July 12, 2019
The Story of Warren Buffett | Legends of Investing Series
Warren Buffett is one of the most idolised, revered and imitated investors in the world.
At the time of writing this article, his company, Berkshire Hathaway, has a market cap of over $400 billion and Buffett himself has a net worth of over $80 billion, making him the third richest person in the world.
His approach to value investing, combined with his influence over the companies he invests in and utilisation of their competitive advantages, has seen him generate an average annualised gain 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 dubbed the Oracle of Omaha. A man whose name is synonymous with wealth and investing, a true modern icon of success.
…This is his story.
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, one older than him and one younger.
As a child, Warren would spend time at his father’s brokerage firm, writing numbers on the chalkboard and reading the books that were there. He was close to his father and describes him as affectionate and inspirational. 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.
Buffett went to Rose Hill Elementary School in Omaha. As a young boy, he was always a lover of numbers and also had a particular interest in collecting things like stamps and bottle caps.
Even from a very early age he had a fondness and appreciation for business. This was particularly heightened 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. His grandfather owned a grocery store, so Buffett would buy a 6-pack of cola for 25 cents and sell them individually for a nickel each, making himself a profit. 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, The Scott Stamp and Coin Company and The Lionel Train Company. 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 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 and his sister, in an oil and gas company called Cities Service. They each 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 and scared Buffett held on tight and waited until the price increased to around $40, at which point they sold 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.
In 1942, Buffett’s father was elected to serve his first term out of four as a US Congressman. This resulted in the family moving to Washington D.C. Buffett attended Alice Deal Junior High then went on to Woodrow High School.
While in High School he started Stable Boy Selections with his friend, which was a horse racing tip sheet. They would use mathematical odds to work out tips and type them out on a typewriter. This was later shut down since they did not have a licence. Buffett also worked in his grandfather’s grocery store at weekends, as well as starting a paper round.
He was delivering newspapers for The Washington Post, but since he was so business-minded, he eventually expanded his paper round route and even started delivering papers for the Washington Post’s competitor The Times Herald, along the same route. He earned a lot from this job as a paperboy and it all added to the good amount of savings that he was building up.
Another of Buffett’s early ventures was in pinball machines. At 14 he and a friend bought used pinball machines to put in barber shops for customers to pay to use. The company was called The Wilson Coin Company and they would split profits between themselves and the barber who owned the shop.
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”.
After graduation, Buffett was not particularly interested in further studies, considering the amount of money he was already earning, he thought it would slow him down.
His father persuaded him to enrol at the Wharton School of the University of Pennsylvania. Buffett studied Business for 2 years, but he wasn’t happy and felt he knew more than his professors, so he moved to 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.
While Buffett was continuing with his studies, he was also continuing with his business ventures. Instead of a paperboy, however, he was now a Circulation Manager for the Lincoln Post and would oversee 50 other paperboys.
Buffett would spend hours reading books. This is something that he continued to do throughout his life. He was said to have read 600 to 1000 pages a day in his early career and still devoted 80% of his time to reading in his late career.
His family claim that he was always there physically, but mentally he would be absent since he would be reading or mulling over his thoughts. This is something Buffett believes is a huge contributor to his success — the fact that he reads so much.
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.
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+. Buffett says his own investing style is 85% Benjamin Graham and 15% Phil Fisher, as 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 very 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 and claims he wouldn’t be where he is today if he didn’t take that class.
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.
He began teaching night classes in investing at the University of Ohama, where most of his students were twice his age. He had also made an investment in a Texaco station, but this was not successful.
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.
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, which was nicknamed ‘Buffett’s Folly’. He used one of the bedrooms to manage the partnership before they got an office.
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.
Buffett Partnership Ltd continued to be very successful. In 1966 assets were rising over $44 million, Buffett decided to stop any new investments. In 1968, while worrying about rising stock prices, the partnership made a huge profit hitting over $104 million.
Buffett dissolved the partnership in 1969 as he said he was unable to find any bargains in the current market. He liquidated all the assets apart from Berkshire Hathaway and Diversified Retailing. He distributed all the partners’ shares of Hathaway but kept his own holding which stood at 29%.
Buffett started buying stocks in Berkshire Hathaway in 1962 when it was mainly run as a textiles company and was owned by Seabury Stanton.
In 1964, Stanton offered to buy the shares back off Buffett at $11 1/2 per share. Buffett agreed, thinking the business was not going to improve. However, when Buffett received the offer in writing a few weeks later, the offer said $11 3/8. This sneaky attempt at gaining an extra eighth made Buffett angry.
He decided not to sell and instead continued to buy more shares in the company. He eventually took over Berkshire in an act of retribution and fired Stanton. He announced Ken Chace as the new president of the company instead.
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. This was a long way from the textiles business that Berkshire Hathaway originally operated in, but this type of investment would soon become a trademark move for the company; investing in businesses that they believed to have a ‘moat’.
In basic terms, this is a company’s ability to maintain a competitive advantage over the rest of the industry and maintain its market share. As Buffett says:
“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.”
Berkshire Hathaway’s value rose over the years, and between 1965 and 1975 it went from $20 per share to $95 per share.
In 1976, Buffett began buying shares in GEICO. He previously had dealings with the company when he was being taught by Benjamin Graham. At the time, Buffett read a book called Who’s Who and realised that Graham was the chairman of the company.
Buffett decided to travel to the company’s headquarters in Washington DC and knocked on the doors until a janitor let him in. Buffett went up to speak to the one man that was working, Lorimer Davidson, who was the Vice President and spoke for hours about the company and how the business was run.
This conversation stayed with him over the years and when there was the opportunity to buy shares in 1976, he did. The company had been reporting big losses, but Buffett knew the basics of the company were still there; it was just being badly managed. Eventually, the company became fully owned by Berkshire in 1996.
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. This is used by Berkshire to invest, essentially giving it a huge interest-free loan. As Buffett says:
“We enjoy the use of free money — and, better yet, get paid for holding it.”
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?”.
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. Buffett sent a message offering a merger and the company called straight away. 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
The 90s brought an interesting new challenge for Buffett and his portfolio but also presented us with an ideal example of how he can stick to his plan despite any possible temptations. Ultimately he was proven to be right over the long-term.
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.
If we look back at the investing philosophy he learned from Benjamin Graham, it’s clear that the tech businesses during this time didn’t represent the companies he looks for.
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.
Although Buffett has never had a big interest in technology companies, he does hold one investment which falls perfectly into his approach of finding businesses with a moat. In 2013, he bought a 13% stake in VeriSign, which holds the exclusive rights to the .com domain.
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.
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”.
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.