Legends of Investing - The Story of Warren Buffet

Warren Buffett is one of the most idolised, investors in the world.

At the time of writing , his company, Berkshire Hathaway, has a market cap of $495 billion and Buffett himself has a net worth of $79 billion.

His approach to value investing, combined with his influence over the companies he invests in , has seen him generate an average annualised return of 20.8% per year. Just over double the 9.7% annualised returns the S&P 500 delivered over the same period of time, since 1965.

He’s known as the Oracle of Omaha. A wise investor whose name is synonymous with wealth and investing, a modern icon of success in the financial markets.

…This is his story.

Early Years

Warren Buffett was born on the 30th August 1930, in Omaha, Nebraska.

His father Howard was a stockbroker, with his own brokerage firm and his mother Leila was a housewife. Buffett had two sisters.

Young Warren

As a young child, Warren Buffet would spend most of his time at his father’s brokerage firm, writing numbers on the chalkboard and reading books. He was close to his father and describes his father as affectionate and inspirational man. He credits a lot of his success to him and says he was the one who introduced him to investing and his love of books.

As a young boy, he was always a lover of numbers.Even from a very early age he had an appreciation for business. This was became clear after reading a book called “One Thousand Ways to Make $1000”. Apparently, as a child, Buffett told a friend that if he wasn’t a millionaire by 30 he would jump off the tallest building in Omaha.

Some of Buffett’s first ventures were to sell chewing gum and bottles of cola door-to-door. He had many other ventures, such as finding and selling used golf balls and selling popcorn at football games at the University of Omaha.

When Buffett was 11, his father took him on a trip to New York. The main things Buffett wanted to see were the New York Stock Exchange. When he saw the NYSE for the first time, he saw a young boy rolling cigars for the traders to keep them happy, this is when he realised that stock investing was where the real money was.

At only 11 years old, Buffett made his first real investment, using the money he had earned so far (around $120) to buy his first stocks.

He decided to buy shares for himself , in an oil and gas company called Cities Service. He bought 3 shares priced at $38.25 per share. After investing in these, the price quickly dropped to around $27 per share, but an anxious young Buffett held on and waited until the price increased to $40, at which point he sold his stocks and took a small profit.

After taking the profit, the price increased a lot more, up to $202 and Buffett realised he could have made a lot more if he had waited. He says he learnt a lot from this early investment, like the need to be patient and not to rush into a decision without reason.

Buffett bought his first property at the young age of 15 using the money he had earned from his paper round and other ventures. He used around $1200 to purchase a 40-acre farm in Nebraska. Buffett hired a tenant farmer who worked the land for him and they shared the profits.

Buffett graduated from high school in 1947 at the age of 17, with the caption under his yearbook picture reading: “Likes math; a future stockbroker”.

His father persuaded him to enrol at the University of Nebraska where he graduated at 19, earning his degree in Business Administration.

It is believed that Buffett was so frugal at an early age that he chose to live in the YMCA whilst at University, so he could spend as little as possible and save his money instead.

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After Graduation

After graduation, Buffett wanted to go to Harvard Business School, as he thought this would be more mentally stimulating and give him a chance to learn more. Sadly he got rejected...

Instead, he decided to go to the Columbia Business School to study for his Masters. Buffett chose Columbia after reading the book “The Intelligent Investor” by Benjamin Graham, which Buffett says is the best book about investing ever written.

THE INTELLIGENT INVESTOR - ndiio.com

When he heard that Graham taught at Columbia, he had to go there. Graham became a massive influence on Buffett, who says he was one of the most influential people to him after his father.

Buffett learnt about the fundamentals of investing whilst in Graham’s classes and was the only student to ever get an A+. He was able to find assets that were valued at a lower cost than they could be worth, by thinking like a business owner. He then manages the investments efficiently over the long term.

After graduating, Buffett was keen to go straight to working on Wall Street, but both his father and Benjamin Graham pleaded with him not to. Buffett even offered to work for Graham for free but Graham refused, so he returned to Omaha and started working at his father’s brokerage firm.

