Beginner
Now you are reading
Warren Buffett - The story of the oracles of Omaha [Great Traders]
0

Warren Buffett - The story of the oracles of Omaha [Great Traders]

created Forex ClubApril 18 2021

Businessman, investor and philanthropist. Warren Buffett is one of the most famous people who made a fortune from long-term investing in the stock market. Buffett's tremendous success has set a role model for many value investors. His famous "nose" for good business has at one point become legendary. For this reason, he earned the nickname "The Oracle of Omaha". Warren's story is an example that thanks to consistency and a clear investment strategy, you can achieve stunning returns from investing in the stock market.


Be sure to read: William O'Neil - Creator of CAN SLIM [Great Traders]


Warren Buffett - The Beginnings

Warren Edward Buffett was born in the city on August 30, 1930 Omaha in Nebraska. Buffett's father - Edward - worked as a stockbroker. His mother, on the other hand, was a housewife. Warren also had two siblings - two sisters. From an early age he tried his hand as an investor and entrepreneur. When he was only 6 years old, he bought packets of Coca-Cola drink for resale. He sold Coca-Cola cans "by piece" at a higher price. Thus, he made money for the first time through his entrepreneurship. 

At the age of 11, he started his career as an investor. It was three company shares  Cities Service Preferred. Warren paid $ 38 apiece. Unfortunately, he did not have a good "timing", immediately after buying them, the share price fell to $ 25. It didn't scare Buffett. He waited patiently for stocks to climb to $ 40. Only then did he commission the sale of his shares. At first, he was happy with his first ones "Stock exchange profits". As it turned out later, he sold his shares too early. Soon after, one Cities Service Preferred campaign cost over $ 200. This was Warren's first lesson. It meant that you shouldn't be content with small profits, but let them grow.

At the age of 13, he started working as a "newsboy". In 1942, Buffett's father entered the House of Representatives. This forced the family to relocate from Omaha to Fredricksburg, Virginia. Warren attended Woodrow Wilson High School in Washington. Despite changing the city and continuing his studies, young Buffett did not give up looking for opportunities to multiply money. Together with his friend, he purchased a machine for $ 25 pinball. They put her in a barbershop. When the machine was making a profit, they bought more. After the business was scaled up, there was a moment of "harvesting", as a result Warren sold the business for $ 1200. 

The Oracle of Omaha - Way to the top

Despite his passion for business, Buffett did not neglect his education. In 1946 (at the age of 16) he enrolled at the University of Pennsylvania. Two years later, he transferred to the University of Nebraska to complete his education. 

young warren buffett

Warren Buffett in his youth.

However, the turning point was reading a book about investing. Influenced by the book "Intelligent Investor"which he wrote in 1949 Benjamin Graham, Buffett chose to study at Columbia Business School to grow under the guidance of a prominent investor and economist. After graduating in 1951, he began his career at Buffett-Falk & Company. However, Buffett preferred to work under his mentor. Warren offered Benjamin Graham to work for him for free. However, this offer did not convince Graham. The investment guru refused Buffett. 

Undaunted by this, Warren continued to develop his value investing skills. Finally Graham convinced Graham to increase the knowledge about investing. In 1954, he began a two-year cooperation under the supervision of his mentor, in Graham - Newman Corp. During his two years working alongside Ben Graham, Warren continued to develop his knowledge of the market. He began to make progress in finding undervalued companies. His love for his teacher is shown by the name of Warren's second son, he named the child Howard Graham. 

In 1956, Warren Buffett's net worth was estimated at $ 174, which in terms of today's prices is over $ 1,3 million. The Oracle of Omaha decided she had to go and start building "her brand". Thanks to those gathered  to savings, decided to create his own investment company, Buffett Partnership Ltd. The seat of the company was the investor's hometown - Omaha. In 1957 he also purchased the house in which he lives to this day. He paid $ 31 for it.

Good investment results led to the fact that in 1962 the net worth of the investor exceeded 1 million dollars at that time. In 1964, Buffett invested in American Express. The reason was the sharp drop in shares as a result of the image scandal that arose after "Salad oil scandal". Buffett recognized that the company's problems are temporary and that the company will return to growth. His assumptions proved successful. In 1965 he took over the company Berkshire Hathaway (it produced carpets, among others). However, it was not a good investment. Buffett has mentioned many times that this was his worst investment in his life. Despite many attempts, Buffett failed to heal the core business. In 1985, Berkshire ceased operations in the textile segment. One of Berkshire's first acquisitions was an insurance company - GEICO. The insurer was there "Cash machine". This was due to the fact that the premiums collected by the insurer were rarely paid to the insured. The reason was that the probability of the event for which the client was insured was very small. As a result, the premiums paid became a float that could be invested in enterprises. GEICO has become a kind of "investment vehicle". Buffett was able to invest in companies by purchasing stocks at bargain prices (Coca-Cola, Gilette, Walt-Disney, etc.).


