“If people weren’t so often wrong, we wouldn’t be so rich.”

Charlie Munger

Very few investors beat the market long term. Those that do tend to have one thing in common: they’re value investors.

In 1984, Warren Buffett wrote a fascinating article about these top performing investors. Today, I dug into The Superinvestors of Graham and Doddsville for the first time.

What can an angel investor learn from these outstanding public market managers?

A History of Massive Outperformance

Buffett digs deep into the raw numbers for 9 top funds, all value investors. Each one has massively outperformed the stock market.

Most of these names are unfamiliar. But they’re crushing the big boys in finance, beating the market from between 8% and 16% a year.

Over time, that results in a colossal difference in wealth.

Take Tweedy Browne, one partnership Buffett profiles. From 1968 to 1983, the S&P would’ve tripled your money. Tweedy Browne grew it 10x.

Among all these top investors, the best is Buffett himself. His Buffett Partnership, which he ran before Berkshire Hathaway, turned in 23.8% annualized returns net of fees over 12 years.

What These Superinvestors Have in Common

“The investors simply focus on two variables: price and value.” – Warren Buffett

What these superinvestors do is very simple: they buy businesses for less than they’re worth. A lot less.

Although most of them bought publicly traded stocks, they looked at each stock as if they were buying the whole business. So instead of trying to figure out what the stock will do next week, they asked themselves, “Is this a good business, and is the price fair?”

It seems obvious. But hardly anyone does it.

“The common intellectual theme of the investor from Graham and Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market.” – Warren Buffett

This does not mean buying the very cheapest company you can find. Instead, Buffett and other top value investors buy great companies that are trading below their real worth.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett

How I Apply These Principles as an Angel Investor

I recently met a young founder who had a great AI startup. He’d built the company to $1 million in revenue, and I was really impressed with the product.

But the price just didn’t make sense.

He was raising at a $50 million valuation. That’s 50x ARR.

I had done two other deals this year with a similar amount of revenue. One was at a $5 million post, another at $12 million.

Both had stronger growth than this pricey startup.

Reward vs. Risk

A $50 million valuation at this early stage takes away most of my upside.

Let’s assume it becomes a billion dollar company. Given that I’ll probably lose half my gains in dilution, I’d only be sitting on a 10x return.

In the typical fund of 30-40 investments, this doesn’t come anywhere near to returning the fund.

Now, what if that startup raised at a $10 million post? My return would be 50x fully diluted, enough to return the fund and then some.

Investing in startups is risky. Without enough upside in the winners, I won’t see a return. It comes down to another observation from Buffett:

“The greater the potential for reward in the value portfolio, the less risk there is.” – Warren Buffett

Wrap-Up

Buffett-style stock picking seems very different from investing in venture capital. But they operate on the same principles.

We have to buy assets for a lot less than they’re worth. The more upside we have, the lower our risk.

Whether you’re talking Coke stock or startups, that means backing the best at a reasonable price.

What do you think of Buffett’s advice?

More on investing:

Meet My Latest Investment: PodcastAI

Small Investors Lead to Big Investors

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street

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