Warren Buffett is one of the richest men in the world today and an investing icon. Regularly interviewed and his words are dissected all over the world. On top of that, his annual Berkshire Hathaway shareholder meeting has become an event in and of itself.
While he is famous for becoming one of the richest men in the world through investing, and has one of the best long term investing track records in the world – there were other factors at work.
Buffett himself in his typical modest tone has frequently said the biggest factor to his success was completely out of his hands: Being born in the United States at that particular point of time. While no doubt that was a factor, there were things that he did and values he kept that allowed him to become as successful as he is today, it’s those keys that we are going to look at.
Of course, no article on Buffett’s success could be written without talking about his investment track record. Buffett’s long term average of around 17% far outpaces the S&P’s long term historical average of around 10%. On its own this is an impressive feat but consider the fact that Warren Buffett has been investing since the 1950s, and in his early days achieved even greater returns.
Outperforming the market over 50+ years compounds into some serious gains. For example, if you had invested $1000 at an average return of 17% for 50 years, that $1000 would have turned into $2,566,215. That is without a single addition in that 50 year time period. It’s no wonder Einstein called compound interest the eighth wonder of the world!
While Buffett is now famous for his style of buying great businesses at a fair price through Berkshire Hathaway – this wasn’t his original investment strategy, or his most successful for that matter. In fact, the only reason Buffett started buying large, well established companies with economic moats was due to the amount of money he had available to invest, which severely reduced the number of investment opportunities available to him. Buffett recently stated that if he was managing small amounts today, he could easily make 50% a year!
As mentioned above, Buffett’s early investment strategy was different, with much higher returns. In his partnership he focused on finding stocks that the market had left for dead and
were below their liquidation value. These weren’t good businesses, but he bought them due to the huge margin of safety and large upside potential.
While it’s clear that his investing talent is what made him one of the richest people in the world, it doesn’t explain how he got started and the huge degree of success he enjoyed. Afterall there are many hedge fund managers out there and not a single one comes close to Buffett’s net worth.
Value doesn’t end at his investing, the principle of value, as in paying less to get more, is a constant in all parts of Buffett’s life. One classic example of this is his infamous frugality.
It has been well documented how Buffett still resides in the first home he bought all the way back in 1958 in his hometown of Omaha, Nebraska for $31,500. Likewise he has never been known for frivolous spending, himself insisting that his favourite meal is a McDonalds and Coke!
If you watch interviews with Buffett, you won’t spot any fancy cars or watches and even his office space appears notoriously plain and simple. When asked about his frugality Buffett answered that he never felt the need for expensive purchases as he was already enjoying his life running Berkshire Hathaway.
For many, going on spending sprees is a temporary pick me up, usually followed up with buyer’s remorse. Buffett doesn’t need the pick me up considering he has built a life for himself that he enjoys every day. An additional part of his value principle is saving – as Warren Buffett famously put it, the first rule is to never lose money. To that end, even as a kid, Buffett would aggressively save every bit of change he got, usually in order to invest somewhere – a point we’ll talk about next.
Buffett loves to work and makes no secret of it, but his work ethic appears to have been forged from a young age. Famously reading a book during his childhood titled One Thousand Ways To Make A Thousand Dollars, Buffett quickly got into the habit of starting small businesses. From the age of five onward, Buffett tried everything from paper routes, bottle recycling and lemonade stands.
At the age of 11, while most kids were playing outside, a young Buffett was already chalking up stock prices and putting in stock orders. From there, his ambitions only got larger. He quickly started delivering multiple newspapers and magazines along his paper route, as well as working at his grandfather’s store over weekends. By the age of 13, Buffet’s monthly wage was already matching his teachers.
All the while, he relentlessly read every business book he could get his hands on. He quickly developed a business sense that would provide him a lifetime of service. All the while he reinvested or saved his profits. By some estimates, in today’s dollars Buffett graduated high school with $55,000 to his name.
Habits and Principles
Lets face it, Warren Buffett is an extraordinary investor. The odds are that we won’t be able to beat him at his own game. What we can do is learn the habits and principles that propelled him further than anyone else in his field.
As we revealed, Buffett got a great headstart and instilled incredibly productive habits in himself that set him up for greatness. While it may be too late to open a business at the age of five, we can still improve ourselves by developing good habits and a strong idea of what value is.
This is a guest post by Evan. He has been picking value stocks since 1999, but eventually stumbled upon Graham’s net nets in 2010. Since then, he’s been a diehard devotee. While he’s managed money professionally, he prefers to spend his time talking to small investors and working on startups. Evan earned a bachelor’s degree in Philosophy, and started his business career as a consultant in the Scottish Enterprise EDGE program. He is author of Benjamin Graham’s Net-Nets, released in 2020 through Harriman-House (UK). His articles have been featured in Forbes, multiple times in NASDAQ.com, Seeking Alpha, ValueWalk, Modest Money, Dr. Wealth, and Old School Value, among others. He currently lives in Seoul, South Korea. Linkedin