[00:02:59] Assuming your money compounded at 20.1% over 56 years like Berkshire did, that will turn a thousand dollars initial investment into an astounding 28.4 million. There have been investors that have had higher returns, no doubt, but no investor has had the ability to compound capital and handily beat the market over the span of their entire lives in the manner that Buffett has.

[00:03:26] Before we dive into the content, the purpose of this episode isn’t to teach you how to be Warren Buffett. Honestly, it’s very likely that very few of us even have the potential to be as good of an investor as he is. But what we can do is look into how he invests and try and pull some of these useful ideas and then take those ideas and integrate them into our own approach to investing in a way that makes sense to each of us.

[00:03:52] So let’s talk about how he did. Starting from the very beginning. Buffett was born in August of 1930 in Omaha, Nebraska. This was right at the beginning of the Great Depression. I think growing up during the Great Depression led to very difficult times for his family. Early on in his life, his family was just trying to do well enough to make ends me and put food on the table.

[00:04:15] His father, Howard Buffett ended up starting a business as a stockbroker, giving Warren a middle-class lifestyle. Growing up during this difficult time period led Warren to have this just tremendous drive to become very, very, very rich. And it’s something he seriously committed to really his entire life.

[00:04:34] At a very early age, even as early as kindergarten, Warren developed a deep interest in numbers, and it was pretty obvious that he had a very sharp mind. He even developed an interest in business at a very young age. The first dollar he made from business was from selling packs of chewing gum at the age of six.

[00:04:53] Then he came to figure out that selling bottles of Coca-Cola was much more profitable, so he pivoted to selling those. Instead, he could buy a six pack for $1, and if he sold each bottle for 20 cents, he could get a 20% return on his initial in. Even during elementary school, Warren just really enjoyed working so he could save all the money he made and put it in his drawer at home.

[00:05:17] Since his dad was a stockbroker and owned his own business, Warren spent a lot of time at the office and spent a ton of time just reading and consuming as many books as possible. One book that had a big effect on him was a book called 1000 Ways to Make a thousand dollars. This book really got Warren’s business mind thinking and helps put him on the path of figuring out what makes a good business and what makes a bad business, and especially what type of business he could set up, which didn’t, you know, really take much of his time and attention.

[00:05:48] So essentially ways in which he can make money work for him rather than constantly just working for money and trading his time for money. This is also when Warren really got started to understand the power of compounding, which is really the key ingredient to Warren Buffett’s success. The book taught him that if you had a thousand dollars and compounded it at 10% per year, you’d have $1,600 at the end of five years, $2,600 at the end of 10 years, and $10,800 at the end of 25 years.

[00:06:19] If a dollar today was going to be worth $10 sometime in the future, then in Warren’s mind, the two were essentially the same thing. So this idea led him to being extremely frugal and very mindful about his spending because he knew that every dollar he let go of was essentially the equivalent of letting go of $10 sometime in the future.

[00:06:40] One of Warren’s motivations around accumulating wealth and having strong business knowledge was the realization that money could make him independent and allow him to spend his time however he wanted to. One of his biggest goals in life was to work for himself, so he had an immense passion for understanding how great businesses operated.

[00:07:00] One of the keys to building wealth through investing is to let your money compound over long periods of time. So it’s no surprise that Warren had purchased his very first doc when he was 11 years old, and by the age of 14, he had accumulated his first $1,000 primarily through delivering newspapers in the mornings and was on his way to achieving his goal of becoming a millionaire at the age of 35.

[00:07:23] Warren also started a number of businesses throughout high school, but one I thought was pretty neat was his pinball machine business that really applied the concept of compound interest he had learned. So he had purchased an old pinball machine for $25 and partnered with local barbers in the area to put these pinball machines in their shops.

[00:07:43] He would just simply split the money with each barber. And in the first week of business, he had collected $25 from the very first pinball machine he put in. He, after he had split the uh, money with the barber, So that was enough to go out and buy another pinball machine to put it in another barber shop.

[00:07:59] This about wraps up what I’d outlined from his childhood. These were very formative years for Buffett and helped him learn some key lessons about business and investing lessons such as You shouldn’t swing at every pitch that is thrown at you for investment or business ideas. You shouldn’t rush to take a quick profit, and you should be very careful when investing other people’s money because he hated losing money for others more than anything.

