How Did Warren Buffett Make His First Million?
In this article, we outline how Warren Buffett made his first million. Hint, it wasn’t diversification.
Warren Buffett was born on August 30, 1930, in Omaha, NE. He is considered one of the most successful investors in the world and has a net worth of over $100B as of April 2021.
In 1954 at age 24, one of his first jobs was working at Benjamin Graham’s investment partnership for a salary of $12,000/year USD ($120,000/year in 2021 dollars). Graham was one of Buffett’s professors at Columbia Business School.
Warren Buffet’s First Business Venture
In 1956. Graham retired and closed his partnership, and Warren established Buffett Partnership Ltd, which was essentially a wealth management firm. Unlike today where most wealth management firms charge approximately 1% – 2% AUM (Assets Under Management), Warren charged 0% AUM but took 25% of any commissions beyond 6% cumulative return. The firm’s average returns from 1957 through 1968 were 31.6% with no negative years. His strategy, as learned from Benjamin Graham, was to buy a small portfolio of On Sale stocks. Benjamin Graham has recommended owning between 10 and 30 stocks, whereas Warren Buffett has recommended owning even fewer stocks. The key to finding great businesses is to calculate the sticker price (intrinsic value) of a stock and make sure you buy that stock for 50% off (Margin of Safety of 50%). Essentially it’s like buying $10 bills for $5.
In 1957 at age 27, he bought his five-bedroom stucco house in Omaha, NE, for $31,500 ($292,000 in 2021 dollars). He still lives in the same house as of 2021.
In 1959, at age 29, he met his future business partner Charlie Munger.
Warren Buffet’s First Million
In 1962 at age 32, he made his first million. His net worth exceeded $1 million dollars ($9M in 2021 dollars) due to the commissions from Buffett Partnership Ltd.
As we all know, his momentum of wealth-building had just begun.
In 1962, he began buying shares of Berkshire Hathaway, which at the time was a textile manufacturing company founded in 1839.
In 1964 Berkshire Hathaway’s stocks were dropping due to the textile industry decline. Buffett had the opportunity to take majority control of Berkshire Hathaway, and he did.
In 1969, at age 39, Buffett closed down Buffet Partnership Ltd because he admitted to his investors that he’s run out of good ideas to beat market returns. He decided to focus his attention on building the share price of one stock on his own, Berkshire Hathaway.
In 1985, the last textile operation under Berkshire Hathaway was shut down.
Learning from His Investment Mistakes
Berkshire Hathaway eventually turned into a conglomerate holding company that owns companies including GEICO, Duracell, Dairy Queen, Fruit of the Loom, Pampered Chef, Kraft Heinz, American Express, Coca-Cola, Bank of America, and Apple. Today you may purchase shares of Berkshire Hathaway under ticker symbols BRK-A or BRK-B. As of July 2021, BRK-A trades at $417,000 per share, and BRK-B trades at $270 per share. Essentially, BRK-B allows you to invest in Berkshire Hathaway with a much lower barrier to entry.
In 2010, Buffett claimed that purchasing Berkshire Hathaway was the biggest investment mistake he had ever made and claimed that it had denied him compounded investment returns of about $200 billion over the subsequent 45 years. Buffett claimed that had he invested that money only in insurance businesses instead of buying out Berkshire Hathaway, those investments would have paid off several hundredfold.
Overall, Berkshire Hathaway may be diversified today, but the key to building wealth is to buy On Sale businesses in a focused portfolio.
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