The Oracle of Omaha, the most successful investor that has ever lived, Warren Buffett has built a legendary investing reputation. A reputation that is fully deserved and suits him, but that's not how he started! There are plenty of articles and interviews going over his wealth generation through stocks. We are going to take a whole different approach.
In today's article, we are going to dive into Warren Buffet The Young Entrepreneur and you will learn:
- How Warren Buffett made his first 100k (no, not with stocks)
- How a personal vendetta created America’s 8th wealthiest company
- What his secret is according to his children
- The man that changed Warren Buffett forever
Enough chitchat! It's time to shine a light on the part of Warren Buffet that defined him early on and what he truly is in his core being.
Early Interest In Business
Warren Edward Buffett was born in 1930 in Omaha, Nebraska. The stock market had crashed half a year before Buffet was born. Omaha was especially hit by this economic downfall because the price for crops (Omaha drives on agriculture) was dropped massively. Warren’s father Howard lost his job and decided to start his own stock brokerage.
When they moved to Washington DC, Warren felt lost and lonely because the people were very different. Therefore he isolated himself and started to read a lot of books about investing and finance. He set his mind on becoming a millionaire before 35. He even told his friends in high school that he would jump from the highest building if he didn't achieve this goal. To that end, he started playing at the stock market by buying 3 shares of Cities Service Companies. Unfortunately for Warren, these first picks turned out horrific.
He expanded his reading materials and soon discovered a book that changed his early years. We are talking about the book: One Thousand Ways To Make $1000 – by F.C. Minaker. This book encouraged Warren to try out all kinds of business ventures to make money.
Buffett’s Love For Coke Started Early!
For instance, he tried selling chewing gum that he would buy at his grandfather’s grocery shop. He would make a profit come $0.02 per package. This meant he would need to sell 50 million packages to reach his goal of becoming a millionaire before 35. Now, this was obviously going to slow, so he started a new venture.
Warren would buy six-packs of Coca-Cola and sell them to his fellow classmates. He came up with this idea by counting the caps from soft drinks. He would go around the neighborhood and collect these. Warren's conclusion? Coca-Cola was by far the most popular soft drink. So that means there should be space for a profitable retail business.
In 1944, Warren started his first real job as a delivery boy for the Washington Post (a company he would buy much later in time). He worked almost a full-time job delivering papers while he still was in high school. He was earning $175 per month. An electrical engineer in that time would earn $393 per month. At age 15 he had a total of $2000 which would be $28,932 today
Buffett The Farmer
In 1945, Warren used $1200 (60%) of his total net worth of $2000 to buy a farm. It almost sounds unlike Warren Buffett to put such a large sum of money into one investment. Buffett has said: when you have small amounts of money you can’t diversify too much. Especially considering his age at that time, the investment made sense.
Now Warren hated to do manual labor so what is he going to do with a farm? He had a tenant farmer that worked at the farm and did all the manual labor. Profits were split between Warren and the farmer. Basically, this means that Warren Buffett has also tried real estate to gather wealth! The rent created cashflow and this was all relatively passive income. This meant he could focus on producing other sources of income while the farm was generating money at the same time.
In 1950, Warren sold his farm for almost twice the value! The farm was bought for a sum of $2000 dollars and in those 5 years, it also generated profit. Meanwhile, Warren could focus on other business ventures. Not a bad deal where you didn't have to put a lot of effort in!
The Pinball Wizard
His best and most profitable business idea in his early years came from the book One Thousand Ways To Make $1000. The book showed a business model on how you could place weighing machines and ask for money. It showed how you could buy weighing machines from the profit of the ones you already own. The amount of time before you could buy your next weighting machine was declining rapidly when your total amount of owned machines increased. This was the first time Warren met the compound interest theory. Warren didn’t go for the weighing machines but gave it his own touch. He would go and place pinball machines!
The Rise Of An Empire
He partnered up with his longtime friend named Don Danley. They would go and buy pinball machines that were in need of a bit of work. Why? Because a new machine would cost $300 and you could get old machines for $25. This means you could get a far better return on investment from the oldies. Don Danley would do the fixing because as you know Warren isn't really from manual labor. When the pinball machines were fixed up and ready for business, Warren would place them at local barbershops. The profits were split with the barber.
They quickly build up a pinball empire whilst they were still in high school. Now if you paid attention to the time stamps you will notice that there is an overlay. The pinball machine endeavor was going on at the same time as his newspaper gig. How? Because Warren mostly handled the financing and making deals with the barbers. Don would do all the manual work. This meant Warren had time to deliver papers.
Berkshire Hathaway The Textile Company?!
After attending Colombia Business School and briefly working and learning with Benjamin Graham (Warren’s hero and mentor), Warren started his own stock brokerage with a few family members and friends. Warren was quickly gaining momentum as his stock picks would turn out to be highly profitable. The teachings of Graham combined with the detective within made Warren a force to be reckoned with.
