020

Buffett & Sequoia


What Buffett & Sequoia Capital have in common.

Warren Buffett lives in Nebraska and invests in established companies. Sequoia Capital is based in Silicon Valley and invests in fast-growing startups.

Despite being worlds apart, one of the ways they've earned their legendary statuses is held in common: slugging percentage.

Rather than achieving a 100% hit rate, their outperformance has come from their winners not just winning, but winning big.

Let's start with Sequoia. Their $60M investment in WhatsApp turned into $3B (a 50x return). Their $12.5M investment in Google grew to $4.3B (a 300x return). You can Google (no pun intended) the rest of their home runs.

Sequoia is OK with losing money on 90%+ of its investments, because they understand that the winners will more than make up for it.

Meanwhile over in Nebraska...Buffett doesn't buy a stock at Berkshire Hathaway expecting a 90% chance of capital loss. His #1 investing rule is quite literally "don't lose money." His #2 rule is "see rule #1." But despite his divergent outlook on process, the outcomes follow a similar Pareto distribution as Sequoia's: a few big winners have driven the majority of his returns.

Take Apple, for instance. Berkshire's original $36B investment has grown to $90B+ today. That's a ~3x return in about 4 years. Many of Berkshire's other bets have actually underperformed the S&P 500 in recent years -- Apple has single-handedly carried his team.

So what we can learn from Buffett and Sequoia Capital, two seemingly opposite investors?

While singles and doubles are nice, the few home runs are what will really drive long-term returns.

Bet accordingly.

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