In the last part of this series, I looked at the investing strategy of Benjamin Graham, who is widely considered to be the Godfather of value investing.
As well as investing himself, and authoring two of the most influential investing books of all time, the Intelligent Investor and Security Analysis, Graham taught investing at the Columbia Business School.
As a teacher and lecturer, he educated hundreds of other investors, including a young Warren Buffett.
Today, Warren Buffett is widely considered to be the greatest investor of all time. He has built a multi-billion dollar fortune by investing according to Graham’s value principles, making him one of the richest people in the world.
Buffett’s career as an investor started officially in 1955 when he went to work for Benjamin Graham at his investment partnership called Graham-Newman Corp. Unfortunately, his employment here didn’t last long. After only a year, Graham told Buffett he was closing down the partnership as he intended to retire. So, the young Warren Buffett set out on his own to create his own investment vehicle.
Over the next few articles, I’m going to be taking a look at these formative years of Warren Buffett’s life.
Warren Buffett: The early years
Warren Buffett’s fortune is close to $100bn, but he came from very humble beginnings. Buffett has always prioritised saving, so when he was let go from Graham-Newman, his funds in the bank allowed him to chose his next move carefully. With $140,000 saved, he decided to set up his own investment partnership.
In May 1956 at the age of 26, Buffett created Buffett Associates Ltd. The young investor personally put in $100,000 while seven family members and friends contributed $105,000.
The young prodigy quickly earned a name for himself and more money found its way to him. By 1957, he was managing five partnerships in total. by 1958, only three years after opening his doors to outside investors, Buffett had doubled investors’ money.
His partnership letters from the time, give us a fascinating insight into how Buffett was earning these staggering returns for his investors. In his 1959 letter to partners Buffett describes what he calls “A Typical Situation”:
“This stock was the Commonwealth Trust Co. of Union City, New Jersey. At the time we started to purchase the stock, it had an intrinsic value of $125 per share computed on a conservative basis. However, for good reason, it paid no cash dividend at all despite earnings of about $10 per share, which was largely responsible for a depressed share price of about $50 per share. So here we had a very well managed bank with substantial earnings power selling at a large discount from intrinsic value.”
He goes on to describe that the partnership acquired so much stock in Commonwealth Trust that it eventually comprise nearly 20% of assets under management. After acquiring a position at a price of around $51 per share on average, towards the end of 1958, Buffett sold the stock at $80, netting himself and his partners a handsome return in a relatively short period.
Disclosure: The author owns shares in Berkshire Hathaway.