Last week on Methods of Prosperity.

Bernard Arnault inherited a civil engineering and property company from his father. He transformed it into a real estate business. He later acquired the struggling textile empire Boussac group. That’s when Arnault formed Financière Agache, the cornerstone of his business empire. This led to his majority ownership of LVMH Moët Hennessy – Louis Vuitton. LVMH controls many prestigious brands. Arnault’s real estate portfolio is extensive. His current net worth is currently $169 billion.

The following is Methods of Prosperity newsletter number 24. It was originally deployed November 23, 2023. As of August 1, 2024, original subscribers have received up to issue number 60: Brad Jacobs.

This week’s newsletter in memory of Charlie Munger, who passed away on November 28, 2023, at the age of 99. He contributed to the success of Berkshire Hathaway alongside Warren Buffet.

Part 24

Warren Buffett

Chairman and CEO of Berkshire Hathaway

Legendary Value Investor

TL;DR

Warren Buffett became a billionaire through his successful investment strategies, particularly value investing. He started investing at a young age, buying his first stock at 11. He studied under the legendary investor Benjamin Graham. In 1962, he became a millionaire through his partnerships and later merged them into one. Buffett built his fortune buying undervalued stocks and companies. They were well researched, timely purchases, held for the long term. He’s known for buying underpriced, solid companies and holding them for decades. Examples are Coca-Cola and American Express. Buffett has pledged to give away the vast majority of his fortune. It’s going to philanthropic causes. He donates through the Bill & Melinda Gates Foundation. Buffett has inspired others to do the same through the Giving Pledge. That’s a charity he founded with Bill Gates in 2010.

Key lessons:

• Hard work is no substitute for who you work with and what you work on.

• Ask specific questions to the right person.

• Rejection is a step in the right direction.

• Play within your circle of competence.

• Invest in companies with a moat.

• Compound interest is magical.

• Guard your reputation.

• Face your fears.

“You’re overpriced”.

That’s what Benjamin Graham told Warren Buffet in 1951. Buffett approached Graham, offering to work for free. Benjamin Graham was a British-born American economist, professor, and investor. He’s known as the “father of value investing”. His book, The Intelligent Investor, provided the principles for the market to follow. Today, all market participants use Graham’s in-depth, fundamental valuation in stock analysis. Graham’s investment philosophy stressed investor psychology, minimal debt, buy-and-hold investing. His investment philosophy stressed fundamental analysis and concentrated diversification. It stressed buying within the margin of safety, activist investing, and contrarian mindsets.

When is free overpriced? Offering services for free is always sus. It brings your credibility and competence into question. Would you let a stranger babysit your child for free?

The value of Benjamin Graham’s teachings and mentorship had too much value to give away for free.

Warren Buffett was born in Omaha Nebraska during the Great Depression in 1930. His father lost his job as a stock salesman in 1931. His father started his own investment company. Warren read every investment book in his dad’s office, some more than once. Warren learned from his father that all lives have equal value. His father ran for Congress when Warren was 12 years old. His mother was very supportive.

Warren’s teachers had stock in AT&T. Warren shorted AT&T stocks to show his teachers how to invest. Warren was buying stocks all through high school and didn’t have a strong desire to go to college. Under pressure from his father, Warren did go to the University of Nebraska.

Warren’s built different. He excelled in his classes and finished in three years. There was only one place for him to go next: Harvard Business School. Warren was so smart, of course he would pass the audition. They sent him to an interview to get into Harvard at a place near Chicago. The interviewer talked to Warren for about ten minutes before he knew. Thanks for your time, Warren. At this time, Harvard will not be accepting you.

Later that summer, Warren picked up the catalog of Columbia Business School. Out of all the information in that catalog, what did he look for? In our quest for financial freedom, one of the hunches I’m going to pitch to you is this. Hard work is no substitute for who you work with and what you work on. Actually, that’s a principle lifted from Naval Ravikant from his epic tweetstorm, How to Get Rich.

Warren noticed who the instructors were at Columbia. David LeFevre Dodd and Benjamin Graham. Dodd was a protégé and colleague of Graham at Columbia Business School during his student years. Warren had books by the two of them, so he wrote to professor Dodd. In his letter, Warren Buffett asked for admittance into Columbia. It worked.

Benjamin Graham was a captivating teacher. Two of the most important rules of investing that Warren learned from Graham was: 

1. Never lose money. 

2. Never forget rule number one.

Everything was fine until one day, Warren experienced fear. When he set out to become a stock salesman, he discovered his fear of public speaking. He realized this would hold him back if he didn’t correct it. Warren enrolled in Dale Carnegie’s public speaking course. Of all accomplishments, this is the one Warren Buffet is most proud of. He keeps his Dale Carnegie certificate of completion on display in his office to this day. In the fourth or fifth week of that course, Warren proposed to his wife. A few months after completing Columbia, Warren started his investment partnership in 1962.

