His business successes as a young man did not immediately translate into a desire to attend college. His father pressured him to continue his education, and Buffett reluctantly agreed to attend the University of Pennsylvania. He then transferred to the University of Nebraska, where he graduated with a business degree in three years.
After being rejected by Harvard Business School, he enrolled in graduate school at Columbia Business School. While there, he studied with Benjamin Graham, who became a lifelong friend, and David Dodd, both well-known stock analysts. It was through Graham’s class in securities analysis that Buffett learned the fundamentals of value investing. He once stated in an interview that Graham’s book The Intelligent Investor had changed his life and set him on the path from professional analysis to investment markets, along with security analysis., co-written by Graham and Dodd, provided you with the right information. intellectual framework and a roadmap to invest.
Warren Buffet: The Road to Riches
- Warren Buffett, sometimes known as the “Oracle of Omaha”, is one of the richest men in the world and a renowned investor.
- Buffett was a disciple of the intelligent investment philosophy of Benjamin Graham.
- In 1962, Buffett bought the textile company Berkshire Hathaway, which he turned into a holding company in which he built a diversified corporate empire.
Benjamin Graham and the smart investor
Graham is often called the “dean of Wall Street” and the father of value investing, as one of the most important early proponents of financial security analysis. advocated the idea that the investor should look at the market as if it were a real entity and potential trading partner, Graham called this entity “Mr. Market,” which sometimes calls for too much or too little money to be bought.
It would be difficult to summarize all of Graham’s theories in their entirety. At its core, value investing is about identifying stocks that have been undervalued by most stock market participants. he believed that stock prices were frequently wrong due to irrational and excessive price fluctuations (both up and down). Smart investors, Graham said, must stick to their principles and not follow the crowd.
Graham wrote The Intelligent Investor in 1949 as a guide for the common investor. The book championed the idea of buying low-risk securities in a highly diversified mathematical way. Graham favored fundamental analysis, capitalizing on the difference between a stock’s purchase price and its intrinsic value.
Entering the field of investment
Before working for Benjamin Graham, Warren had been an investment salesman, a job he liked to do, except when the stocks he suggested went down in value and lost money for his clients. To minimize the potential for irate customers, Warren started a partnership with his close friends and family. the partnership had unique restrictions: Warren himself would invest only $100, and through reinvested management fees, he would increase his share of the partnership. Warren would take half of the partnership’s profits above 4% and pay the partnership back a quarter of any losses incurred. Moreover, money can only be added or withdrawn from the association on December 31st, and the partners would have no input on the investments in the partnership.
By 1959, Warren had opened a total of seven partnerships and had a 9.5% interest in over $1 million in partnership assets. Three years later, when he was 30 years old, Warren was a millionaire and merged all of his partnerships into one entity.
It was at this point that Buffett’s gaze turned to invest directly in companies. he made a $1 million investment in a windmill manufacturing company, and the following year in a bottling company. Buffett used the value investing techniques he learned in school, as well as his ability to understand the general business environment, to find bargains in the stock market.
Buy Berkshire Hathaway
In 1962, Warren saw an opportunity to invest in a New England textile company called Berkshire Hathaway and bought some of its stock. Warren began aggressively buying stock after a dispute with his management convinced him that the company needed a leadership change. Ironically, buying Berkshire Hathaway is one of Warren’s biggest regrets. (For more, see: Risks and Rewards of Berkshire Hathaway .)
Understanding the beauty of owning insurance companies (customers pay premiums today to possibly get paid decades later), Warren used Berkshire Hathaway as a holding company to buy a national indemnity company (the first of many insurance companies he would buy). and used its substantial cash flow to finance new acquisitions.
As a value investor, Warren is something of an all-around trader when it comes to industry knowledge. Berkshire Hathaway is a great example. Buffett saw a company that was cheap and bought it, regardless of the fact that he was not an expert in textile manufacturing. Gradually, Buffett shifted Berkshire’s focus away from his traditional endeavors, instead using it as a holding company to invest in other businesses. Over the decades, Warren has bought, held, and sold companies in a variety of different industries.
Some of the more well-known Berkshire Hathaway affiliates include, but are not limited to, Geico (yes, that little gecko belongs to Warren Buffet), Dairy Queen, Netjets, Benjamin Moore & Co., and Fruit of the Loom. , These are just a few companies in which Berkshire Hathaway has a majority stake.
The company also has interests in many other companies, including American Express Co. (AXP), and Costco wholesale corp. (cost), DirectTV (DTV), general electric co. (GE), General Motors Co. (GM), Coca-Cola Co. (ko), International Business Machines Corp. (IBM), Walmart stores inc. (wmt), proctor & gamble co. (pg) and wells Fargo & co. (WFC)
Berkshire afflictions and rewards
However, the Buffett business has not always been optimistic. In 1975, Buffett and his business partner, Charlie Munger, were investigated by the Securities and Exchange Commission (SEC) for fraud. The two maintained that they had done nothing wrong and that the purchase of Wesco Finance Corporation only seemed suspicious because of its complex business system.