Around 1961, Berkshire Hathaway had caught the attention of Warren because it was selling far below its value. Berkshire Hathaway was a New England textile factory at that time. There was a disagreement over a tender offer that made Warren very mad. He said it felt like the management had double-crossed him. He reacted by buying more shares from Berkshire Hathaway until 1965 he then owned the company. The first thing he did was replacing the management.
Part of the decisions in buying Berkshire was motivated by the numbers but there was also a part that was pure emotion. Something we don't often see with Warren Buffett. The issue with the tender offer happened a few days after his dad died. Who knows if that was one of the reasons that he acted the way that he did.
The textile industry was having a bad time. It was not a business that would make a lot of money for him. Later on, Warren admits that purchasing Berkshire was a mistake. However, he owned the company so he had to make the best of it. Over time Berkshire Hathaway was transformed from a textile company into an investment vehicle. In the beginning, they used the profits from the textile to buy shares from profitable companies. Berkshire stayed active as a textile company until 1985. Nowadays Berkshire Hathaway is known as the 8th wealthiest company in the states. They have both majority and minority stakes in multiple insurances and food businesses e.g. See's Candies, Dairy Queen, and Geico.
Charlie Munger – The Man That Changed Buffett Forever
Charlie Munger is a partner but also one of the greatest influencers in Warren Buffett’s life. He changed the perspective of how you should look at a stock. Buying a stock is not buying a symbol. No, you buy a real brand with people behind it and you are responsible for that. Before Charlie, Warren would buy fair businesses for a cheap price. With Charlie, Warren started to buy wonderful businesses for a fair price.
“We were mental partners right from the moment that we met”
This was a huge change in the way of how Warren invested. The old technique works only with relatively small amounts of money. With the massive sums of money that Berkshire Hathaway has to manage it was in need of a different approach. And Charlie's approach was absolutely masterful. Without this approach, there wouldn't have been the acquisition of See's Candies or Dairy Queen. Investments that turned out to be highly profitable.
Warren Buffett himself said that without the shift of vision taught by Charlie, there wouldn’t have been this much success for Berkshire by a longshot.
Source: Financial Post
Warren Buffett’s Secret According To His Children
When asked about what made their dad so successful there were multiple reasons. He has an amazing brain, is good with numbers, reads a lot, but there was one clear winner for all of Warren’s children.
The one thing that made Warren Buffett successful above all others is consistency.
Every morning they heard the garage door open at the same time and every evening he was on time for dinner. Yes, you read that right. Warren Buffett joins his family in eating dinner in the evening. Whatever he is doing, he is making sure that his performance is consistent. Always trying to catch his own flaws and learn from them.
If you are consistent for every day of the year you will be amazed by the things you can get done in one year. Working consistently on acquiring assets that made him money. Consistently reading to become better educated. Consistently reading annual reports in order to know all the ins and outs of a company. Consistency will beat talent every day of the week.
Adopt These Habits To Become More Like Warren Buffett
Reading through the life and adventures of Warren Buffett is immensely interesting and educational. There have been so many eye-openers that I wonder if my eyes will ever be the same again… At 90 years old Warren Buffett is still going strong and keeps providing a lot of wisdom in our modern world. I hope that we can continue to learn from this wise man.
To close this article I am going to summarize a couple of highly valuable lessons that I learned from Warren Buffett:
- Read on a daily basis
- Be consistent
- Create multiple income sources
- Take care of your mind and body
Read on a daily basis: traditional education will not bring you where you want to be. It also isn’t going to fall into your lap. To become successful you have to put in the work. Whether you have financial goals or are trying to make the world a better place, you have to become smarter. Working hard is good, but working smart makes you great.
Be consistent: we talked about this one before in the chapter about Warren's secret according to his children. So I will keep it brief. Consistently working day in day out to become a little bit better will get you results beyond your own beliefs. It's the easiest thing to understand but also the hardest thing to master. Be honest, how consistent are you? Haven't you been postponing that certain task for weeks now…?
Create multiple income sources: this was something that Warren understand relatively early in his life. Do you remember his businesses? His pinball business mostly passive whilst delivering newspapers. He had a farm but didn't do the labor. Warren kept expanding his income sources and in time the compound interest rewarded this immensely. So what are you waiting for? You can start today by creating your first or second income stream.
Take care of your mind and body: you will only have one mind and body in this life. So you better take good care of it. If you take care of your mind and body then it will take care of you. With a healthy mind and body, it will be much easier when you have to work long days in order to achieve your dreams. Start reading or do board games to train your mind and keep it strong. For food, don't eat crap and have enough exercise during the day. Add 30 minute walks into your daily routine. It will do wonders for you
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