How Did Warren Buffett Get Started

For decades, the name Warren Buffett has been synonymous with investing success. He always holds a place on the Forbes Billionaire List. Today, he is number six, just behind Facebook’s Mark Zuckerberg, with a net worth approaching $100 billion. 

Affectionately known as the “Oracle of Omaha”, Buffett’s annual letters to shareholders are a master class in managing the highs and lows of the market to generate consistent returns. Every method and strategy he shares is based on his own personal experience. After all, Buffett wasn’t always wealthy. In fact, he started with practically nothing. Buffett built his massive fortune through thoughtful, deliberate decisions focused on quality and value. 

Buffett Saw Poverty When Young

Warren Buffett was no ordinary boy. In his early years, his skill in mathematics set him apart from his peers. Those who knew him at that time told stories of his ability to perform lengthy calculations in his head – no paper and pencil needed. Friends and families watched as Buffett took in large amounts of data and turned them into usable information – and it wasn’t just long columns of numbers. 

At 7-years-old, Buffett was frustrated with the financial challenges facing his family of five. He borrowed a book called One Thousand Ways to Make $1,000, and an entrepreneur was born. Buffett absorbed the techniques in that book and came up with new ways to apply the information. Soon, he had a series of successful business ventures that opened up a world of opportunity for Buffett and his family. 

How Buffett’s Father Influenced Him

Howard Buffett, Warren Buffett’s father, was a stockbroker who later served as a member of the United States Congress. As a child, young Warren spent much of his time with his father, which was an opportunity to learn the nuances of investing. 

Buffett was 11-years-old when he bought stock of his own for the very first time. He selected three shares of Cities Service Preferred, which were priced at $38 each. The stock went down to $27 per share, which had Buffett alarmed. However, he held his ground based on what he knew of the company, and he was rewarded. 

Buffett sold his shares at $40, making a total profit of $6. He was proud – until the stock rose to almost $200 per share. Buffett later said that lesson was one that he applied for the rest of his life: the importance of patience in making investment decisions. 

Warren Buffett: First Tales of Entrepreneurship 

Buying and selling Cities Service Preferred gave Buffett a taste of the thrill that comes with creating profits. It wasn’t long before he launched entrepreneurial ventures of his own. In addition to working as a paperboy, Buffett developed a horse racing tip sheet – Stable-Boy Selections – that eager gamblers found particularly valuable – and they were willing to pay for it. 

Of course, that wasn’t all Buffett did to earn money. Buffett worked in his grandfather’s grocery store, and when he wasn’t doing that, he sold Coca-Cola, magazines, and chewing gum door-to-door. Buffett knew that his customers would pay for the convenience of door-to-door service, and he knew how to turn a profit. For example, he purchased Coca-Cola six-packs for $0.25 and sold them for $0.05 each – a $0.05 profit on every six-pack. It’s worth noting that Buffett claimed his bicycle as a tax deduction, as it was integral to his ability to earn income. 

In high school, Buffett came up with new business ideas that were even more lucrative than betting sheets and door-to-door sales. Buffett and a partner invested $25 in a used pinball machine, which they installed in a local shop. They quickly recouped their investment and generated a profit, which they reinvested into two more machines. The pair sold their pinball business for a grand total of $1,200. 

Buffett’s First Partnership

Warren Buffett continued to launch new and ever-more-creative ventures throughout his college years and beyond. Between that and smart investing, he amassed a personal fortune of $140,000 by 1956. It was time for his first partnership. 

Buffett invited seven others, including two of his relatives, to join him in a limited partnership he called Buffett Associates. They handed their own capital to Buffett to manage – an amount that grew to roughly $300,000 by 1957. Just five years later, his company’s total assets were more than $7.2 million and included investments from 90 limited partners nationwide.

Buffett transitioned Buffett Associates into a new entity, Buffett Partnerships, and within ten years, Buffett’s genius for investing was clear to just about everyone. His firm delivered returns of 1,156 percent, while the Dow Jones Industrial Average had returns of just 122.9 percent for the same period. The company’s total assets under management? A whopping $44 million. 

