Warren Buffett’s Rise to Riches

buffettsnowball1The Snowball‘, a biography of Warren Buffett by Alice Schroeder offers quite a few unexpected tidbits on this respected investor. Here are some notable aspects of Warren Buffett’s life that made him the icon he is today as well as lessons for other investors:

1. Buffett started setting goals as a child- Buffet began thinking with numbers as a youngster. He raced marbles using a stopwatch, sold chewing gum at 7 and Coke at 8. At the time, he also began wearing a money-changer on his belt.

Other points worth mentioning:

* His father was a stockbroker, which provided him with an early knowledge of the markets.
* At 10 he visited the Stock Exchange in New York , and was asked for a tip by an executive partner of Goldman Sachs, Sidney Weinberg.
* His favorite book at the time was ‘One Thousand Ways to Make $1,000’.
* At 11 he proclaimed he will become a millionaire at 35, a very unusual goal for the early 1940’s.
* He filed his first tax return at 14, having already made $1,000 (about $12,500 in today’s value).

The lesson: Learn about money and how it works from an early age. Avoid delaying and utilize the concept of the time value of money to build your wealth.

2. Buffett bought his first stock when he was 12 – He invested $114.50 in 3 shares of Cities Service Preferred, with his sister. The stock price dropped from $38.25 to $27 a share, which made his sister unhappy. The stock went back up to $40 and Buffett sold, making $5 per share profit, and a happier sister. However, subsequently, the stock went  to $202 a share.

The lesson: Participating in the market, not just watching it, can provide you insight on your investment habits, such as whether you can endure a bear market and selling too soon or investing during a bubble and selling too late.

3. Buffet shoplifted, lied, and skipped school – Buffett is quoted in the book:

“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.”

“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

The Lesson:  This revelation actually made Buffett appear more like the rest of us, which of course he is but it’s easy to forget this when you talk about the richest man in the world. Buffett grew out of his rambunctious behaviour, as do all/most of us, but he did maintain his independent spirit and way of thinking while running Birkshire Hathaway.

4. For Buffett, investments come second – It’s known that Buffett decides on buying a given stock as if he’s buying the entire company. This is so because he is an investor who looks at his decisions from a businessman point of view.

* Buffett had numerous businesses while still in school. He sold refurbished golf balls, peddled stamps to collectors, ran a network of pinball machines at 17, owned a tenanted farm, and managed a 50-employee paperboy route.
* He actively dealt with strikes and turf wars at newspapers such as The Washington Post to the Omaha Sun.
* Buffett is highly involved n the businesses he invests in, as exemplified by his efforts in replacing the CEO of Coca Cola. He is a voracious reader of stock and sales reports  which has truly helped him leverage the strength of Birkshire Hathaway as an insurance business to reinvesting its capital in other solid companies, thus, substantially growing his returns.

The Lesson:  Buffett’s success suggests investors should spend as much reading about the business they wish to invest in as they do in cashflow and PE ratio calculations.

5. Buffet makes mistakes – Some of his failures include:

* With his friends, he invested $25,000 in 1957 on 4-cent Blue eagle stamps which the US government was ready to take out of circulation. By eliminating the supply, they ruined any chance of the stamps becoming valuable. His partners were still mailing him with Blue Eagle postage decades later.
* Buying Salomon Brothers in 1987 for $700 million eventually  immersed him into the Wall Street culture he so disliked, when its  rogue traders and bad management threatened his reputation and wealth.

The Lesson: Bad investments happen even to the best. Buffett never took a risk that he could not outlive and he did learn from these blunders.

6. Buffett thought of quitting as an investor early on – In his early 30’s Buffett wrote to his investors that he was going to close their  partnerships:

“I know I don’t want to be totally occupied with outpacing an investment  rabbit all my life. The only way to slow down is to stop. I am not attuned  to this market environment, and I don’t want to spoil a decent record by  trying to play a game I don’t understand just so I can go out a hero.”

“I do know that when I am sixty, I should be attempting to achieve  different personals goals than those which had priority at twenty.”

Buffet has no sports cars, or a yacht – even when he  eventually bought a corporate jet he called it ‘The Indefensible’. For  decades he purchased suits from the everyman outfitter nearest his office, and his main home is the first  house he bought in 1961. He is averaging 20% returns on his investments  but has chosen to leave virtually all $62 billion of his assets to charity.

The Lesson: Buffett did reduce his activity in the market in the 1970s which showed a measure of humility and self-restraint that is often missing from the average investor’s behavior.

7. Buffett is investing for what he calls his internal scorecard, not for the payday – From setting that goal aged 11 of becoming a millionaire by 35, Buffett  seems to treat investing as an intellectual challenge. He probably learned  this from his mentor Benjamin Graham, the proponent of value investing. Unlike Graham, however, Buffett really watches every penny. From asking his  friends to sell him shares they bought in companies he was interested in,  right up to his close personal friendship with his rival for the title of  world’s richest man, Bill Gates, Buffett truly aims to have the biggest  snowball.

The Lesson: Try to avoid looking at your financial returns as the ultimate goal, but more as challenges which you can overcome by practicing savvy investment strategies.

Invest in this good read to learn more financial lessons and determine how close are you to creating your own version of a snowball.