Warren Buffett is among the world’s most admired, idolised, and imitated investor. His corporation, Berkshire Hathaway, has a market value of over $400 billion at the time of writing this article. Buffett himself has a net worth of over $80 billion, making him the world’s third-richest man.
His value investment approach, combined with his leverage on the firms in which he invests and the use of their competitive advantages, has seen him gain an average annualized benefit of 20.8 per cent per year. The S&P 500 delivered over the same period, after 1965, is just over twice the 9.7 per cent annualized returns. He is called the Omaha Oracle. A man whose name stands for riches and investment, a real modern symbol of achievement.
Warren Buffett was born in Omaha, Nebraska, on 30th August 1930. His father Howard was a stockbroker, with his own brokerage business. And his mother Leila was a housewife. Buffett had two sisters, one older and one younger than him. As a kid, Warren would spend time writing numbers on the chalkboard at his father’s brokerage company and reading the books that were there.
He was close to his father and describes him as caring and inspiring. He credits him with much of his popularity and claims he was the one who introduced him to investment and book love. Buffett attended Omaha’s Rose Hill elementary school. He was still a fan of numbers as a young child, and also had a keen interest in collecting items like stamps and bottle caps.
He has had a fondness and passion for the business market from a very early age. This was compounded especially after reading a book called “One Thousand Ways to Make $1000.” Apparently, as a child, Buffett told a friend he would leap off the tallest building in Omaha if he failed to become a millionaire by 30.
Some of Buffett’s first projects was to sell door-to-door chewing gum and cola bottles. His grandfather owned a convenience store so that for 25 cents Buffett used to purchase a 6-pack of cola and sell them separately for one nickel each, giving himself a profit. He had several other projects, including searching and trading used golf balls and selling popcorn at the University of Omaha football games.
His father took him on a holiday to New York, when Buffett was 11. New York Stock Exchange, The Scott Stamp and Coin Company, and The Lionel Rail Company were the other attractions Buffett wanted to visit. He saw a young boy rolling cigars for the merchants to keep them entertained. When he first saw the NYSE, this was when he knew that equity trading was where the money was.
Buffett made his first real savings when he was just 11 years old, using the money he had raised so far (around $120) to purchase his first stocks. He wanted to purchase shares in an oil and gas firm called Cities Service, for himself and his sister. They each acquired 3 shares at $38.25 per share. The price fell fast to around $27 per share after investing in these, but an exhausted and afraid Buffett kept on closely and waited until the stock soared to about $40, at which point they sold and made a modest profit.
The price rose a lot more after getting the profit, up to $202 and Buffett discovered he might have made even more if he had been waiting. He claims he gained a lot from this early investment, including the need to be careful and not hurry to a reasonless decision.
Buffett’s father was elected as a United States Congressman in 1942 to complete his first term out of four. That resulted in the family moving to Washington D.C. Buffett attended Alice Deal Junior High then moved to Woodrow High School afterwards.
He began Stable Boy Selections with his classmate while at High School, which was a tip sheet on horse racing. They will use statistical odds to figure out ideas on a typewriter and type them out. This was shut down later because they didn’t have a licence. Buffett also served on weekends at his grandfather’s convenience store as well as starting a paper round.
He was distributing newspapers for The Washington Post, but because he was so business-minded, he soon extended his paper round route and also began distributing papers in the same route for Washington Post’s rival The Times Herald. As a paperboy he gained a lot from this work and that all contributed to the decent amount of savings that he was building up.
Another early venture by Buffett was in the pinball machines. At the age of 14, he and a friend purchased pinball machines to allow the clients to pay and use in barbershops. The firm was renamed The Wilson Coin Company, and they’d share income between themselves and the shop-owning barber.
At the young age of 15, Buffett acquired his first property with the money he’d received from his paper round and other businesses. He bought a 40-acre farm in Nebraska with about $1200. Buffett employed a tenant farmer who had been working the land for him and split the profits.