[00:08:24] Then at the age of 17, Warren went off to the Wharton’s Business School at the University of Pennsylvania, and initially, Warren didn’t really see the point in college because he just saw it as an obstacle in accumulating wealth, and he just thought it was going to slow down his path to doing that. He ended up transferring to Nebraska, which is where I went to college actually.

[00:08:46] Upon graduation, Warren got the sudden motivation to attend Harvard Business School, which was driven by the prestige he’d received, you know, as well as the networking opportunities and the connections he would make from such an experience. However, Harvard denied him, so he started investigating other graduate programs, and in his research of other universities, he discovered that Benjamin Graham was a professor at Columbia.

[00:09:11] Graham wrote the book, The Intelligent Investor, which is what Buffett would consider essential reading. For those that want to understand how the stock market really works, Buffett was someone who would read and reread every single investment book until he discovered what actually worked the best. He left Graham’s approach, not only because it worked at the time, but it was very rational, systematic, and it was a reliable investing method.

[00:09:36] I think one thing that really sets Buffett apart from, you know many other people, many other investors, was his whole life, and especially from an early age, he just had this intense obsession with reading and learning. He was the type of person that when he would get interested in a particular topic, he would go out and read every single book he could find on it.

[00:09:58] And this most definitely applied to investing as well as he would read and reread all of the books he could find. In Benjamin Graham’s books, he outlined his own definition of what makes an investment. Graham said, An investment operation is one in which upon thorough analysis promises safety of principle in a satisfactory return.

[00:10:21] Operations not meeting. These requirements are speculative. Graham was also well known for ensuring all of his investments had an adequate margin of safety, giving him some room for error in his stock picks, and that if he was somewhat off in any of his assessments, it’s still likely he would make money to try and do this.

[00:10:41] There are two methods investors could apply. One purchase shares when the overall market is trading at low prices, like when stocks are in a bear market, or two purchases stock when it trades below its intrinsic value, even though the overall market might not be substantially cheap in either case.

[00:10:59] Graham said that a margin of safety is present in the purchase price. Benjamin Graham also believed that the single most important factor of a company’s value is their future earnings power to determine how much the company is actually worth. The simple formula he used was determined by estimating the future earnings of the company in multiplying those earnings by an appropriate earnings multiple, which depended on a number of factors such as the stability of the earnings, the company’s assets, dividend policy, as well as the financial health of the company.

[00:11:32] And the intrinsic value isn’t going to be one specific and exact number. Typically, for a stable company, you can determine some sort of range of values that the company’s intrinsic value is assessed to fall between. And again, the margin of safety concept plays in here because Graham wants to find a company whose intrinsic value is trading well below the market price in order to end up making that purchase.

[00:11:57] So Buffett ended up getting into Columbia Business School so we could learn from Benjamin Graham. One of Buffett’s very first classes was with David dod, who was the author of Security Analysis alongside Benjamin Graham. This book was over 700 pages, and Warren had practically memorized this book, and he knew all the examples they laid out in the book.

[00:12:19] Buffett knew the book so well. He claimed to have known it even better than DOD himself. This goes to show just how Smart Buffett was, as he not only was an extremely avid reader, he also had practically an incredible photographic memory. Buffett paid close attention to the stocks that Benjamin Graham was buying because he believed that Graham had cracked the code on finding deeply undervalued stocks.

[00:12:46] Upon his search, he discovered that Graham was the chairman of the board of Geico and that Graham’s investment company, Graham Newman Corporation, had owned 55% of Geico at the time. Buffett wanted to learn more about Geico, so he hopped on a train to head to Washington dc, knocked on the company’s front door, and said that he was a student of Graham’s and wanted to learn more about the business.

[00:13:09] Geico’s financial vice President, Lauren or Davidson thought, What the heck? I’ll give the kid a few minutes of my time and then just politely ask him to leave. However, this guy quickly realized that he was not talking to your typical student. The questions Warren was asking him are questions that he would be asked by an experienced insurance stock analyst.

[00:13:30] As many of you might know, Geico had positioned themselves to be a low-cost provider of auto insurance by marketing through the mail without using an insurance agent, which oftentimes gets paid a decent commission for each policy sold. Davidson and Buffett sat down and chatted about insurance for four hours that day, and that ended up really being Buffett’s introduction to insurance, which many of you also know ended up being an integral part of his investment career.

[00:13:58] After diving deep into Geico’s business model, he moved 75% of his portfolio into Geico, which was a bold move for someone who was pretty cautious with those investments. Despite only being a freshman in college, this was nearly a $15,000 bet for Buffett. It was in Buffett’s second semester that he had the opportunity to be in one of Benjamin Graham’s classes.

