Warren Buffett is 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 Skillshare
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
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 stock broker, 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 Democrats at
the time. Amidst his rise in politics, Howard moved
the Buffett family to Washington DC, where Warren naturally felt very lonely. He’d spend 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 in
Warren 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 thirty, 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 would 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 a thousand dollars, and back home in Nebraska he used that money to
buy a 40-acre farm, which he then rented out. Warren used the farm’s rent to pay his way
through the University of Nebraska, where he got a Bachelors 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. 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 50 cents. Buffett fell in love with this method 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 year later Graham decided to
retire, closing down his company and leaving Buffett on his own. Now at the time Buffett had saved up $175,000,
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, or in
other words, still good for one more puff. Here’s an example: in 1958 Buffett noticed
the Sanborn Map Company, which held a virtual monopoly on the production of detailed maps
used in the insurance business. The company had been around for nearly a century,
and while it had been doing poorly for the past decade, Buffett 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. So 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% 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
had officially become a millionaire, just two years after he had promised 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. The textile industry in New England was in
decline for decades and Berkshire had closed 9 out of its 11 textile mills. The stock itself was trading at around $7,
but its assets were worth at least $11. But here’s the thing: the company’s CEO
at the time was using whatever cash the company earned to buy back its own stock. Thus, whenever Berkshire sold off another
mill, 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 offer to buy them back. A few years later, the two men shook hands
on a price: $11.50 per stock, but when the day came, the offered price was only $11.375. The CEO had tried to cheat Buffett out of
13 cents, and to return the favor Warren bought out 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 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 thus wasn’t a
factor in the purchasing price. Suddenly he had access to immense capital
which he invested wisely and carefully into A-grade companies. By 1983 Berkshire’s 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
make 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 2-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.
I'm inspired by this video, thank you for these.
No trap.