The biggest year for Buffett Partnerships came in 1968, when Buffett delivered returns of 59 percent. Total assets under management rose to $104 million. However, in 1969, Warren Buffett decided that Buffett Partnerships had run its course. He liquidated the portfolio and returned assets to his partners. However, Buffett didn’t quite liquidate everything – he held onto two companies: Diversified Retailing and Berkshire Hathaway. 

How Buffett Met Charlie Munger

While Warren Buffett was transforming tens of thousands of dollars into tens of millions, friends introduced him to Omaha native Charlie Munger. Munger, a Harvard Law School graduate, was considered nothing short of brilliant. He and Buffett found common ground and forged a strong connection almost immediately. 

When Buffett liquidated Buffett Partnerships to start on another phase of his professional journey, Munger was the natural choice to join and help with guiding Buffett’s new company. The personal and professional relationship between Buffett and Munger withstood the test of time. The two have been working together – and achieving unprecedented success – for more than fifty years. 

When Did Buffett Buy Berkshire Hathaway?

Warren Buffett didn’t found Berkshire Hathaway (BRK.B). The companies that made up Berkshire Hathaway, Berkshire Fine Spinning Associates and Hathaway Manufacturing, were Massachusetts cotton mills that dated back to the 19th century. The two merged in 1955, and Warren Buffett – through Buffett Partnerships – bought a majority stake in Berkshire Hathaway in 1965. 

As part of the deal, Buffett and his firm assumed full control of the company. Buffett had noted its poor management, but he saw the makings of something great. Buffett became the director, and he appointed the well-respected Ken Chace as president. In 1967, Buffett bought the rest of Berkshire Hathaway. Once he closed down Buffett Partnerships, he could focus on Berkshire Hathaway full-time. 

Buffett became Chairman of the Board in 1970, and he wrote the first of his annual letters to shareholders that year. He noted that profits from textiles – Berkshire Hathaway’s traditional source of revenue – were almost nonexistent as compared to profits the company was pulling in from insurance and banking investments. As it turned out, this was a sign of things to come. 

Berkshire Hathaway’s next outright purchase of another company came within months – the acquisition of premium confectioner See’s Candy. That was just the beginning. From the time Buffett became involved with Berkshire Hathaway in 1965 to 1975, he grew share values from $20 per share to approximately $95 per share. 

The Geico Deal

Warren Buffett’s first experience with the Geico Insurance Company had nothing to do with acquisition. Buffett became aware of the organization in his early 20s, when he learned that his hero and mentor Ben Graham was chairman of Geico and owned a large portion of it. 

Buffett went to visit the company’s headquarters and spent hours speaking with the Vice President of Finance, Lorimer Davidson. The conversation made quite an impression – so much so that when Buffett learned that Geico was struggling in 1976, he took action. 

Through Berkshire Hathaway, Buffett purchased shares in Geico – enough to influence the strategy and overall management of the business. As it slowly turned around, Buffett reinvested Berkshire Hathaway’s profits, eventually acquiring all of Geico, making it a wholly-owned subsidiary of Berkshire Hathaway in 1995. 

Berkshire Hathaway Transforms To Conglomerate

A close look at Berkshire Hathaway’s history shows that the company really became a conglomerate with its purchase of the National Indemnity Insurance Company in 1967. The act of gathering the capital necessary for this transaction reduced Berkshire Hathaway’s textile-related assets to almost nothing. Instead, it was transformed into a holding company for a wide variety of unrelated businesses. 

Today, Berkshire Hathaway owns dozens of businesses in their entirety, and it has a substantial ownership interest in many others. Examples of subsidiaries include:

• Dairy Queen, Inc.
• Benjamin Moore & Co.
• Berkshire Hathaway Automotive
• Jordan’s Furniture
• Berkshire Hathaway Homestate Companies
• Business Wire
• Oriental Trading Company
• Pampered Chef
• Duracell
• Fruit of the Loom Companies
• See’s Candies
• Gateway Underwriters Agency
• Star Furniture
• GEICO Auto Insurance
• United States Liability Insurance Group
• Helzberg Diamonds

At first glance, these companies have nothing in common, but Warren Buffett saw something more. He saw businesses that had been poorly managed, leading to lost value – but they still had the brands, structure, and potential to rebound. Buffett purchased them at value prices and turned them around, creating a fortune for himself and his shareholders along the way. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.