Warren Buffett compares companies to cigars. He used to buy the butts with a little smoke left in them. This metaphor applies to the valuation of an investment. It’s likely that he likened Berkshire Hathaway to a cigar butt. In 1962, he started investing in this troubled textile company.

Berkshire Hathaway started in 1839 as the Valley Falls Company. It was a textile manufacturing company in Valley Falls, Rhode Island. Oliver Chace established the Valley Falls Company. It later merged with the Berkshire Cotton Manufacturing Company in 1929.

This formed the basis of the present-day Berkshire Hathaway. Warren bought the stock with the idea that the company would free up capital. He planned to sell it for a profit. Realizing that wouldn’t happen, Warren Buffett took control of Berkshire Hathaway. He redirected its focus towards investments and acquisitions. He shaped it into the conglomerate it’s known as today.

Charlie Munger was Warren Buffett’s business partner for approximately 45 years. Munger officially joined Berkshire Hathaway as vice chairman in 1978. He remained in that role until his death in 2023. Charlie influenced Warren not to buy cigar butts.

By now you’re thinking, “That’s all fine and dandy, Sean Allen Fenn, but how did Warren Buffett become a billionaire?”

You’ve heard of the 80/20 rule? It’s also known as the Pareto Principle, which asserts that 80% of outcomes result from 20% of causes. It suggests that focusing on the most impactful 20% of efforts can yield 80% of the desired results. Warren Buffett describes a variation of this rule. Which he calls his circle of competence. He adapted the concept from the book written by legendary baseball player. Ted Williams’ The Science of Hitting. Warren only swings at throws within his sweet-spot.

A typical guru of personal development will tell you myths. If you want to succeed, you must wake up at 4:30 AM every morning. Take no days off, always make your bed, out-work everybody, and have a bias towards action. Warren Buffett has a bias towards inaction. There’s no guarantee that taking action will result in a better outcome than waiting. You’re too impatient to wait for a better alternative. A typical overachiever will take action anyway.

Action bias is an irrational reaction fueled by overconfidence or scarcity. Instead, Warren Buffet limits his investment decisions. He stays within his circle of competence. This way, he makes more deliberate and better informed decisions. Decisions based upon his criteria.

Warren’s investment criteria includes selecting companies with a moat around their business. A moat around a business refers to having a competitive advantage. It’s a barrier that makes it challenging for rivals to erode its market share. For example, See’s Candies has brand recognition. While there’s no shortage of chocolate makers, there are very few with a brand story like See’s. A guy gives a box of See’s candy to his love interest. That usually comes with flowers and either a marriage proposal or an apology.

Before we wrap up this week’s newsletter, it would be unfortunate to not discuss the magic of compounding. Compound interest is the addition of interest to the principal sum of a loan or deposit. This allows for the calculation of interest on two sides. Both the initial principle and the accumulated interest from previous periods. That means your money is making money. It works in reverse, too. Debt is money making money, but the loan servicer is making it and the debtor is losing it.

Our brains have a hard time comprehending exponential growth. For instance, if you invested a penny into itself for thirty years, how much do you think it would add up to? There’s a mathematical formula to find out, which we can skip for now. Invest one cent at an annual interest rate of 100% compounded for thirty years. The future value of your first penny would be $10,737,418.24!

In conclusion, Warren Buffet doesn’t outwork anyone. On a typical day, he spends around five or six hours reading. He’s focused on one thing: thinking. All day he sits and thinks about investment problems. His insurance companies, including Geico, generate “float”. That’s the regular shares that a company has issued to the public and are available for investors to trade. Stocks with a lower float are generally more volatile. It may be harder to find a buyer or seller, leading to larger spreads and lower volume. Stocks with a higher float are more available and easier for investors to buy. Float provides capital. There’s no need to leverage too much debt, which allows you to buy more assets.

“It takes twenty years to build a reputation and it takes five minutes to lose it.” 

Known as the Oracle of Omaha, Warren Buffet guards his reputation. In the 1990’s he invested in a too-big-to-fail Wall Street firm named Salomon Brothers. In 1991, the firm violated Treasury auction rules. This led to a significant public outcry and a tarnished reputation. Paul Mozer was the former head of Salomon Brothers’ government-securities trading operation. The court indicted him on criminal charges. He pleaded guilty to securities fraud and conspiracy.

Salomon Brothers owed $150 in debt, more than any other company at the time. Warren Buffet believed his reputation was on the line. He refused to let his investment go bankrupt. Warren Buffet took over as interim chairman. He recovered the firm from suspension by the US Treasury. Warren saved the jobs of 8,000 employees.

He gave them the following warning: “After they first obey all rules, I want them to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends. If they follow this test, they need not fear my other message to them: Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless.”

Warren Buffett’s net worth is currently around $135 billion. He’s one of the wealthiest individuals in the world.

I like you,

– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.