Check it out: How do I buy Berkshire Hathaway stocks? [Guide]


Charlie Munger

Charlie Munger

In addition to Graham, he had a huge impact on Buffett's investment strategy Charlie Mungerwho, being a lawyer, also had an investment nose. Charlie, by investing the money of his family and some clients, achieved in the years 1962-1975 an average annual rate of return of over 19,7%. It was almost 4 times better than the DJIA index. Charlie Munger was suggesting to Buffett that you shouldn't always buy average companies at great prices. He preferred to invest in the best companies in the world, even paying a higher price for them. An example of such a transaction was the manufacturer of sweets - See's Candies. The company was selling for $ 25 million, which Buffett said was "exorbitant." Munger managed to convince Buffett to the deal. As a result, over the next several decades, See's generated over $ 1,9 billion in profit. Profits could be reinvested in other businesses, improving the average annual rate of return.

Buffett, despite the fact that the investment strategy was "liquid", at the same time was precise "Baseline conditions". As a result, they had no influence on the investment policy "Market madness". An example would be "Dotcom bubble"when Buffett, despite underperforming, did not follow the tech company vogue. Back then it was said that the "Oracle of Omaha" did not understand the modern economy. However, after a few years, the Nasdaq "scrubbed the bottom" and many companies hailed as "pearls" lost over 80% of their value. At the same time, Berkshire was gaining in value.

Buffett also liked to take advantage of market crashes to buy great companies at great prices. During the 2008 panic, he invested $ 26 billion, In 5 years, he made $ 10 billion gross on these investments. Among the acquired shares was General Electric and Goldman Sachs. 

However, in recent years, Buffett's star has faded significantly. The unsuccessful investments in Kraft Heinz and Occidential Petroleum caused heavy losses. At the same time, Buffett did not use the declines in 2020 to cut back on his liquid assets, which exceeded $ 130 billion.


Worth reading: In the footsteps of Warren Buffett [Literature]


Warren Buffett's investment strategy

One of Warren Buffett's "secrets" is how you manage your venture capital. The Oracle of Omaha likes to use very delicate leverage. Andrea Frazzini, David Kabiller and Lasse Heje Pedersen in the work "Buffett's Alpha" estimate that his so-called the leverage is around 1,6: 1. 

It is crucial to know where the funds for the investment are obtained from and what their interest rates are. The main providers of capital are insurance companies belonging to Berkshire (including GEICO, Gen Re, Nederlandse Reassurantie Groep, Berkshire Hathaway Assurance), which invest their premiums from insuring persons and companies in this way. 

Warren pays insurance companies about 2,2% a year for the money they borrow. Thanks to such financial engineering, Buffett obtains a very cheap source of capital, which is "insensitive" to the stock market situation. So it is a very cheap source of long-term capital. The second source of capital is deferred tax payments due to accelerated depreciation. 

Another source of income is running an "insurance business" on the stock exchange. How does it look like? Warren Buffett issues options (e.g. put options), thanks to which it receives a bonus and in return bears the risk of exercising the option. Skillful selection of the exercise price and the option expiry date allows for additional capital.

However, simply getting cheap capital is not enough. The investor still has to invest it well. As a result, there is a favorable difference between the rate of return on invested capital and the cost of capital.

Buffett's investment approach can be characterized as "Looking for valuable companies at a decent price".  These are the main rules used by Buffett. Each company you intend to acquire should have:

  1. a business that is easy to understand (e.g. Coca-Cola, Pepsi, Apple Lossless Audio CODEC (ALAC),, Heinz etc.);
  2. has a well-known and respected brand (moat);
  3. has a strong market position;
  4. profits should grow in the last few years;
  5. the company has the potential for further growth;
  6. the share price should be very attractive;
  7. it is good if the company's operations are easily scalable;

Sam Buffett says that:

“I try to buy stocks so great that even an idiot can direct them. It will come to that sooner or later. "

At the same time, he approaches the investment with a great deal of patience. Both in terms of keeping inheritance and "Allowing profits to grow". This is not the type of investor who uses enormous leverage and rotates his portfolio every week.

Another feature of Warren as an investor is the ability to admit your mistakes and close your position. An example is the recent sale of airline stocks. Buffett's strategy works well in the long term. Between 1965 and 2020, the average growth rate of S&P was 10,2% (including dividends). At the same time, Berkshire Hathaway grew in value on an annual average of 20,0%. Buffet was one of the few investors who managed to beat the market in the long term.

To sum up, Warren Buffett is one of the greatest investors to have ever operated in the capital market. A precise investment strategy, consistency and diligence should be a role model for all investors based on fundamental analysis. It is also worth paying attention to Buffett's "longevity". It is relatively "easy" to cross the market in a year, two or five. To be better than the market for over 50 years is an art. Of course, recent years have been much worse than the "Buffett's golden age." Especially the achieved rates of return in 2020 did not fare very well. Berkshire's result was as much as 16 percentage points worse than the the S&P 500 index.

It is worth quoting three quotes that illustrate well what the search for values ​​is according to Warren Buffett: 

  1. "Big investment opportunities arise when great companies are hit by unexpected circumstances that cause stocks to sell off."

  2. "It is much better to buy a great company for an average price than an average company for a great price."

  3. “The price is what you pay. Value is what you get. "

What do you think?
I like it
20%
Interesting
80%
Heh ...
0%
Shock!
0%
I do not like
0%
Detriment
0%
About the Author
Forex Club
Forex Club is one of the largest and oldest Polish investment portals - forex and trading tools. It is an original project launched in 2008 and a recognizable brand focused on the currency market.