This weekend Warren Buffett holds Berkshire Hathaway’s 51st AGM. At a time when world stock markets have been at their most volatile, Warren’s investments are showing another record year.
It’s easy to forget that Warren’s wealth is entirely self made (Even after giving away $21.5 billion he is still the 3rd richest man in the world with $66.7 billion). So how did he get started?
At 20 years old, Warren applied to Columbia Business School where Benjamin Graham (famous for his ‘value investing’ theories) was lecturing – Just so he could be around the best mentor he could find.
Warren worked for Benjamin for free, and his loyalty led Benjamin to send him out to visit possible investments on the weekends. In 1951, Benjamin sent Warren to research GEICO, a direct mail auto insurance company. He visited on a Saturday and the janitor sent him to the only person in on a Saturday, the head of the company.
The two chatted for five hours, and Warren pledged three quarters of his entire net worth – $9,000 at the time – to buy shares in the company. Impressed, Benjamin bought 50% of GEICO for around $720,000 – using a quarter of his fund’s assets.
Little did he know it at the time, but eventually Warren would end up owning all of GEICO, and the company would turn into a $9 billion business.
Warren kept learning from Benjamin for the next six years and by 1957, Warren had learnt enough to launch his own fund. With Benjamin’s support, he asked one of Benjamin’s investors, a doctor, to find ten other doctors who would invest $10,000 each into his new partnership. Eleven doctors agreed to invest.
Over the next five years he kept asking investors to recommend friends and by 1962 the Buffett Partnership, which began with $105,000, was worth $7.2 million. Buffett invested $1 million of his fund in Dempster Mill Manufacturing, bringing in management to turn it around, and making a net gain of $2.3 million within two years.
Warren had another big break in 1962, when American Express shares fell from $65 to $35 following a scandal. As the rest of the market was selling far below true value, Warren invested $13 million – 40% of his assets. Within two years, the shares had tripled in price and the partners made a $20 million profit.
Then, four years later, Buffet made a fateful purchase of a textile company, Berkshire Hathaway. He recalls, “We went into a terrible business because it was cheap. It’s what I refer to as the “used cigar butt” approach to investing. You see this cigar butt down there, it’s soggy and terrible, but there’s one puff left, and it’s free. That’s what Berkshire was when we bought it – it was selling below working capital – but it was a terrible, terrible mistake.”
Buffett bought Berkshire Hathaway and then tried to turn it around, but couldn’t. So he turned this ‘terrible, terrible mistake’ into a listed vehicle to manage all his other investments. As a listed company he could now raise funds through the stock market. Through his experience with GEICO, he also understood the value of owning insurance companies, giving him an instant cash base from policies to invest with.
In 1967, he bought two insurance companies for $8.6 million which came with a combined investment portfolio of $31.9 million. Over the next two years he grew the portfolio to $42 million – more than paying for the entire purchase price of the companies. Warren continued with this strategy and by 2004, Berkshire Hathaway owned 38 insurance companies.
With ready access to cash to feed his flow, Buffett had built the investment vehicle he needed to sustain ongoing growth. He set a target to grow the value of his investments by 15% per year, which he then exceeded. The 1972 market sell-off came at just the right time, leading Buffett to say that at the time he felt “like an oversexed guy in a harem.” He added, “You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino and everyone else is boozing. If you can stick to Pepsi, you should be OK.”
By 1979, Buffett’s fortune had risen to $140 million, but he continued to live on a $50,000 salary. (He still lives in the same Omaha home that he bought in 1958 for $31,500). Berkshire Hathaway shares continued to grow at a 22.2% compound growth rate – a feat he has maintained over 40 years, leading to his $66.7 billion net worth today.
This week, he also announced plans to invest $3.6 billion in the World’s largest wind energy facility in Iowa. Plus he set another record year of giving as a part of his Giving Pledge to give away 99% of his wealth (He’s already given $21.5 billion to Bill Gates’ Foundation since joining the Giving Pledge in 2006).
Warren has always focused at the long term, saying, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
What lessons can you take from one of the wealthiest people in the world? What mentor can you learn from? How much are you willing to invest your time to learn before you earn?
Instead of trying to focus on an exit strategy, how can you focus at a success strategy – where there is no need to exit? As Warren said to a group of students: “I may have more money than you, but money doesn’t make the difference. If there is any difference between you and me, it may simply be that I get up and have a chance to do what I love to do, every day. If you learn anything from me, this is the best advice I can give you.”