As a very introverted, shy and nervous person, Buffett decided to take a Dale Carnegie public speaking course. He credits this as being one of his most important investments.

It was around this time that Buffett met his first wife Susie. They were married in 1952 and lived in a small run-down apartment. They had their first child, Susie, and to save money they turned a drawer into a bed for her.

Warren and Susan Buffett-wedding 1952 | Celebrity wedding photos ...

He began teaching night classes in investing at the University of Ohama, where most of his students were twice his age.

Finally, Buffett was contacted by Benjamin Graham who offered him a job at his partnership and in 1954, he moved back to New York to work there.

He spent most of his time at the partnership searching for opportunities and analysing reports. He became more interested in how companies worked and thought about the company’s management as part of his investment decision process. Graham was more interested in the balance sheets as his main investment decision process.

Already in these early years of his career, there were aspects of finance that he was obsessed with — the most important being that of compound interest. It’s thanks to this that he was able to build huge levels of wealth over the years.

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Starting his own partnership

In 1956, Buffett decided to leave the partnership and move back to Omaha. It was here that he started his own partnership called Buffett Associates Ltd. Seven family members and friends invested $105,000 in total, with Buffett only investing $100 himself. By the end of the year, he was managing around $300,000.

Buffett had two more children and, with a growing family, he decided to buy a house for $31,500.

In 1960, Buffett spoke to one of the partners who was a doctor and asked him if he could get another 10 doctors to invest $10,000 each, he succeeded in this and got 11 doctors to invest.

By 1962, the partnership was now worth $7.2 million, and Buffett decided to merge all the partnerships together into one; forming Buffett Partnership Ltd. The minimum investment amount was $100,000.

It was also in this same year that Warren Buffett met Charlie Munger and they hit it off straight away, starting the famous friendship that was to last for years to come.

Billionaire Charlie Munger praises this 1 skill of Warren Buffett's

Berkshire Hathaway

Buffett started buying stocks in Berkshire Hathaway in 1962 when it was mainly run as a textiles company and was owned by Seabury Stanton.

He decided continue to buy more shares in the company. He eventually took over Berkshire.

Buffett tried to stick with the textiles part of the business at first but realised there was not so much profit in it and started to phase it out. He started investing in insurance companies instead, and in 1967 bought the National Indemnity Company and National Fire & Marine Insurance Company.

In 1970, Buffett named himself as Chairman of the Board at Berkshire Hathaway and wrote his first letter to the shareholders. These letters from Buffett would later become very famous and something studied by many investors around the world.

Investing in a Moat

In 1971, he made the biggest investment of his career until then. Through Berkshire Hathaway, he bought a company called ‘See’s Candy’ for $25 million in cash.

“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.” - Warren buffet.

Berkshire Hathaway’s value rose over the years, and between 1965 and 1975 it went from $20 per share to $95 per share.

Gaining the Float

This acquisition and involvement of the insurance business in Berkshire Hathaway have also become a trademark part of Buffett’s success.

When insurance companies collect people’s premiums, they don’t get paid immediately in other insurance claims. This cash stays with the company and is known as its ‘float’.

Berkshire Hathaway, thanks to its insurance businesses, has a float that was $39 million in 1970 and has risen to over $100 billion.

In the late 70s, Berkshire’s stock prices went up to over $290 per share and Buffett was worth around $140 million. Buffett’s net worth was tied up in Berkshire and therefore the only money he had to spend was his salary of $50,000.

His solution was to start investing his personal money in stocks as well. He made himself $3 million dollars in investments.

Apparently, around this time a friend spoke to him about investing in property, but Buffett refused, saying “Why should I buy real estate when the stock market is so easy?”.

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Buffett in the 80s

Investments Buffett made throughout the 80s really typify his approach.

Buffett set his sights on Nebraska Furniture Mart in 1983, so he walked in to speak to the owner and offered to buy it. The owner agreed at a price of $60 million, which Buffett agreed to and shook hands. A contract and cheque were sent along just days later.