[00:14:23] Graham’s approach to investing was defined companies whose market price was trading far below what the business was worth. Conservatively. Essentially, he was looking for companies where, in theory, if the debts were repaid and the assets of the company were sold off, how much cash would they have left?

[00:14:39] That would be your intrinsic value of the business. Put another way, if a person has $50,000 in assets and cash, $40,000 in debt to be paid, the net worth of that person would be $10,000 after the assets are sold and the debt is repaid. The trick with this approach is that you don’t know when the market will eventually come to its senses and bring the market price closer to fair value or the intrinsic value.

[00:15:04] The way Graham hedged against his certainty and the price was to be sure he built in a margin of safety or plenty of room for error to be made. Buffett highlighted three primary principles that he picked up from Graham’s classes. One, A stock is the right to own a little piece of a business. It’s not a blip on a screen.

[00:15:24] It’s not a piece of paper. Or something that should be used to trade in and out of constantly buying a stock is the same as buying ownership in a real business. Two, use a margin of safety. Investing includes estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors.

[00:15:47] Three, Mr. Market is your servant, not your master. Mr. Market offers you a price every day, and the price that Mr. Market offers should not influence your view over the price. From time to time, he will give you a chance to buy at a low price or even sell at a high price. Next, Buffett set his sites on doing anything he could to work for Benjamin Graham.

[00:16:10] He knew that if he could work for him, it was certain that he would excel. At the time, Buffett lacked the self-confidence in many areas of his life. But one area he was very ambitious and confident in was his ability to analyze stocks. So he asked Graham if he could work for him at Graham Newman, which only had four employees.

[00:16:30] Buffett was Graham’s only student who had ever earned an A plus in his 22 years of teaching. To help seal the deal, Warren even offered to work for Graham for free, but Graham actually turned him down since Graham was adamant about only hiring Jewish people since the big investment banks at the time wouldn’t do so.

[00:16:51] Since Warren couldn’t work for Graham, he decided to move to Omaha, Nebraska, and become a stock broker for his father. Howard’s Company, Buffett Falk. Since he moved to Omaha and not New York City, he was outside of the confines of Wall Street and was really able to think for himself and come to his own conclusions and not be influenced by the herd mentality.

[00:17:13] And it was at this point that you could see Warren really start to think for himself instead of solely following the two people that had just a huge influence on him up to that point. This was his father Howard, and then Benjamin Graham as. His father was somewhat of a gold bug and was very concerned about inflation, so he recommended Warren hold gold and mining stocks, whereas Graham was extremely conservative and thought the market was overvalued.

[00:17:40] Buffett took a very micro approach and saw many great opportunities of businesses that he thought would be fantastic investments. Geico being one of them. Sure inflation might take hold temporarily, or the economy might have the inevitable hiccup at some point in the future, but he was certain that over the long haul, great businesses was where the money was to be made.

[00:18:03] Buffett also quickly learned about the importance of incentives. As a stockbroker, you’re paid a commission each time someone buys or sells the stock through you. But at the time, Warren wanted to recommend all of his friends and family buy Geico stock and hold it for the next 20 years. But you can’t make a living by giving that advice and being a stock broker.

[00:18:23] So he felt there was a bit of a conflict of interest being in this position. So Warren was in search for something new. Luckily, he had kept in touch with Benjamin Graham, and Graham gave him a call in 1954 and asked Warren to come work for him in New York. As many of the listeners know, Warren Graham and the rest of the team at Graham Newman focused on finding companies they like to call cigar butts, keep in unloved stocks that had been cast aside, like a little cigarette that had one or two free puffs left in them that everyone else would just really overlook.

[00:18:58] This is what Graham specialized in, not because he loved these companies in particular. He just recognized that the strategy worked really well for him. And Graham knew that some of these companies would end up going bankrupt and lose him money, so he would spread out his risk over a large number of these companies.

[00:19:16] Warren, however, took a slightly different approach. Personally, he was much more confident in his ability to pick winning stocks, and when he found picks that he was very sure in, he would bet big on them. For Buffett Graham was much more than a tutor. Graham provided Buffett a clear and reliable roadmap to successful stock picking, which was essentially seen as similar to gambling by many people.

