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Warren Buffett: Biography, Education & Quotes

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, you will learn about the life and career of Warren Buffett, one of the most famous investors in the world. You'll learn about his precocious nature as a child and the investing style he adopted half way into his investing career.

Early Life

Warren Buffett was born in Omaha, Nebraska during the Great Depression in 1930, the second of two children. He was a precocious student, who showed a natural ability for numbers at an early age. Buffett also showed an interest for money at a very early age and told one of his sisters that he was going to be a millionaire when he got older. He was entrepreneurial with several newspaper routes. He bought and leased out a pinball machine. A good example of his affinity for numbers/counting and his entrepreneurial spirit is how he sold soda. First, he identified that Coca-Cola was more popular than Pepsi by collecting and sorting as many used bottle caps as he could (at horse races, etc.). He would then buy 6-packs of Coca-Cola for a quarter and sell each bottle for a nickel. Years later he said, ''I always knew I was going to be rich. I don't think I ever doubted it for a minute.''

He was a prolific saver and began to take an interest in investing in the stock market. He entertained technical analysis for a bit, but then read The Intelligent Investor by Benjamin Graham when he was 19 and became a 'value investor' convert. Buffett eventually went to Columbia University and studied under his soon-to-be mentor, Graham. Buffett still refers to The Intelligent Investor as ''the best book about investing ever written.''

Buffett sitting with President Obama in the Oval Office
obama

Cigar Butts

After Columbia, and after a few years of wrangling Graham, Buffett got a job working under Graham as an analyst at Graham-Newman, an investment house in New York. The firm's investment strategy was to buy depressed securities where the company was selling less than its working capital (i.e. current assets - current liabilities). These companies sold for less than the proceeds if they were liquidated. Graham-Newman would buy a basket of securities and would either wait for the market to realize the value of the shares or they would prod management to return more cash to shareholders, to sell certain assets, etc. Buffett called this strategy the 'cigar butt' approach. ''You can pick up a wet, soggy cigarette on the sidewalk and you may be able to get one or two puffs from it, but that's it.'' That one puff was profitable, and they paid very little.

Buffett learned that strategy from Benjamin Graham and used it when he started his own investment partnership once Graham retired from investment management. In fact, Berkshire Hathaway was a cigar butt style investment by Buffett in 1962. It took Charlie Munger to persuade Buffett to change his investment style from 'cigar butts' to wonderful business at fair prices.

Berkshire Hathaway

At the time Buffett began buying Berkshire Hathaway, it was a New England textile business that faced stiff competition from southern mills which operated at a significant cost advantage. Buffett knew the textile industry's outlook was bleak, but he was encouraged by Berkshire's habit of returning cash to shareholders by repurchasing shares. He began buying even more of the company and eventually replaced Seabury Stanton, the original manager. Buffett then made Berkshire Hathaway, the floundering textile in a bad industry, the foundation for the mighty conglomerate that it is today. He used some of the cash from Berkshire to invest in insurance companies, which really became the springboard and strong foundation for his business.

Buffett liked insurance companies back then, and still likes them for the same main reason, they generate float, this is the cash policyholders pay upfront. The float can be invested and then paid out as claims become due many years later. Buffett knew he had a natural skill to compound money, and the float allowed him to invest with 'other people's money.' Buffett and his partner Charlie Munger took the proceeds and invested them in common stocks and eventually whole businesses. Charlie Munger gets a lot of the credit for persuading Buffett to change his investment style from cigar butts to wonderful businesses. As Buffett says, ''It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.''

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