Warren Buffett is a man who needs no introduction he is the saint of investing, he is reviewed by many because he did something truly exceptional he became one of the richest man alive not by Innovative technology or by inheriting billions but by winning in a stock market consistently for over half a century. In this blog we gonna learn how Warren Buffett became a self-made investing billionaire.
Warren Buffett immense fortunes are tied to world’s largest conglomerate BERKSHIRE HATHAWAY but Buffett beginning is much more humble he was born in Omaha in 1930, right as the great depression was kicking off the stock market had crashed half a year earlier and Nebraska was hit particularly hard. The State economy relied on agriculture and the collapsing price of crops left many communities Buffett himself was lucky enough to be born in the family of local stockbroker named Howard Buffett. Warren’s father Howard buffet was a smart businessman so despite the collapse he was able to provide for his family. In fact, once the economy and started recovering, Howard’s career took off so much so that in 1942 he ran for Congress a Republican and actually won the election, despite the immense popularity of FDR and Democrats at the time. Amidst his rise in politics, Howard moved the Buffett family to Washington DC, where Warren naturally felt very lonely. He spent his days by solving maths at home and at school and reading investing books in his father’s study.
It is these early years which instilled in the warren the ambition to become rich and in fact, he would tell his friends in school that if he wasn’t the millionaire by the time he was thirty, he would jump off the tallest building he could find. To that end Warren started playing on the stock market before even finishing high school, buying just a couple of shares here and there to see how it goes, but warren aspiration was not limited to the stock market, one of the books he read ( One thousand ways to earn $1000) inspired him to try nearly every business venture he came up with. He would buy 6 packs of Coca Cola and use to sell them to his fellow students at markup. His real job came in 1944 when he started delivering the Washington post around his neighborhood. That year 14year od warren filed his first tax return, featuring a $45 for his bicycle and his watch. With the money, he made through selling newspaper he would purchase Pinball machines which he would then place in stores around the Neighbourhood. But in 1948 Howard Buffett lost his re-election his family was forced to go back to Omaha. Warren sold his pinball in Washington DC for over Thousands of dollars and back home in Nebraska he used that money to buy a 40 Acre Farm, which he then rented out. Warren used his farm’s rent to pay his way through the University of Nebraska where he got bachelor’s in Business Administration.
Warren also applied to the Harvard business school when he was 19, but he got rejected so he went with the next best option: the Columbia Business School. There he met a teacher who would change his life forever: in fact that man; Benjamin Graham would down in history as the Father of Value Investing. The two met in 1949 the same year when Graham published his magnum opus: The Intelligent Investor, in this book Graham lined out step by step on how to invest Successfully and consistently without speculating. In a nutshell, his approach was finding decent companies at bargain prices, essentially finding a $1 stock trading at 50cents. Buffett fell in love with his methodology and quickly he became one of Graham’s favorite student. In fact just a few years after graduating, Warren went to work for Graham at his investment company. There Warren would master the art of security analysis, learning how to see the real value of a company just by glancing at its numbers. But two years later Graham decided to retire, closing down his company and leaving Buffett on his own. Now at the time, Buffett has saved up $175,000 which he used to start a partnership where he could apply Graham’s method. He started looking for companies that were not doing so great but still undervalued by the market or in other words, still good for another puff. In 1958 Buffett noticed that Sanborn Map company which held a virtual monopoly on the production of detailed Maps used in Insurance Business. The company had been around for nearly a century and while it had been doing poorly for the past decades. Buffett noticed something interesting in their books: the company had been investing its profits from the past 20years in over 40 different stocks. Buffett did the math and it turned out that while the company stock was trading at about $45 per share just the investment portfolio alone was worth $65. So Buffett naturally started buying up the Sanborn Stock until he held the majority of the voting power, at which he liquidated the Investment Portfolio. Effectively he spent $45 to buy $65 and in two years he made 45% return with almost no risk.
Warren’s early Investment followed the same philosophy and surprisingly the outperformed the stock market. Thus in January 1962, at 32 years old Warren had Officially become a Millionaire, just 2years after he promised to jump off a building. That very same year Warren encountered a Cigarette butt that caught his eye; a struggling textile called Berkshire Hathaway. Now the Textile industry in New England was in decline for decades and Berkshire had closed 9 out of his 11 textile mills. The stock itself was trading at around $7 but its assets were worth at least $11. But here’s the thing the company’s CEO at the time was using whatever cash the company earned to buy back it’s own Stock. Thus, Berkshire sold off another mill, it would offer to buy out the shares of its own investors, essentially liquidating the company one mill at a time. Warren purchased a lot of stocks at $7 and eagerly awaited the CEO’S offer to buy them back. Two years later, the two-man shook hands on a price $11.50 per Stock, but when the day came, the offered price was only $11.375. The CEO had tried to cheat Buffett out of 13cents, and to return the favor Warren bought the whole company and fired him. Instead of letting Berkshire go to waste Warren started investing in stocks through the company, but this bad experience changed his philosophy. Instead of searching for Cigarette butts he started looking for amazing companies at fair prices.
Warren’s First purchase using this philosophy was American Express, a company whose stock he still owns to this day. Now Buffett applied his analytical skills to find the best Stocks in the whole market but that’s only part of the reason he became successful. What really allowed him to make immense returns was his entry in the Insurance business. Warren saw the path to ultimate wealth in exactly thus business, which is why in 1967 he started buying up only Insurance companies, beginning with National Indemnity and culminating with GEICO in 1996. Here’s why Buffett fell in love with Insurance companies; they are essentially like Banks. Thousands of people regularly pay their insurance premiums, effectively giving the insurance company a huge cash balance, but people can on “ withdraw” their deposits when something bad happens. Buffett was buying companies with a billion dollars in cash that was technically considered the liability and thus wasn’t a factor in the purchasing price. Suddenly he had accessed to immense capital which he has invested wisely and carefully into A- grade companies.
By 1983 Berkshire’s Portfolio was worth over a million dollars and just three years later Buffet himself was worth a billion.
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