[00:19:41] Warren then learned the importance of opportunity costs. Without using leverage, he could only invest a certain dollar in one place. He can’t take that dollar and invest it in two different companies. He had to choose the best place for that dollar so that he could earn the highest possible return without taking any excess risk.

[00:20:01] Because of this, Buffett had sold off much of his GE composition because he had found better opportunities such as Western Insurance, which was earning $29 per share while the stock was trading for as little as $3 per share. So to find these companies, Warren would sift through any resource he could, such as Moody’s manuals or what were called pink sheets.

[00:20:23] In 1955, Warren had made $20,000 in profit in just a few weeks on a bus company that was trading at a big discount to its net, to its net assets. Warren was only in his mid-twenties at the time, and nobody in Buffett’s family had ever made $20,000 on a single idea. The amount was several times more than what the average person earned in a whole year’s work.

[00:20:48] Now, some of you might be wondering, how can I do what Buffett did today and invest my money at high rates of return with very little risk? Well, today, with the rise of technology, large trading firms can spot these opportunities in an instant. So finding these types of deals that Warren Buffett found in the 1950s is extremely difficult, if not impossible.

[00:21:10] So we, as investors will have to find a different approach to investing that, works well for us if we want to take an active investing approach. Then in 1956, Graham decided his time was up with his investment career and it was time for him to retire. Buffett was offered to become a general partner in Graham’s firm, but he turned it down and at the age of 26, moved back to Omaha to start his own partnership where he could invest from his house and could put his friends and relatives into the same stocks he invested in.

[00:21:41] At this point, Warren was worth $174,000 at the age of 26. He structured the partnership so that he got half of the upside above a 4% threshold, and he took a quarter of the downside himself, so even if his investments broke even, he ended up losing money. He promised his investors that his investments would be chosen on the basis of value in not popularity, and that the partnership will attempt to reduce the permanent loss of capital to a minimum.

[00:22:12] Within that first year, Buffett already managed over $1 million in assets, much of which came over from not just friends and family, but from people who needed a new place to invest after Grant’s partnership had ended. During that time period, Buffett was primarily purchasing companies that were around the one to $10 million in market cap that most people knew.

[00:22:33] Nothing. One of Buffett’s big problems in the early days was that he had so many opportunities, but not enough capital to pursue such opportunities. So a lot of his time was spent trying to sell others on joining the partnership, whether that would be networking or introducing himself around Omaha, or reaching out to former members of Graham’s partnership.

[00:22:55] He’d get $10,000 here, a hundred thousand there, 50,000 there. Month after month. He was getting more and more investors in his partnerships. And this was great from Warren’s perspective because the more money he managed, the more money he could make and the faster his snowball of wealth to the million-dollar mark could accumulate.

[00:23:14] Like I mentioned before, Warren was very big on incentives. He knew that his incentives were aligned with his investors’ Incentives. If he did well in managing their money, then his partners would do well too. If he did poorly, then he would suffer from that just like his partners did. He’s really operated in that manner from day one.

[00:23:34] Many times when Buffett brought on larger investors, he would set up new partnerships that were legally separate from his other partnerships. Legally he could only take on a hundred partners without having to register with the s e C as an investment advisor. And eventually, his partnerships got to the point where word of mouth was really starting to take hold.

[00:23:54] People would see the results they were getting from Buffett and they would go out and tell all their friends, Hey, if you wanna get rich, then you need to invest your money with Warren Buffett. So he didn’t need to do much selling at this point as he was getting many organic inbound requests from prospective investors.

[00:24:11] His second partnership achieved an annualized rate of return of 24.5% versus the market average of 9.3%. Warren eventually dissolved all of the partnerships into one, and in 1961, the partnership returned 46% versus the Dows 22%. Because of Buffett’s massive success up to this point, he had achieved his goal of becoming a millionaire by the age of 35.

[00:24:39] His whole family thought he was crazy for setting such a goal and thinking he could achieve such a thing, but he ended up doing it at the age of 30 rather than 35. Although he was on his own investing now, Buffett really didn’t deviate too much from Graham’s investment strategy of buying the cheapest stocks he could possibly find.

[00:24:59] And that was until Buffett met Charlie Munger. Warren met Charlie Munger in 1959 when Buffett was around 29 years old and they clicked and it became friends almost instantly. Munger was a lawyer for most of his career up until then, but like Buffett, he was also an avid reader that enjoyed reading about business investing and studying successful individuals.

