How Buffett Did It: Building Berkshire Hathaway

published on July 17, 2020

Warren Buffett as a man who needs no introduction for he is the patron saint of investing for almost anyone who has dabbled in picking stocks he is revered by many because he did something truly exceptional he became one of the richest men alive not by innovative technology

Or by inheriting billions but by winning on the stock market consistently for over half a century in this video we're gonna learn how Warren Buffett became a self-made investing billionaire this video is brought to you by skill share

And you'll probably be happy to learn that I've partnered with them to make a series of lessons on the stock market but more on that later Warren Buffett's immense fortune is tied to the world's largest conglomerate Berkshire Hathaway

But Buffett's beginnings are much more humble he was born in Omaha in 1930 right as the Great Depression was kicking off the stock market had crashed half a year earlier and Nebraska was hit particularly hard the state's economy

Relied on agriculture and the collapsing price of crops left many communities devastated Buffett himself was lucky enough to be born into the family of a local stockbroker Howard Buffett Warren's father was a smart businessman

So despite the crash he was able to provide for his family in fact once the economy started recovering Howard's career took off so much so that in 1942 he ran for Congress as a Republican and actually won the election despite the

Immense popularity of FDR and the Democrats of the time amidst his rise in politics Howard moved the Buffett family to Washington DC where Warren naturally felt very lonely he'd spent his days doing math both at home and at school

And reading investment books in his father's study it is these early years that instilled and warrant the ambition to become rich and in fact he would tell his friends in school that if he wasn't a millionaire

By the time he was 30 he would jump off the tallest building he could find to that end Warren started playing on the stock market before even finishing high school buying just a couple of shares here and there to see how it goes but

Warren's aspirations weren't limited to the stock market one of the books he read inspired him to try nearly every business venture he came up with he would buy six packs of coca-cola and sell them to his fellow students at

A markup his first real job came in 1944 when he started delivering the Washington Post around his neighborhood that year the 14 year old Warren Buffett filed his first tax return featuring a $45 deduction for his bicycle and watch

With the money he made delivering newspapers he would purchase pinball machines which he will then place in stores around the neighborhood but in 1948 Howard Buffett lost his re-election campaign and the family was forced to go

Back to Omaha Warren sold his pinball business in Washington DC for a little over $1,000 and back home in Nebraska he used that money to buy a 40 acre farm which he then rented out Warren used the farms rent to pay his way through the

University of Nebraska where he got a bachelor's in business administration he applied to the Harvard Business School when he was 19 but he was rejected so he went with the next best option the Columbia Business School there he met a

Teacher who would change his life forever in fact that man Benjamin Graham would go down in history as the father of value investing with the two met in 1949 the same year when Graham published his magnum opus the

Intelligent investor in this book Graham lined out a step-by-step guide on how to invest successfully and consistently without speculating in a nutshell his approach was finding decent companies at bargain prices essentially finding a $1

Stock that was trading at $050 Buffett fell in love with this methodology and he quickly became one of Graham's favorite students in fact just a few years after graduating Warren went to work for Graham at his investment

Company there Warren would master the art of security analysis learning how to see the real value of a company just by glancing at its numbers but just two years later Graham decided to retire closing down his company and leaving

Buffett on his own now at the time Buffett had saved up a hundred and seventy five thousand dollars which he used to start a partnership where he could apply Graham's method he started looking for companies that

Were essentially cigarette butts not doing great but still undervalued by the market where in other words still good for another puff here's an example in 1958 buffett noticed with a Sanborn map company which killed a virtual monopoly

On the production of detailed maps used in the insurance business the company had been around for nearly a century and Wow it had been doing poorly in the past decade but it noticed something interesting on their books the company

Had been investing its profits for the past 20 years in over 40 different stocks buffett did the math and it turned out that while the company's stock was trading at about $45 per share just the investment portfolio alone was

Worth 65 Buffett naturally started buying up the Sanborn stock until he held the majority of the voting power at which point he liquidated the investment portfolio effectively he spent $45 to buy 65 and in two years he made a 45

Percent return with almost no risk Warren's early investments followed the same philosophy and unsurprisingly they outperformed the stock market by a factor of four thus in January 1962 at 32 years old Warren Buffett had

Officially become a millionaire just two years after he could promise to jump off a building that very same year Warren encountered a cigarette butt that caught his eye a struggling textile company called Berkshire Hathaway now the

Textile industry in New England was in decline for decades and Berkshire had closed nine out of its eleven textile mills the stock itself was trading at around $7 but its assets were worth at least eleven but here's the thing the

Company CEO at the time was using whatever cash the company earned to buy back its own stock this whenever Berkshire sold another Mel it would offer to buy out the shares of its own investors essentially liquidating the

Company one mill at a time Warren purchased a lot of stock at $7 and eagerly awaited the CEOs offered to buy him back a few years later the two men shook hands on a price $1150 per stock but when the day came the offered price

Was only $11 and 37 cents if the CEO had tried to cheat Buffett out of 30 cents and to return the favor Warren bought off the whole company and fired him but now Warren was stuck owning a declining company which he had no way to

Get rid of instead of letting Berkshire go to waste Warren started investing in stocks through the company but this bad experience dramatically changed his philosophy instead of searching for

Cigarette butts that is mediocre companies at low prices he started looking for amazing companies at fair prices his first purchase using this new philosophy was American Express a

Company whose stock he still owns to this day Buffett applied his analytical skills to find the best stocks in the whole market but that's only part of the reason he became successful what really allowed him to make astronomical returns

Was his entry into the insurance business that might sound like a strange statement after all insurance is pretty boring and you wouldn't expect it to double your money every year but Warren saw the path to ultimate wealth in

Exactly this business which is why in 1967 he started buying up insurance companies beginning with national indemnity and culminating with Geico in 1996 here's why Buffett fell in love with insurance companies they're

Essentially like banks thousands of people regularly pay their insurance premiums effectively giving the insurance company a huge cash balance but people can only withdraw their deposits when something bad happens for

Example when their house burns down or their car breaks in other words Buffett was buying companies with a billion dollars in cash that was technically considered a liability and this wasn't a factor in the purchasing

Price suddenly he had access to immense capital which he invested wisely and carefully into a great companies by 1983 Berkshires portfolio was worth over a billion dollars and just three years later Buffett himself was worth a

Billion now I'll probably make a separate video for the stocks Buffett invested in over the years but what I can tell you is that picking winning stocks isn't as hard as it sounds as long as you understand how the market

Works you can earn a lot of money by investing in it and to help you learn the ins and outs of the stock market I'm happy to announce that I've partnered up with Skillshare to a series of educational videos on how

The stock market works I've made a 20 minute animated introductory series exclusively on Skillshare and the first 500 of you can watch it right now by registering for a two month free trial of Skillshare using the link in the

Description once you've registered search for investing 101 or follow the link i've conveniently left in the comments below the videos cover fundamental topics like what is a stock or an ETF or why

Companies go public and if you have any interest in investing I think my class will help you a lot so go check out my class and let me know if you enjoyed it I'm hoping to make many more lessons on investing and your support will be very

Encouraging anyway thank you for watching this video make sure to leave a like and maybe consider checking out my patreon especially if you want early access to my future videos or HD versions of the music I use thanks again

For watching and until next time stay smart

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