At the age of 17, Buffett graduated from high school in 1947 with the caption reading under his yearbook picture: “likes math; a potential stockbroker.” After college, Buffett was not particularly interested in further study, because he felt it would slow him down given the amount of money he was already making.
His dad encouraged him to study at the University of Pennsylvania’s Wharton School. Buffett studied Business for 2 years, but he was not satisfied and felt he knew better than his teachers, so he moved to the University of Nebraska where he graduated at 19 and received his degree in business administration. Buffett is known at being so frugal from an early age that he decided to remain in the YMCA whilst at the University, so he could spend as little as possible and still save money.
Though Buffett continued his studies, he continued his business ventures as well. But he was now a Circulation Officer for the Lincoln Post, instead of a paperboy, and would direct 50 other paperboys. Buffet also used to invest hours reading novels. He’s continued to do so throughout his life. In his early career, he was said to have read 600 to 1000 pages a day and even dedicated 80% of his time to reading in his late-career.
His family says he’d always been there emotionally, but he’d be absent psychologically while he’d be reading or mulling over his feelings. Buffett claims this is a major contribution to his success — the fact he reads too much.
Buffett decided to go to Harvard Business School after graduation, as he felt this would motivate him more intellectually and allow him to learn more. Sadly he got rejected. He decided instead to go to the business school in Columbia to graduate for his Masters. After reading Benjamin Graham’s book “The Intelligent Investor,” Buffett chooses Columbia which Buffett claims is the best book ever written about investing.
He decided to go there because he learned that Graham was teaching at Columbia. Graham became a major influence on Buffett, who, after his father, says he was one of the most influential people to him.
When in Graham’s lectures, Buffett learned about the basics of investing and was the first one ever to get an A+. Buffett claims his investing style is 85 per cent Benjamin Graham and 15 per cent Phil Fisher, while he was able to locate assets that were priced at a cheaper cost than they might be worth, thinking like a company owner. Then he handles the long term commitments successfully.
Buffett was very keen to go straight to work on Wall Street after graduation but both his father and Benjamin Graham argued against his decision. Buffett also offered free work for Graham, but Graham declined, so he went back to Omaha and continued to work at the brokerage firm of his father.
Buffett, as a very introverted, reserved and anxious guy, wanted to take a public speaking course at Dale Carnegie. He cites this as one of his most valuable decisions and says that if he did not take the class he would not be where he is today.
Buffett met his first wife, Susie, at about this point. In 1952, they were married and lived in a small, run-down apartment. They had their first child, Susie, and they converted a drawer for her into a bed to save money.
He started teaching night classes in investment at Ohama University where most of his students were twice his age. He also made an investment in a station in Texaco but this was not successful. Buffett was eventually approached by Benjamin Graham who offered him a position at his company and he moved back to New York to work there in 1954.
He spent much of his time looking for opportunities at the company and analyzing documents. As part of his investment decision process, he became more involved in how businesses worked and were curious about the operation of the business. As his principal investment management process, Graham was more involved in the balance sheets.
There were facets of finance that he was fascinated with even in those early years of his career — the most important was that of compound interest. It is due to this that, over the years, he has been able to create massive amounts of income.
Starting his own partnership
Buffett agreed to abandon the relationship in 1956 to return to Omaha. Here it was that he formed his own company called Buffett Associates Ltd. Seven family members and associates made a combined contribution of $105,000, with Buffett contributing just $100 himself. He raised about $300,000 at the end of the year.
Buffett had two more kids and wanted to purchase a house for $31,500 for a growing family that was called ‘Buffett’s Folly.’ Before they had an office he used one of the bedrooms to run the partnership. Buffett went to one of the partners who was a doctor in 1960, telling him if he could convince another ten doctors to invest $10,000 each, he succeeded in this, and he had 11 doctors to invest.
By 1962, the company now had a valuation of $7.2 million and Buffett agreed to combine all the partnerships into one; creating Buffett partnership Ltd. The minimum amount of funding was $100,000. It was also in this same year that Warren Buffett met Charlie Munger and they quickly hit it off, beginning the successful relationship that would continue for years to come.