[00:25:25] Munger enjoyed being a lawyer, but what he decided he really wanted was to have the freedom and financial independence to do whatever he wanted. Similar to Buffett. After he learned about Buffett’s partnership model, he was hooked and wanted to implement the same model for himself to achieve that independence he wanted.

[00:25:44] Munger was a bit older, but he wasn’t as wealthy as Buffett. One reason was because he was a lawyer and not so focused on accumulating as much money as possible. But another reason was that Monger had eight children, which we all know is not. Now Munger understood Buffett’s approach of buying businesses that were really cheap, but he was much more interested in investing in great companies.

[00:26:06] He wanted to learn more about a company’s intangibles, intangible assets, such as the strength of the management, the durability of the brand, or how someone else could compete with them. What Monger didn’t like about Benjamin Graham’s approach was that he was quite pessimistic about the future and invested in a way that was very, very conservative.

[00:26:26] Whereas Buffett’s personality was very optimistic about the future and bullish on where America was heading. The cigar about style of investing is determining what the company would be worth if it were dead in all its assets were liquidated. Munger thought that given Buffett was so optimistic about the future, he should be investing in a way that reflects that.

[00:26:46] One time Buffett explained why Graham cigar, but strategy wasn’t always the best. He said, If you paid 8 million for a company whose assets were 10 million, you will profit handsomely if the assets are sold on a timely basis. However, if the underlying economics of the business are poor and it takes 10 years to sell the business, your total return is likely to be below average.

[00:27:10] Remember, time is your friend of the wonderful business in the enemy of the mediocre business. Buffett quoted John Kanes in regards to this transition. The difficulty lies not in the new ideas, but in escaping from the old ones Buffett, however, didn’t ever forget one key principle that Graham taught him.

[00:27:31] Successful investing involves purchasing stocks when their market price is at a significant discount to their underlying business value. In 1963, in 1964, Buffett did start to come around to Munger’s line of thinking as he purchased American Express as it was being punished by the market. It was by no means as cigar about style pick.

[00:27:51] However, Buffett invested 13 million of the partnership’s money into the stock, making it the fund’s largest position. The stock had been involved in a giant scandal in which it was backed by fraudulent loans and American Express’s share price decreased by over 50%, as Robert Hagstrom put it in his book.

[00:28:11] If Buffett has learned anything from Ben Graham, it was this, When a stock of a strong company sells below its Intrinsic value Act, decisively Buffett was aware of the 58 million loss American Express have had from the fraudulent. But he went around Omaha and found that people who had American Express cards were still using them as usual.

[00:28:33] Then he visited several banks and saw that American Express travels checks had no impact on their sales either. So he pulled the trigger as this share price tripled over the next two years. This was a timely move for Buffett as the cigar approach was becoming more and more difficult to implement as the opportunities begun to be arbitraged away by the market.

[00:28:54] And since Buffett was managing larger sums of money, this also limited the choices of cigar companies to invest in as very small companies were no longer really moving the needle for him. Another individual who had influence on Buffett transitioning to buying quality companies was Phil Fisher. Fisher believed that superior returns could be made by investing in companies with above average potential that had capable managers.

[00:29:20] While Graham’s approach was very qualitative. Fisher’s approach was very much quantitative. He popularized what he called the scuttlebutt method of researching all of the qualitative aspects of a business. Its management and its competitive advantage, especially from those who are very familiar with the company.

[00:29:38] Fisher would take those steps that most other investors simply wouldn’t take in their research, such as meeting with the customers or the vendors to get their opinion on the company as well as their opinion on the company’s competitors. So Fisher would go out and chat with the most knowledgeable people about a company, their employees, their investors, and those who were most knowledgeable about them.

[00:30:00] Buffett also adopted ideas from Fisher around portfolio diversification. Graham being very conservative, liked to diversify his bets, whereas Fisher taught Buffett not to overstress diversification. He thought it was a mistake to spread out your risk given that you were very sure about a handful of stocks that were very well-researched.

[00:30:20] Also, once you have too many stocks, it makes it practically impossible to watch all of them and monitor their business performance effectively in Fisher’s view, buying shares in a company without thoroughly understanding the business was far riskier than having limited diversification. But Buffett wasn’t a hundred percent done with buying cigars when he found them, as he had discovered a textile maker in Massachusetts.

[00:30:46] This company was called Berkshire Hathaway. The plan was to buy the company, liquidated its assets, and shut down the business. According to the accountants in the company’s books, the business was worth over $19 per share, but the stock was trading at $7 and 50 cents. So Buffett started accumulating shares in the company originally.