In 1984, Berkshire bought into Scott and Fetzer. The company had been going through a hostile takeover and were panicking. Berkshire offered $60 per share and Scott and Fetzer agreed.

In 1988, Berkshire began to buy shares in Coca-Cola. The owner, who was an old neighbour of Buffett, noticed the shares being bought and began to panic and started investigating. Upon investigation, he recognised that it must be Buffett and gave him a call to find out what was going on, but Buffett wouldn’t say anything until he was required to (once they hit the 5% threshold).

Berkshire managed to own a share of 7% in Coca-Cola, which was worth over $1 billion. Buffett became a billionaire in 1990.

Buffett in the 90s

In the late 90s, the lure of the new dot.com companies was simply too appealing for most investors and it soon became a bubble. Buffett, on the other hand, steered clear.

In his letter to shareholders, he claimed that technology investors had overstayed the party. He said value is destroyed, not created by any business that loses money over its lifetime.

During this time, many people thought Buffett had lost his touch, with Barron’s even writing “What’s Wrong, Warren?” as Berkshire stock had gone from a high of $81,000 to around $40,000 per share.

However, Buffett, in hindsight, was right. As the share price recovered to its previous highs once the bubble and hysteria ended. His vision to avoid the hype and stick with his long-term approach beat other investors yet again.

The Financial Crisis

During the financial crisis of 2007-2008, Buffett was once again criticised. This time it was for allocating capital too early and not getting the best deals.

Throughout 2008, he acquired large stakes in big companies such as Goldman Sachs and General Electric. It was at the times of panic that Buffett was able to use his huge hoards of cash to gain companies at a large discount from the value he saw in them.

However, the criticism may have been misplaced, as already 5 years later he was reported to have made over $10 billion profit from the deals he had made between 2008 and 2011. This is despite showing a drop in profits of 62% during 2008 itself.

In particular, Buffett’s investment in Bank of America is seen as being a genius move. A $5 billion investment in warrants were able to be exercised for a stake worth $19 billion; meaning by 2017, he had made a profit of $12 billion.

Philanthropy

In February 2011, Buffett attended a ceremony at the White House where he, along with fourteen others, received a Presidential Medal of Freedom, which is America’s highest civilian honour. It was awarded by President Obama, who said the people being awarded were “some of the most extraordinary people in America and around the world”.

When talking about Buffett, Obama said he was “not only as one of the world’s richest men but also one of the most admired and respected” and he has “demonstrated that integrity isn’t just a good trait, it is good for business”.

Philanthropy

In February 2011, Buffett attended a ceremony at the White House where he, along with fourteen others, received a Presidential Medal of Freedom, which is America’s highest civilian honour. It was awarded by President Obama.

When talking about Buffett, Obama said he was “not only as one of the world’s richest men but also one of the most admired and respected” and he has “demonstrated that integrity isn’t just a good trait, it is good for business”.

Since the year 2000, Buffett has donated more than $46 billion, making him the most charitable billionaire. It was always his aim to build up wealth in order to give it away to help the wider society. His lifestyle of frugality shows how money holds little value for him other than being a measure of his success in what he calls ‘the game’.

He has also pledged that 99% of his wealth will go to charitable causes, with 83% of that going to the Bill and Melinda Gates Foundation, the foundation co-founded by one of his best friends, Bill Gates.

When you look at the life of Warren Buffett, it’s clear that you have a man who lived by principles and integrity. This included his investment decisions, which always followed fundamental rules that he stuck to, as well as his private life.

Rather than letting his life be dictated by his huge wealth, he lived a humble lifestyle and appreciated the close group 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.”

Once it’s all said and done, in the history books, his reputation will be regarded as one of the greatest investors and businessmen of all time; a humble and generous man who enjoyed and understood the game. 

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Graphic Design: Alex Singeorzan 

singeorzan@alexdesigno.com

https://www.instagram.com/alex.singeorzan

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