Other problems arose with a large investment in Salomon Inc. In 1991, news broke that a trader broke Treasury’s bidding rules on multiple occasions, and only through intense negotiations with the Treasury managed to avoid a ban on buying Treasury notes and the subsequent bankruptcy of the company.
In more recent years, Buffett has acted as a financier and facilitator of major transactions. During the great recession, Warren invested and lent money to companies facing financial disaster. Approximately 10 years later, the effects of these transactions are emerging and they are enormous:
- A loan to mars inc. resulted in a profit of $680 million
- Wells Fargo & Co. (WFC), of which Berkshire Hathaway bought nearly 120 million shares during the Great Recession, is up more than 7x from its 2009 low
- American Express Co. (AXP) is up about five times since Warren’s investment in 2008
- Bank of America Corp. (bac) pays $300 million a year and Berkshire Hathaway has an option to buy additional shares at around $7 each, less than half of what is currently listed.
- Goldman Sachs Group inc. (gs) paid $500 million in dividends a year and a $500 million redemption bonus when they bought back the stock.
More recently, Warren has partnered with 3G Capital to merge the JH Heinz Company and Kraft Foods to create the Kraft Heinz Food Company (KHC). The new company is the third largest food and beverage company in North America and the fifth largest in the world and has annual revenues of $28 billion. In 2017, it bought a significant stake in Pilot Travel Centers, the owners of the Flying J. Pilot truck stop chain. It will become the majority owner for a period of six years.
The modesty and quiet life meant that it took a while for some to catch on to Warren and add him to the list of the richest Americans, but when they finally did in 1985, he was already a billionaire. Early investors in Berkshire Hathaway could have bought as low as $275 a share and by 2014 the share price had reached $200,000 and was trading for less than $300,000 earlier this year.
Comparing Buffett with Graham
Buffett has referred to himself as “85% Graham.” Like his mentor, he has focused on company fundamentals and a “stay the course” approach, an approach that allowed both men to build huge personal savings. In search of a strong return on investment (ROI), Buffett typically looks for stocks that are accurately priced and offer solid returns for investors.
However, Buffett invests using a more qualitative and focused approach than Graham. Graham preferred to find undervalued average companies and diversify his holdings among them; Buffett favors quality companies that already have reasonable valuations (although their shares should still be worth a little more) and the capacity for great growth.
Other differences lie in how to establish intrinsic value, when to take risks, and how deeply to dive into a company that has potential. Graham relied on quantitative methods to a greater extent than Buffett, who spends his time visiting companies, talking to management, and understanding the company’s particular business model. As a result, Graham was more capable and comfortable investing in many smaller companies than Buffett. Consider a baseball analogy: Graham was concerned with hitting good pitches and getting on base; Buffett prefers to wait for pitches that allow him to hit a home run. Many have credited Buffett with having a natural gift for the time that cannot be replicated, while Graham’s method is friendlier to the average investor.
Buffett fun facts
Buffett only started making large-scale charitable donations at age 75.
Buffett has made some interesting observations about income taxes. specifically, you are asked why your effective capital gains tax rate of about 20% is a lower income tax rate than your secretary’s, or for that matter, what most workers pay hourly or middle-class wage earners. As one of the two or three richest men in the world, having long since established a mass of wealth that virtually no amount of future taxes can seriously affect, Mr. Buffett offers his opinion from a state of relative financial security that has virtually no parallel. even if, for example, every future dollar Warren Buffett earns is taxed at a rate of 99%, it is doubtful that it will affect his standard of living.
Buffett has described The Intelligent Investor as the best book on investing he has ever read, with a very close security analysis. Other favorite reading matter includes:
- Common stock and rare earnings of Philip a. Fisher, advise potential investors not just to examine a company’s financial statements, but to evaluate its management. Fisher focuses on investing in innovative companies, and Buffett has held him in high regard.
- The outsiders by William n. Thorndike outlines eight CEOs and their blueprints for success. Among those profiled is Thomas Murphy, a friend of Warren Buffett and director of Berkshire Hathaway. Buffett praised Murphy, calling him “overall the best business manager I’ve ever met.”
- A stress test conducted by former Secretary of the Treasury Timothy F. Geithner chronicles the financial crisis of 2008-9 from a gritty, first-person perspective. Buffett has called it a must-read for managers, a textbook on how to stay level under unimaginable pressure.
- Adventures in Business: Twelve Classic Tales from the World of Wall Street by John Brooks is a collection of articles published in The New Yorker in the 1960s. Each addresses famous failures in the business world, describing them as cautionary tales. Buffett lent his copy to Bill Gates, who has reportedly yet to return it.
The bottom line
Warren Buffett’s investments haven’t always been successful, but they were well thought out and followed value principles. By keeping an eye out for new opportunities and sticking to a consistent strategy, Buffett and the textile company he acquired long ago are considered by many to be one of the greatest investment success stories of all time. But you don’t have to be a genius “to invest successfully for a lifetime,” the man says. “What is needed is a strong intellectual framework for making decisions and the ability to prevent emotions from corroding that framework.”