[00:31:07] Buffett a plant to sell his shares in a tender offer at $11 and 50 cents. But he received a note that the tender offer, or they offered to buy Buffett shares was not at $11 and 50 cents, but it was at $11 and 37.50 cents being who he was. This infuriated him to no end as he was pretty much a tight wad and wanted to maximize every single dollar he could.

[00:31:33] So instead of selling the stock, he continued to buy as many shares as he could possibly get. He wanted to buy the whole company. There’s a whole backstory on how this ended up playing out, but essentially it seems like Buffett ended up getting pretty emotional when purchasing these shares because he had issues with shutting down operations and companies in the past.

[00:31:55] He had enough shares to have influence over the management of the business, but he learned from his past, he shouldn’t shut down Berkshire’s operations. Essentially, he had discovered that Berkshire was a cigar. But it didn’t have any puffs left, and he’s on the record for saying he would’ve been better off if he had never even heard of Berkshire Hathaway, which is pretty funny given that the company is worth over 600 billion today.

[00:32:23] By 1966, his partnership had grown to 44 million, and for the first time in his career he had more money than he had ideas. So he made the decision to close the doors on new investors and his partnership so that he wouldn’t disappoint his partners by investing in subpar opportunities. Still, at this point, Buffett was making a lot of cigar approach deals, with the exception of, of American Express, which had played out extremely well up to that.

[00:32:51] However, as we approached the late 1960s, he was beginning to make the transition to buying great businesses rather than cheap businesses. At the time, companies like Polaroid, Xerox and electronic data systems were taking hold on the market in gaining a lot of hype. As technology companies whose products went way over Buffett’s head started to so.

[00:33:13] With that Buffett made two rules for himself. One, he would not invest in businesses whose technology is way over his head and it’s crucial to the investment decision. Two, he would not seek out activity in the operations of the investment, even if it offered tremendous opportunities for profit, meaning that he wanted his investments to be very passive and not require a tremendous amount of his time and attention.

[00:33:41] The first point is that value investing principle that you should only invest in what you truly understand. If you don’t truly understand your investment, then it’s very difficult to hold on during the inevitable drawdowns in the market. When Buffett was 38 years old, he had watched Intel start from nothing in turn into a massive success, and likely one of the best opportunities he had ever come across.

[00:34:05] But he never purchased Intel for the partnerships. And he had watched a number of other tech companies be great successes as well, but also many more had ended up failing. He did have a strong, long-standing bias against technology companies because he felt there was no margin of safety in them. Buffett was so focused on margin of safety.

[00:34:25] Quoting Alice Schroeder in her book, this particular quality to pass up possible riches, if he could limit his risk, was what made him Warren Buffett in quote. The second point got to something. Buffett learned through experience. He was involved in many deals that led to headaches or just a massive time commitment.

[00:34:46] The purchase of Berkshire Hathaway stock being one of them. He was on the phone almost daily with Berkshire employees trying to make sure the management team was making the right decisions to ensure he didn’t lose any. In an October, 1967 letter to shareholders, he wrote to investors that he would limit himself to activities that were easy, safe, profitable, and pleasant.

[00:35:10] He also wrote that when I am dealing with people I like in businesses, I find stimulating and achieving worthwhile overall returns. On capital employed, say 10 to 12%. It seems foolish to rush from situation to situation to earn a few more percentage points. It also does not seem sensible to me to trade known pleasant personal relationships with high-grade people at a decent rate of return for possible irritation, aggravation, or worse at potentially higher returns in quote.

[00:35:41] This was a huge step for Warren as he was the biggest penny pincher anyone had ever known, and he was always trying to achieve the highest returns possible. So for his investors, to hear him say that he was willing to sacrifice returns was quite a transition for someone so strong willed, figuring out where he was going to allocate capital.

[00:36:00] Next he have Bong had his eye on a company in Omaha named National Indemnity, which was located just a few blocks from his office downtown. Through Buffett’s research, he came to find out that National Indemnity insured some unusual people such as circus performers and Lion Tamers. The company CEO, Jack Ringwald, used to say, There’s no such thing as a bad risk, only bad rates referring to the premiums that policyholders were charged.

[00:36:29] Buffett Weezled, his way to talk Ringwald into selling national indemnity to him, and Buffett quickly put together the final papers before Ringwald could change his mind and back out of the deal. And at that point, Buffett had entered the insurance business and was on his way to exiting the textile business.

