What you don’t know about Warren Buffet

What you don’t know about Warren Buffet

What you don’t know about Warren Buffet is a lot. There have been hundreds of books and millions of words about the Oracle of Omaha, but did you know this? That Warren Buffet was already a millionaire in today’s dollars before he started his first hedge fund.

Income in 1954

Warrens income in 1954 of $12,000 was equivalent to $105,000 today. So he was paid $12,000 a year working for his mentor Ben Graham.

The average income back in 1954 was $3,155. Therefore Warren Buffet was making almost 4X the average income working for Ben Graham. After taxes of 25% that puts the average household income at $2366 net income. My guess is Mr. Buffet figured ways to reduce his tax structure so let’s say he netted about $10,000 a year or 5X the average household income.

 Buffets net worth in 1956

Warren’s net worth was about $174,000 in cash. So this does not include his house or any stocks he owned. Therefore he had a net worth in today’s dollars of about $1,600,000 in cash.

I always wondered how he lived on his investments when he started his first fund with $100 of his own money and $105,000 in family money. So Warren Buffet was actually a millionaire in today’s buying power dollars.

Why is this important?

I need to know how Buffet became rich, so how he started is important for me as an example of my own situation.

Therefore he was actually a millionaire in today’s dollars. This is important because his fund doesn’t appear to have had enough income in dividends for him to live off. Also, he didn’t trade stocks, or did he?

I’ve looked closely at his total capital investments in his 7 funds and the actual dollar amount was $585,000. Therefore he started at $5,270, 829 in today’s dollars. So he was well-capitalized with friends and relatives’ money.

My fund

So for me to be at the same starting point that Warren Buffet began, I would $5,270,000.

Buffets second fund

“On September 1st, 1956, he raised $120,000 from Homer Dodge, a physics professor who had attended Harvard University.  That is almost $937,000 in today’s money.  With it, Buffett setup Buffett Fund, Ltd.  This second fund had more money than the Buffett Associates, Ltd. partnership.”

On September 1st, 1956, he raised $120,000 from Homer Dodge, a physics professor who had attended Harvard University.  That is almost $937,000 in today’s money.”

The B-C Partnership

“Then, on October 1, 1956, Warren founded another partnership for a friend of his, John Cleary, who was his father’s secretary in Congress.  (Buffett’s father served in the House of Representatives.)  It had $55,000 in the capital, which is the equivalent of $429,300 today.”

The Underwood Partnership

“In June of 1957, Buffett started another partnership called Underwood, which was set up by one of the original partners of Buffett Associates, Ltd., Elizabeth Peters, with $85,000.  Today, that is $640,500.”

The Dacee Partnership

“It wasn’t until next year, on August 5, 1957, that Buffett started what was actually his fifth partnership, excluding Buffett & Buffett with his father, which was called Dacee.  Eddie Davis and his wife Dorothy Davis had Buffett manage $100,000 for themselves and their three children.  In today’s dollars, that is $753,400 or so in today’s inflation-adjusted dollars.”

The Mo-Buff Partnership

“On May 5, 1958, Dan Monen and his wife, Mary Ellen, formed the basis of Warren’s next partnership, called Mo-Buff.  They put in $70,000.  That is $527,400 today.”

The Glenoff Partnership

“The seventh Buffett partnership (again excluding the Buffett & Buffett he had with his father), was called Glenoff and consisted of $50,000 contributed by a local businessman and two sons in one of Omaha’s most prominent families. It was established in February of 1959.  Today, that is $364,000.

The thing is, by mid-way through 1959, Buffett, who had only contributed $100 to each partnership, had earned fees, counting reinvested earnings, of $83,085 and owned approximately 9.5% of the combined partnerships due to his performance.  That is about $605,000 today.  Not bad!  Plus, of course, he still had his personal investments.

That means, by the time he was about to turn 30, he was managing almost $7,300,000 in today’s money, had his personal investments, managed Buffett & Buffett with his father, and some other side commitments.”

Penney Stock Buyer

“He loved investing in cheap stocks at discounted prices, which at the time were bargains. He made a vast fortune buying penny stocks and day trading. Buffett was investigated by the SEC in 1974-1976 for manipulating the price of a penny stock called Wesco. He and Charlie Munger bought shares at a higher-than-necessary price. Buffett did this as he was buying the company and had made a promise to a shareholder that he would keep the price above a certain number. He sort of admits what he did was wrong, but it didn’t affect his reputation and one of his companies had to pay a $115,000 fine.”

