Everybody knows Warren Buffet started early. But what exactly did he do? How did he find the companies that fueled his success, and how was he able to multiply his investments fast?
I have recently read the book The Snowball which mentions some the early stock market investments Warren Buffet made that possibly helped him get where he is now.
Most people remember the Berkshire Hathaway and the magical growth that followed. But there was a path that got Warren Buffet to the Berkshire Hathaway. It was not that he magically saw this opportunity and made the lucky to jump on the train with nothing in his hands. There was a huge path traveled already before.
Most notably, you should know that Warren Buffet was already quite rich when he got to the Berkshire stage.
So how did it all start? Warren Buffet started when he was a child, probably before his teen years, delivering newspaper, getting involved in various businesses, making money on game machines in small businesses like barber shops. This got him his first money. But he really pulled it off after finishing his business school.
Getting along after business school
After initial rejection and mixed results trying to start in Omaha, he finally got an offer to work for Ben Graham, the author of the famed book Intelligent Investor and a well known investor at the time.
Though Warren Buffet only worked for Ben Graham for a couple of years, he used this time really well.
He studied the publicly traded companies relentlessly. Spent his days behind Standard & Poor’s and Moody’s Manual. And possibly weekends and evenings too.
In the firm they were looking for cheap and undervalued companies. Undervalued companies might be undervalued by say fifty percent and it can take years for the value to recover. But with ears wide open and mind fully employed, Warren Buffet spotted a couple of deals that multiplied his money much faster. This was probably key for his rocket start.
Among the first companies Warren Buffet found good for himself was Western Insurance. It was selling for $3 per share and had $29 per share earnings. He bought as much as he could. I do not have to say this is an amazing deal to find such a stock as long as the company is not heading to bankruptcy or some kind of trouble.
Reading Coal & Iron
Reading Coal & Iron company was in focus in the Ben Graham office as much and as in Warren Buffet’s mind. The company was selling anthracite coal and was not very interesting on its own. But it was throwing off cash. The cash was to be used to transform the business. Ben Graham was on the board of the company. As Graham-Newman controlled the company, they negotiated a deal where the company bought Union Underwear Company and got onto the path to be a much better business.
Rockwood & Co.
Very hands on example of what the value in investing is, is the purchase of Rockwood & Co.
To understand the investment better, let me share a bit of a backstory. Around 1954, the price of cocoa suddenly increased around 10 times. For chocolate makers like Rockwood & Co., this limited their profitability. Their number one product was chocolate bits used e.g. in cookies, and there was not much space to increase the price of this product. Company started to run a loss. However, it had an inventory of the cocoa beans, which suddenly increased in their value. They could sell off the inventory for a nice profit. Then they would have to pay a lot of tax.
Graham-Newman was offered to buy the company, but they did not. Another investor Jay Pritzker did and found a way to avoid the tax bill. He decided to liquidate thirteen million pounds of cocoa beans as part of the cocoa-butter business he decided to close down.
He also decided to offer these cocoa beans to the current stock holders in exchange for the stock they held. He offered $36 worth of beans for a company share that was at $34 price. An easy way to make $2 per one stock traded. So Graham-Newman took that, bought the stock at $34, got the bean certificates and sold those at $36, making $2 on such a trade.
But Warren Buffet thought about the trade a bit more. He calculated the per share value of cocoa beans, it was more than $36 Jay Pritzker was offering. So if he just kept the stock, he would keep more cocoa bean value plus the cocoa bean value would increase from the leftover value of cocoa bean trades. In essence this was kind of a stock buyback, and I think it taught Warren Buffet a lot about extracting value from company ownership.
So he kept the stock. And after the cocoa bean trades were done, the per share value increased and he was left with $85 price per stock. This made him a quick $13,000. More than a very good annual salary at that time.
These are a couple of examples of how Warren Buffet built the base of his fortune. It is good to note that this goes completely contrary to the common approach to diversify widely and buy into well known indexes.
And this is correct. With the index investments, it is realistic to expect 5–10% annual appreciation. And this is on average over decades. So there can be a better decade and a decade where the index does nothing. With such appreciation, it would had taken Warren Buffet ages to build up his money.
But putting the money into investments that multiplied much faster, and where he could reason about the quality of the investment with a high certainty, is what got him ahead.
In bullandbearlist.com we build tools for regular people to search for such high potential companies. Please note that all investments entail risk and these are just my opinions, not a professional financial advice. I am not a professional financial advisor.