How did Warren Buffett get rich? What’s the secret to his success?
Warren Buffett is one of the richest people in the world, but that wasn’t always the case. The Snowball by Alice Schroeder details Buffet’s childhood love of finance all the way up to when his success started taking off.
Continue reading to learn how Warren Buffett got rich from investing.
Accumulating Wealth: The Road to Independence
How did Warren Buffett get rich? Unlike the stereotypical Wall Street tycoon, Buffett’s dogged pursuit of wealth can’t be written off as simple greed. Money lay at the intersection of his childhood love of collecting, his fascination with numbers, and his drive for independence. Like an athletic or musical prodigy, Buffett had talents that created in him the ability and the calling to make money better than anyone else. Schroeder charts Buffett’s early endeavors through grade school, college, and his first investments as his dedication and intelligence led to an ever-growing snowball of wealth.
Buffett’s money-making started at the age of six when he went door-to-door selling chewing gum, before moving up to magazines and Coca-Cola and eventually delivering newspapers in his teens. But Buffett wasn’t a spender, says Schroeder. He collected money like he collected bottle caps. He filed his first tax return at the age of 14, and before long he’d saved up $2,000. While combing racetrack bleachers for lost tickets, he learned the math to calculate a horse’s odds of winning, a skill he’d later use to judge stocks. His most lucrative venture was a refurbished pinball machine, from which he used the proceeds to pay for even more machines.
(Shortform note: Though Buffett was more determined and creative than most, children earning money for their families wasn’t uncommon. Reforms of the 1920s set limitations on child labor, but many children still performed odd jobs and sold knickknacks and scraps. Further restrictions on child labor took effect with the Fair Labor Standards Act of 1938, which enacted the first minimum wage and shifted many jobs back into the hands of out-of-work adults.)
As a college sophomore, he invested his paper route savings in a building supply company and a sharecropping farm. He was extremely thrifty, knowing that every penny spent was one he couldn’t invest. Schroeder claims that Buffett didn’t value money for its present amount, but for how much it would be worth after years of compounding. He kept searching for stocks to invest in, even going so far as to travel in person to the offices of GEICO to speak to the company’s financial vice president. (Buffett soon put three-quarters of his money in its stock.)
(Shortform note: GEICO was founded in 1936 as the Government Employees Insurance Company. It turned its first profit in 1940, but faced difficulties when the US entered World War II, during which many of GEICO’s military customers were deployed overseas. However, those soldiers’ return provided a post-war boom for the company, quadrupling GEICO’s income in 1946 alone. Buffett saw the company’s potential for even higher returns; hence his investment.)
Once he graduated from Columbia, Buffett went to work for his father’s investment firm, though he disliked selling stocks to other people. In 1954, he moved back to New York to work for his mentor, Ben Graham. There, Buffett specialized in identifying undervalued stocks, taking the role of financial detective by digging into various companies’ histories and SEC records. In 1956, Graham retired and offered Buffett a place as his firm’s junior partner. Though grateful, Buffett declined and struck out on his own.
(Shortform note: Investing in the stock market was very different in the 1950s than it is today. By law, brokerages and banks were completely separate entities. Stock brokers made money on fixed commissions per sale, and stocks were only just beginning to outpace government bonds on returns. Buffett’s job at Graham’s firm, however, wasn’t selling stocks to customers, but ferreting out companies with the most potential for investment returns in the new financial era. The post-war industrial boom sent corporate profits soaring and helped the country climb out of debt, a situation that was strongly reversed in later decades.)
Partners in Business
Buffett returned to Omaha, leaving Wall Street behind to work out of his own home. Instead of selling stocks, he founded an investment partnership, Buffett Associates Ltd., in which he’d manage his own money and that of friends and family. The point of the business was to let money compound—his partners put up the seed money, and Buffett’s share would come from his nominal management fee, which he’d reinvest using the techniques he’d learned under Graham. Schroeder writes that by the end of 1956, Buffett’s partners’ earnings had beaten the market by 4%, and more investors were eager to join.
Buffett was transparent about his partnership’s terms but not about how he invested the money. He only ever revealed where his partners’ money was in an annual summary report—otherwise, the investments were a matter of trust that Buffett knew what he was doing, and his partners wouldn’t interfere or invest without him. To be fair, Schroeder explains, the terms of the deal incentivized Buffett to make as much money as he could, while also making him liable for losses. As his network grew, he formed more partnerships under these terms, and by 1958 he was managing over $1 million in assets. (Shortform note: $1 million in 1958 dollars is equivalent to roughly $10 million today.)
The market shot upward in the early 1960s and Buffett’s hunt for new investments went into overdrive. He kept his focus on undervalued stocks, and Schroeder says that when the market finally dropped, Buffett had built up enough cash to scoop up cheap stocks by the bushel. One was American Express—it had taken a blow in a financial scandal, driving down its stock price, but the public’s perception of the company hadn’t wavered. Another was Berkshire Hathaway, a failing textile company that would one day become the center of Buffett’s entire operation.
(Shortform note: American Express’s financial troubles in 1963 were of a nature that damaged its reputation in the financial world while being too obscure for the layman to fathom. At the same time, American Express had what Buffett would characterize as an economic moat. In 7 Secrets to Investing Like Warren Buffett, Mary Buffett and Sean Seah define an economic moat as a product or service that customers will buy no matter what is going on in the economy. In the case of American Express, their “moat” was their popular Travelers Cheques, which were ubiquitous before the rise of ATMs.)
Buffett had well exceeded his goal of becoming a millionaire by the age of 35. By 1966, he was starting to have trouble finding undervalued stocks to buy with all the money he had, to the point that he decided not to take on any more partners. Schroeder writes that any further growth would have proved problematic. In 1969, Buffett announced that he’d dissolve his partnerships entirely. He would no longer be responsible for anyone’s money but his own.
(Shortform note: While Buffett was always reluctant to predict the ups and downs of the market, he was certainly aware that the end of the 1960s marked a sea change in the financial world. Throughout the ’60s, the government initiated projects to spread the nation’s wealth to the poor, such as Medicare and food stamp programs, while ramping up military spending on the Cold War. The government’s reluctance to raise taxes for funding, coupled with a flood of money from the Federal Reserve, led to a decade of recession and inflation that would not level out until the end of the 1970s.)
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Here's what you'll find in our full The Snowball summary:
- A biography of one of the wealthiest people in the world, Warren Buffett
- Why Buffett is known for his honesty and wisdom, just as much as his wealth
- How Buffett's life was shaped by his family, his teachers, and the era into which he was born