[00:36:46] This is when Buffett figured out a whole new business model when he bought stocks and the company, he made money. That money would typically stay within that particular company. But since he had bought the whole business of national indemnity, he could then use the extra profits from that business to go out and purchase other businesses that offered better opportunities to compound his capital.

[00:37:08] Another thing that Buffett loved about the insurance business was the float that the insurance company had. The advantage of holding insurance would pay a premium today in return for potentially receiving some benefit in the future. For the time in between those dates, the insurer had the opportunity to invest that money and keep the returns they earned for themselves to someone like Buffett.

[00:37:30] Having other people’s money to invest on which he kept the profit was like a dream come true despite insurance being essentially a commodity business. It was a key piece for his investing career as he would eventually come around to owning large stakes in Geico and General Re as. Likely his best insurance acquisition wasn’t a company but a person, Aje Jane, whom he would eventually hire to run the Berkshire Hathaway Reinsurance group.

[00:37:57] At this point, his partnership had been around for 12 years and it had achieved an average annualized rate of return of 31% while the Dow returned 9%. Despite achieving a significantly higher return, Buffett believes that he also achieved those returns with much less risk taken as well. But Buffett’s opportunity set was beginning to dry up and he was realizing it.

[00:38:22] It worried Buffett that he would potentially let his investors down because he wasn’t able to find deals that met his investment criteria. He delivered the bombshell to investors in early 1970, letting them know that he would be closing down the investment partner. For many of his investors, this was terrible news because they just didn’t trust anyone else to manage their money other than Warren Buffett’s partnership was making waves as Forbes recognized it in their titled article, How Omaha Beats Wall Street.

[00:38:50] The article stated that $10,000 invested in the partnership in 1957 would now be worth $260,000. 13 years later, it ended with a hundred million in assets under management and grew at an annualized growth rate of 31% without a single losing year. At the time, Buffett was now worth 26.5 million and he owned 26% of the partnership.

[00:39:16] Forbes said that Buffett is not a simple person, but he does have simple taste. He had four to five bottles of Pepsi per day and would have that instead of wine at dinner parties. If the meal included anything more complicated than a steak or hamburger, oddly enough, he would just eat dinner rolls. His wife had done plenty to take care of him as far as cooking and preparing his clothes each day for him, but he worked about every waking hour and he really wasn’t attentive to his children at all.

[00:39:44] Buffett was most definitely extraordinary when it came to making money and compounding capital, but seemed to be anything but that in other areas of his life because of his obsession with business and investing to Buffett. Doing well with money was how he measured success. One thing I’ve really admire about Buffett is how he truly treated his shareholders like partners.

[00:40:06] He really, truly wanted what was best for them. He would be fully transparent in his letters about how the partnership performed, what his strategy was, and what they could do with their money once the partnership had been diluted. As those of you who have read Buffett shareholder letters, know there is so much to learn from his brilliant writings and teaching.

[00:40:25] He would tell his shareholders or partners as much as he would like to be told if he were in their shoes. When the parting shareholders asked Buffett if they should keep their Berkshire shares or to sell them, he has said he plans to hold onto it and continue buying more. At that time, Berkshire owned the failing textile Mills, a small bank, and the Ensure National Indem.

[00:40:46] Later Buffett would comment that Berkshire is still like a partnership, and that you basically have the closest thing to a private business with shareholders who identify with you and who like to come to Omaha. He often said he tried to treat his partners in a way he would treat his family. As I mentioned, Buffett is going through this transition period as he isn’t finding the cigar opportunities anymore, so he essentially had to adjust his strategy for Berk.

[00:41:11] Here is how Buffett phrased his new approach, which was largely influenced by Charlie Munger. Time is the friend of the wonderful business and the enemy of the mediocre. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early. I was a slow learner, but now when buying companies or common stocks, we look for first-class businesses accompanied by first-class management, that leads right into a related lesson.

[00:41:40] Good jockeys will do well on good horses, putting hot on broken-down nags and. One day in the early 1970s, Buffett got a call about a company called See’s Candy based in California that sold premium quality. Candy See’s is a classic example of a great business that was trading at a fair price. This is not a company whose stock price you’d expect to double in one or two years.

[00:42:03] However, Buffett and Munger were certain that the company would be able to grow and compound their cash flows for the many years to come. They ended up paying 25 million for See’s Candy, which produced roughly in 9% earning yield at the time, or just over $2 million. Munger regarded See’s Candy as the first time Buffett paid for quality.

