Exactly How Did Warren Buffett Get Rich?
A millionaire before he was 30-years-old and now the third wealthiest individual in the world, Warren Buffett is one of the most extraordinary figures in global finance. So how did he get so rich?
Studying
Buffett bought his first stock while still a kid.
But Buffett’s success in the markets came as an adult.
And his success was built on careful study of the companies he invests in and the principles of investment.
Two of the most significant sources for Buffett’s investing wisdom were The Intelligent Investor by Benjamin Graham and Security Analysis, which Graham wrote with David Dodd.
Buffett studied under Graham and Dodd. And he has made extensive use of their wisdom, as well as recommending their books to other investors.
But his studying extends well beyond that, giving him a strong grasp of market ideas.
So if you ever wonder why you take time out to read books and articles, remember the good it did Buffett.
Strong Start
A strong start was vital to Buffett’s rapidly rising value.
Some of his earliest work on the markets was done as an investment analyst at Graham’s investment partnership.
There he earned a salary of $12,000, the equivalent of around $112,000 today. That gave him a substantial sum with which to make his own investments.
The compound effect of reinvesting the profits ensured that he was accumulating substantial wealth from a relatively young age.
Other People’s Money – High-Risk High Reward Fees
Buffett was already starting to make money off investing his own savings. But he earned far more from investing other people’s wealth.
After working for Graham, Buffett set up his own investment partnerships. Here, he invested other people’s fortunes, including those of family and friends.
Buffett took a high-risk high reward approach.
If he didn’t earn at least 4% on investments then he would lose out. On the other hand, above that 4%, he would take half the earnings.
Compared with modern hedge funds, which normally take a percentage fee regardless, there was less security.
But then, he was taking 50% of the benefits, not the 20% those funds commonly take.
Scrimping and Saving
Frugality is relative.
Buffett has long lived a comfortable lifestyle with a home most people would envy and no shortage of creature comforts.
But by the standards of his wealth, he has been canny.
Because this has been Buffett’s approach from the start, it has meant that he’s always had plenty of money to invest.
Again, the compounding effect has kicked in. Dozens of dollars saved half a lifetime ago have become hundreds or thousands now through canny investment.
Value Investing
The philosophy guiding Buffett’s investments is value investing.
This involves identifying companies that are undervalued not compared with the interest of the market but compared with their inherent worth.
By buying company shares at less than their intrinsic value, it’s possible to sell them on later at a much higher price.
Doing this means looking at businesses in some depth, understanding their assets and their potential.
It’s a form of investment far more grounded in the real world than the strategies of many hedge funds.
Sound Businesses with Growth Potential
Buffett’s particular approach to value investing has evolved over time.
It’s now a more refined model than it was when he acquired Berkshire Hathaway, the textile firm that would eventually become the heart of his financial empire.
Graham’s model, on which Buffett initially built his approach, involved buying average companies that had been undervalued and then spreading investment across them to reduce risk.
The modern Buffett approach is different.
It focuses on higher quality shares. Buffet focuses on companies that are performing solidly but are still undervalued compared with their full potential, and so have plenty of room for growth.
It’s an approach that balances potentially high profit with minimising risk by investing in sound companies.
Index Funds
For those looking for advice on how to invest, Buffett recommends index funds.
He believes that index funds provide better performance over time for ordinary investors, especially once hedge funds’ fees are taken into account.
He was so confident in this advice that he entered into bets over how several hedge funds would perform in the long run compared with index funds.
So far, the bets have all worked out in Buffett’s favour.
This is what happens when you take the time to learn and understand the market.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
