Warren Buffett: The Early Years

From selling newspapers and setting up a pinball business to buying farmland at age 14,  Warren Buffett accomplished a lot even before he started Berkshire Hathaway. Given his massive success in the later years of his life, many have wondered what he did in his younger days to set himself up.

This is that story.

An enterprising young man

Warren Edward Buffett was born in 1930 to Leila and Howard Buffett. His grandfather ran a grocery store, while his father started a small brokerage firm in Omaha.Howard also pursued a successful political career with the Republican Party before returning to his business.

Buffett spent many hours in the lounge of a brokerage near that of his father's, and also worked at his grandfather's store. This early exposure to business would guide him on many of his own ventures later in life.

The spirit of entrepreneurship awoke in him early. At age 7, Buffett borrowed the book One Thousand Ways to Make $1000 from Omaha Public Library.  Soon, he began experimenting with ways to make money — selling chewing gum and Coca-Cola bottles, and delivering magazines.

Another book that inspired Buffett is Benjamin Graham's The Intelligent Investor. Though he didn't know it at the time, Graham would go on to play an important part in Buffett's later life.

We'll get to that story. But first, stocks.

Buffett wet his toes in the stock market as a pre-teen. At age 11, he purchased 6 shares of Cities Service preferred stock, split between him and sister Doris. They would later sell this for a small profit, and watch the share price shoot up much higher soon after.

A year later, the Buffett family moved to Washington as Howard began his political career. In high school, Warren started making $175 a month delivering the @washingtonpost, saving a significant portion and buying a 40-acre farm. At age 14. 🤯

By this time, he'd even begun filing Income Tax returns and developed a fair understanding of financial systems. On his first return, he claimed a deduction of $35 for the use of his bicycle and watch while delivering newspapers.

Buffett's penchant for business didn't stop there. Together with a friend, he bought a used pinball machine and installed it at a barbershop, soon expanding to 3 machines. They sold this business for a neat $1200 shortly after.

Meanwhile, Buffett's paper route was netting him ~$5000 a year. By this point, he was confident in his capabilities and trajectory in life.When he graduated from Woodrow Wilson High School in DC in 1947, his yearbook photo read:

"Likes math; a future stockbroker."

Buffett wanted to skip college, but on his father's insistence, joined Wharton School of the University of Pennsylvania.

He didn’t enjoy his time there, and left the course to enrol at University of Nebraska for a degree in Business Administration. This course he took to naturally, finishing in 3 years. By the time he graduated, his personal savings had almost touched $10,000.

Doesn't sound impressive? This was the 1940s. In today's money, his savings would have been over $100,000. 👀

Master and pupil

After applying to and being rejected by Harvard University, Buffett realised that Benjamin Graham, who authored The Intelligent Investor, was teaching at Columbia University, and enrolled there.

Graham took a liking to Buffett, and began mentoring him.

Buffett was always a diligent investor. Learning that Graham was on the board of GEICO Insurance, he turned up at their office and discussed insurance at length with an executive. Impressed, he invested most of his savings in GEICO stock.

Today, he owns the company.

After graduating from Columbia, Buffett wanted to join Wall Street, but his father and Graham advised him against it. To continue learning from Graham, Buffett offered to work for him for free. Graham turned down his offer.

Shortly after, Buffett returned to Nebraska.

Back in his home state, Buffett fulfilled the prophecy of his yearbook photo and became a stockbroker. He also took a public speaking course, and used the skill to teach a night class on 'Investment Principles' at the University of Nebraska.  

A couple of years later, Buffett got the much-awaited call to join Graham's investment firm. He'd continue to work there until Graham retired in 1956. However, he could not shake off the twinge of regret whenever his recommendations made losses for clients.

The beginnings of a business

Returning to Nebraska, Buffett decided to go into business for himself using a partnership model, together with close friends and family. Over time, he entered multiple partnerships, incorporating Graham's value investing principles with his own knack for timing.

These partnerships had a unique structure: Buffett himself invested only $100, and would take half of any return generated over 4%, reinvesting it to grow his own stake. He would also compensate his partners a quarter of any loss incurred.

In 3 years, Buffett had already doubled his partners' money. A year later, at 29 years of age, he met Charlie Munger, who would go on to become Vice-Chairman of Berkshire Hathaway soon after.

The two immediately struck a chord.

By 1961, Buffett began displaying a penchant as an 'activist investor', obtaining over 40 percent stake in Sanborn Map Company and forcing the board to buyback shares from holders at a fair price.

The ‘worst’ best trade

In 1962, Buffett began buying shares of Berkshire Hathaway — a textile company — after noticing a pattern in the movement of its stock. However, he soon realised the textile industry was waning, and the company's prospects looked bleak.

When Seabury Stanton, who ran Berkshire at the time, offered to buy back Buffett's stake, he was inclined to agree. However, Stanton tried to undercut Buffett on price.  An angered Buffett bought more stock, took control of the company, and fired Stanton.

His moment of anger now left Buffett stuck with a failing textile business. While he managed to use his acumen to transition Berkshire from textiles into a holding company for his investments, he still calls it "his worst trade".

The story of Warren Buffett and Berkshire Hathaway since is the stuff of legend. The conglomerate today holds significant holdings in global behemoths, including the likes of Apple and Coca-Cola.

Buffett has established himself as a titan of the investment world.

Despite the fame, Buffett keeps a relatively low profile, still living in a 5-bedroom house he bought half a century ago, and giving away most of his wealth to philanthropic causes.

He does write annual shareholder letters.

Warren Buffett's early life is full of interesting lessons for investors, we hope we've managed to capture the key ones for you.

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