Warren Buffett

An easy billion

I recently read Warren Buffett’s Ground Rules by Jeremy Miller. I would recommend the book to anyone interested in Warren Buffett’s pre-Berkshire days when he was starting out his various investment partnerships, which were eventually consolidated into a single partnership called Buffett Partnership Limited (BPL). What I found impressive was Warren’s clarity of thought and honesty to his early investors at such a young age. His approach to investing today is essentially the same as it was towards the end of the BPL days. The difference is that the size of his funds today limits his universe of potential investments which explains why he buys Apple today and not Blue Chip Stamps.

Warren’s investment returns over 12 years is highlighted in the book and when he liquidated BPL in 1969, he distributed cash and Berkshire Hathaway shares to its members. So that got me thinking, how much would his early investors made if they invested $10,000 in the partnership in 1957 and invested all the proceeds from BPL’s liquidation (and continued holding Berkshire shares which were also distributed) into Berkshire Hathaway in 1969 and held the stock through to 2016?

Note: The pre-1969 returns are taken from Warren Buffett’s Ground Rules. The post-1969 returns are share price returns of Berkshire Hathaway taken from the 2016 annual report.

$1.6 billion is the answer.

$10,000 turned into $1.6 billion due to Warren’s ability to generate an annual compounded return of 22% per year over 60 years. This ability to consistency produce market beating returns is why the “Oracle of Omaha” is such a legendary investor.

Although I wasn’t fortunate enough to cross path with Warren, the key lessons I take away are:

  • To unleash the powers of compounding, you need two ingredients; the ability to consistently generate good returns and a long runway of time. This is shown in the chart above, where the line starts ascending rapidly from the mid 1990s onwards.
  • If you find a compounding machine, don’t sell!

So how many people actually stayed invested with Warren from the early days? According to Forbes in an article called “The Berkshire Bunch”, there are at least 30 families in Omaha who are centimillionaires from owning Berkshire stock. Other than being born into wealth or striking the lottery, I reckon these early investors made one of the easiest fortunes ever made.