[00:42:23] 10 years later, Buffett was offered to sell See’s for $125 million, which was five times the 1972 purchase price, and he decided to pass on the offer. Another area that interested Buffett was the newspaper and publishing business. By the early 1970s, he had owned Sun Newspapers, which was based in Omaha, and he was always on the lookout for other newspapers to purchase for Berkshire Hathaway.

[00:42:47] In 1973, Buffett had started purchasing shares in Washington Post and a number of other newspaper companies. Buffett believed that the overall market was not appreciating the underlying value of these newspaper companies, so he took advantage of the opportunities he found. Buffett was also involved in a holding company with Charlie Munger called Diversified Retail Company or DRC.

[00:43:08] Buffett owned 80% of the company. Munger owned 10%, and David Gosman owned 10% as well. It was created to primarily invest in chief retail companies despite having quote unquote retired from being a money manager on behalf of others. He was still very busy finding companies to buy and the. It was what he loved to do and he had no plans on ever stopping.

[00:43:30] During the 1970s, inflation had started to take hold, eventually bringing down most stocks, and Buffett was out looking for more deals. Since he was fully immersed and understood the newspaper business, he found stocks of advertising agencies such as Inner Public, Jay Walters Thompson, and Al Vy and Mo author that he put nearly $3 million into as they were trading at less than three times earnings.

[00:43:53] Through the inflationary 1970s, Buffett believed that owning stocks and companies that had strong pricing power were the best protection against inflation. Inflation was running in the double digits, and investors were piling into gold, diamonds, platinum art, real estate, and commodities. Everyone thought that cash was trash in business week titled in the Article, The Death of Equity.

[00:44:17] Meanwhile, Buffett wrote that it was time for investors to be buying stocks, thinking that when everyone else wants to avoid stocks is the best time to purchase. As investors are getting more favorable prices when the consensus outlook is poor. Many of Buffett’s holdings were down 25% or so. His former partners had wondered if it was a mistake to hold onto Berkshire, but Buffett saw it as the opposite, as he started buying as much of the stock as he could until he had front outta cash.

[00:44:44] Buffett remained calm throughout the downturn as he believes Mr. Market’s opinion of the stocks. Price at the time had no bearing on the company’s true intrinsic value. At this time, Buffett was receiving a $50,000 annual salary from Berkshire Hathaway and come to realize that he was very rich from a net worth perspective, but very cash poor despite Buffett being cash poor.

[00:45:06] His companies were producing plenty of cash, which he could then use to reinvest in other companies. Buffett decided to set up a reinsurance company to link Berkshire Hathaway to his holding company, DRC, the reinsurance company Insured National Indemnity, and he set it up in a way that allowed them to take the immense profits from National Indemnity and invest them in DRC.

[00:45:29] All right. That is all I had for part one of how Warren Buffett became the greatest investor to ever live. To give a quick rundown on what we covered today, we touched on Buffett’s childhood and how he was really just a learning machine that was just obsessed with business in making money. Then he attended college and started learning directly from his mentor, Benjamin Graham.

[00:45:51] Then he started his extremely successful investment partnership and eventually met Charlie Munger who joined him at Berkshire hath. At this point in Buffett’s journey, we are now in the mid-1970s as we have a lot more ground to cover. In next week’s episode, next week, we’ll be diving into his purchase of Geico, Nebraska Furniture Mart, Coca-Cola, and many others.

[00:46:12] How Solomon Brothers nearly destroyed Buffett’s entire investment career. How he ventured through the 2000 tech bubble and crashed to follow, as well as how Berkshire Hathaway weathered the great financial crisis, which occurred from 2007 to 2009. Again, part two will be released next Monday, October 17th, 2022.

[00:46:32] This will be titled, WSB 480. So stay tuned for part two. Be sure to subscribe to the show so you can get notified next Monday when the episode gets released. In the episodes to come, I’ll be diving in even more on how Warren Buffett invests exactly today and what principles entail. I’ll also be getting into some real-world examples and applying Warren Buffett’s framework.

[00:46:54] Thank you so much for tuning in. I really, really appreciate it, and hope you’ve enjoyed this series so far on Warren Buffett. With that, I’ll see you again next. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence.

[00:47:14] To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investors’ Podcast Network. Written permission must be granted before syndication or rebroadcasting.