Corporate Raider

Sanborn Map

“In 1958 Buffett bought a major stake in the Sanborn Map Company, a publisher of detailed maps of all US cities and towns. Buffett noticed that the company had built up a sizable investment portfolio, so he joined with other shareholders to lobby the board to realize the value of the portfolio. The board had virtually no ownership of the stock — a telltale red flag for today’s activist mavens — and protested the efforts of the “outsider” attempting to make a change. But Buffett ultimately got what he wanted when Sanborn Map executives voted to exchange a portion of their investment portfolio for company shares, narrowly avoiding an ugly proxy fight.

Buffett’s lesson: Beware of corporate executives with minimal stock ownership. Their interests likely won’t be aligned with common shareholders.”

Dempster Mill Manufacturing Company

“In 1961, Buffett obtained majority control of Dempster, a manufacturer of farm implements and water systems, purchasing 80% of the stock at nearly a third of its value. Initially, Buffett worked with the old management to try to improve operating numbers, but the effort proved fruitless. Instead, Buffett brought in his own manager to clean up the balance sheet by getting rid of slow-moving inventory and selling off unprofitable facilities. The company quickly became profitable again, allowing Buffett to exit his investment in 1963 with a nearly threefold gain.

Buffett’s lesson: Try working with current management to improve the company. If it doesn’t work, don’t be afraid to cut the cord and move on.”

Berkshire Hathaway

“Beginning in 1962, Buffett began buying up shares in textile manufacturer Berkshire Hathaway, and by 1965, he had acquired majority control of the company. Buffett then met with management and offered to sell his shares back at a discounted rate, but the company lowballed him. Infuriated, Buffett forced out the management team and installed Ken Chace as manager. Since then, the company stock has soared by about 500,000% (no, that’s not a typo).

Buffett’s lesson: If you can’t trust someone to keep their word, you probably can’t trust that person as a business partner.”

Coca-Cola

“Buffett first bought Coke stock in 1988 — right at the cusp of the beverage company’s emergence as a global brand — and is today the largest shareholder. Yet when it came time to cast his vote against a controversial executive compensation plan, Buffett abstained from voting altogether and opted to speak privately with Coke CEO Muhtar Kent. Buffett defended his actions by explaining how corporate boards are “part-business and part-social organizations,” rationalizing that an open dialogue would be more effective than going to “war” with Coke, a company which he still considers a core part of his portfolio.

Buffett’s lesson: Don’t go to war with your business partners if you don’t have to. The potential short-term gain is not worth the long-term consequences.

Although the outcome of Buffett’s inaction has yet to be determined (according to reports, Coke will indeed revise the plan), the incident represented quite a departure from his earlier days of shareholder activism and “control” positions.

As Buffett’s investment sizes and time horizons have changed, he has moved toward a more collaborative model of activist investing. As a long-term investor, he realizes the importance of his relationships and does not want to be hostile to corporate boardrooms. In the case of Coke, he views his relationship with the company and Muhtar Kent as more of a marriage than a transaction, and it takes much more than a lavish shopping trip to break up a marriage.

Buffett is and always has been one of the world’s great activist investors. But like an astute general, he’s careful about picking which battles to fight and which weapons to use.”

Warren’s Compensation Formula in the Early Days

“The compensation formula was simple.  The investors received 4% interest on their money from the partnership.  After that threshold, Buffett got 50% of the gain and the limited partners got the other 50%.  If there were a loss, Buffett took 25% of it himself.  That means if he broke even, he lost money.  His obligation to pay back losses was not limited to his capital; it was unlimited.”

In Conclusion

Was Buffet a corporate raider in the early days? The answer is yes. Did he target companies and then buy up shares to gain access to their boards? Yes, he did. Did he use greenmail to get those early investments to pay him off? For sure.

Whats’ the point here

Warren Buffet was not the quiet unassuming investor in his early days. In order to accumulate Capital, he charged forward with 7 funds and 5 million in today’s dollars. Therefore it may be prudent to take this into consideration as we move forward in our strategy.

 

Mike Addis, Carlsbad, California

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