Buffett Partnership Ltd remained incredibly successful. Buffett agreed to abandon all new investments in 1966 as funds were rising above $44 million. In 1968 the company made a big profit touching over $104 million while worried about rising stock values.
In 1969 Buffett ended the relationship as he said he did not see any bargains in the new market. All properties except Berkshire Hathaway and Diversified Retailing were liquidated. He divided all of Hathaway’s partners’ stock but retained his stake at 29 per cent.
Buffett began buying stocks in Berkshire Hathaway in 1962, when it was primarily owned by Seabury Stanton as a textile firm. In 1964 Stanton bid $11 1/2 per share to buy back the stock off Buffett. Buffett agreed, assuming things wouldn’t get any better. However, the bid said $11 3/8 after Buffett got the deal in writing several weeks back. This sly effort to gain an extra eighth made Buffett upset.
He chose not to sell and went on to purchase more stock of the company instead. In an act of revenge, he finally took over Berkshire and fired Stanton. He named Ken Chace as the company’s next president.
At first, Buffett tried to stick to the textiles part of the company, but found that there was not that much value in it and began phasing it out. Instead, he began investing in insurance companies, buying the National Indemnity Corporation and National Fire & Marine Insurance Company in 1967.
Buffett appointed himself chairman of the board at Berkshire Hathaway in 1970 and wrote his first letter to the shareholders. These Buffett letters would later become very popular and something many investors around the world have been researching.
Investing in a Moat
He made the greatest investment of his career up to that point in 1971. He purchased a business named ‘See’s Candy’ for $25 million in cash, through Berkshire Hathaway. This was a long way from Berkshire Hathaway’s initial textile firm, but this form of investment would quickly become a signature step for the company; investing in companies they felt they had a ‘moat.’
Basically, this is the potential of a corporation to retain a strategic lead over the rest of the industry, and to preserve its market share. As Buffett describes it:
“The single most important decision in evaluating a business is pricing power, if you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
The value of Berkshire Hathaway increased over the years and went from $20 per share to $95 per share between 1965 and 1975. Buffett started buying shares of GEICO in 1976. He previously had relations with the firm before Benjamin Graham trained him. Buffett read a book called “Who’s Who” at the time and discovered Graham was the company’s boss.
Buffett decided to travel to Washington DC headquarters of the corporation and pounded at the doors before he was let in by a janitor. Buffett went up to talk to the one guy who was working, Lorimer Davidson, who was the Vice President and spoke about the corporation for hours and how the firm was managed.
Over the years this discussion stuck with him and he did as there was a chance to purchase shares in 1976. The firm had announced major losses, but Buffett realized the business’s assets were still there; it was simply being poorly run. In 1996, the company finally became completely owned by Berkshire.
Gaining the Float
This acquisition and engagement of Berkshire Hathaway’s insurance company have also become a hallmark aspect of Buffett’s growth. When insurance companies receive payments for individuals, most insurance policies don’t pay them automatically. This cash remains with the company and its ‘float’ is established.
Berkshire Hathaway has a float that was $39 million in 1970 and has grown to over $100 billion, due to its insurance companies. Berkshire used it to save, effectively making it an immense interest-free loan. As Buffett describes it:
“We enjoy the use of free money — and, better yet, get paid for holding it.”
Berkshire’s stock values rose to more than $290 a share in the late 70s and Buffett was worth about $140 million. Buffett’s net worth was wrapped up in Berkshire and so his $50,000 paycheck was the only income he had to spare. His answer has also been to start spending his own funds in stocks.
He made $3 million in investments himself. Apparently, a friend spoke to him about investing in the property about this time, but Buffett declined, saying “Why should I buy real estate when the stock market is so easy? ”.
Buffett in the 80s
Buffett’s investments made during the 80’s still typified his strategy. In 1983, Buffett set his eyes on Nebraska Furniture Mart so he went in to talk to the owner and offered to buy it. The owner accepted and shook hands at $60 million which Buffett accepted to. Only days later, a contract and cheque were sent along.
Berkshire acquired into Scott and Fetzer in 1984. The company had experienced a hostile takeover, was panicking. Buffett sent a letter proposing a deal, and the firm soon called. Berkshire bid $60 per share, and negotiated with Scott and Fetzer.
Berkshire started purchasing shares at Coca-Cola in 1988. The person, who was Buffett’s old neighbour, observed the shares being acquired, and got worried and started to investigate. He admitted at the time of the investigation that it must be Buffett and sent him a call to figure out what was going on, but Buffett wouldn’t say much until he had to (once they crossed the 5% threshold). Berkshire continued to hold a 7 per cent stake of Coca-Cola, worth more than $1bn. In 1990, Buffett became a Billionaire.
Buffett in the 90s
The 90s posed an exciting new challenge to Buffett and his portfolio but also presented us with a perfect illustration of how, amid any potential temptations, he should adhere to his plan. At the end of the day, he was proved correct for the long run. The appeal of the emerging dot.com firms in the late 1990s was just too enticing for most investors and eventually, it became a bubble. Instead, Buffett steered clear.
In his letter to shareholders, he said the group had been overstayed by technology investors. He said value is killed, not generated by any company that has lost money in its existence. If we look back at the investment theory he heard from Benjamin Graham, it’s obvious that the tech firms didn’t represent the companies he is looking for during this period.
Throughout this time, several people felt Buffett had lost touch, with Barron even writing “What’s wrong, Warren? “As the stock of Berkshire had fallen from $81,000 to around $40,000 a share. Still, Buffett was right in retrospect. Since the bubble and panic stopped, as the share price returned to its former levels. His vision of ignoring the speculation and sticking with the long-term approach once again beat other investors.
While Buffett has never had a strong interest in technology firms, he holds one investment that fits perfectly into his strategy of seeking a moat company. He acquired a 13 per cent interest in VeriSign in 2013, which owns the exclusive rights to the.com domain.
The Financial Crisis
Buffett was once again targeted after the 2007–2008 financial crisis. This time it was for too early to allocate capital, and not to find the better offers.
Throughout 2008, he purchased major holdings in big firms including Goldman Sachs, General Electric and others. It was in moments of panic that Buffett was willing to leverage his vast cash hoards to buy companies with the potential he saw in them, at a massive discount.
However, the outrage may have been misguided, as he was estimated to have made more than $10 billion profit from the transactions he had made between 2008 and 2011 only 5 years back. This is despite seeing a 62 per cent fall in earnings in 2008 itself.
Buffett’s investment in Bank of America is especially seen as a brilliant leap. A $5 billion stake in warrants could be traded for a $19 billion stake; ensuring he’d make a $12 billion return by 2017.
Buffett attended a reception at the White House in February 2011 where he received a Presidential Medal of Freedom along with fourteen others, which is America’s highest civilian honour. It was awarded by President Obama, who said the individuals honoured were “some of America’s most exceptional citizens and people around the world.”
When talking about Buffett, Obama said he was “not only one of the richest men in the world but also one of the most loved and admired” and he has “demonstrated that honesty is not just a positive quality, it is good for the company.”
Buffett has raised over $46 billion since the year 2000 making him the most generous billionaire. It has always been his goal to create resources and give them away to support the wider community. His frugality attitude demonstrates how little value money has to him other than being an indicator of his success in what he calls ‘the game’.
He also vowed that 99% of his money will go to charitable causes, 83% of which will go to the Bill and Melinda Gates Foundation, the foundation co-founded by one of his closest friends, Bill Gates.
Looking at Warren Buffett’s story, it’s evident you’ve got a guy who lived on values and honesty. This included his investment decisions which, as well as his private life, often followed basic principles that he adhered to. Instead of letting his life be determined by his vast riches, he led a modest lifestyle, appreciating the small community of people around him. As he says:
“It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that, you’ll do things differently.”
When it’s all said and gone, his name will be known in history books as one of the greatest investors and businessmen of all time; a humble and generous man who has understood and cherished the game.