The Snowball

"Warren was already a cautious child, who had kept his knees bent and stayed close to the ground when he learned to walk."

Childhood entrepreneurship: From a young age, Warren Buffett displayed an unusual interest in money and business. He started various ventures, including:

• Selling chewing gum and Coca-Cola door-to-door

• Collecting and reselling lost golf balls

• Operating pinball machines in local barbershops

Family influence: Buffett's father, Howard, was a stockbroker and later a congressman, exposing Warren to financial concepts early on. His grandfather Ernest owned a grocery store, further immersing young Warren in the world of business.

Early lessons: Buffett's childhood experiences taught him valuable lessons about:

• The power of compounding and reinvesting profits

• The importance of understanding customer behavior

• The value of hard work and perseverance

"Graham's investing method was not simply about buying stocks cheap. As much as anything it was rooted in an understanding of psychology, enabling its followers to keep their emotions from influencing their decision-making."

Value investing foundation: Benjamin Graham's teachings formed the basis of Buffett's investment philosophy:

• Focus on intrinsic value rather than market sentiment

• Look for a margin of safety in investments

• Treat stock ownership as partial ownership of a business

Cigar butt approach: Initially, Buffett followed Graham's strategy of buying undervalued, often troubled companies (cigar butts) for a quick profit. This approach included investments in:

• Berkshire Hathaway (initially a struggling textile mill)

• Dempster Mill Manufacturing

• Various other undervalued securities

Evolution of strategy: Over time, influenced by Charlie Munger, Buffett shifted towards investing in high-quality businesses with strong competitive advantages, even if they weren't extremely cheap. This led to investments in companies like:

• See's Candies

• The Washington Post

• GEICO

"The way that numbers exploded as they grew at a constant rate over time was how a small sum could turn into a fortune. He could picture the numbers compounding as vividly as the way a snowball grew when he rolled it across the lawn."

Long-term focus: Buffett understood the exponential growth potential of compound interest, leading him to:

• Prioritize reinvestment of profits over immediate consumption

• Focus on businesses with high returns on invested capital

• Maintain a long-term investment horizon

Snowball effect: Buffett's wealth grew dramatically over time due to:

• Consistent reinvestment of profits

• Leveraging insurance float for investments

• Acquiring businesses that generated strong cash flows

Teaching others: Buffett emphasized the power of compounding to:

• His investment partners

• Berkshire Hathaway shareholders

• The general public through his annual letters and speeches

"I had about $174,000, and I was going to retire. I rented a house at 5202 Underwood in Omaha for $175 a month. We'd live on $12,000 a year. My capital would grow."

Buffett Partnership Ltd.: In 1956, Buffett started his investment partnership with:

• Seven initial partners, including family and friends

• A unique fee structure that aligned his interests with partners

• A focus on undervalued securities and special situations

Key early investments:

• GEICO: Buffett's largest early investment, demonstrating his ability to identify undervalued companies

• American Express: A significant investment following the salad oil scandal

• Berkshire Hathaway: Initially a cigar butt investment that became Buffett's primary vehicle

Partnership dissolution: In 1969, Buffett decided to close his partnerships due to:

• Difficulty finding attractive investments in an overheated market

• A desire to focus on long-term ownership of businesses rather than short-term trading

"So I bought my own cigar butt, and I tried to smoke it. You walk down the street and you see a cigar butt, and it's kind of soggy and disgusting and repels you, but it's free ... and there may be one puff left in it. Berkshire didn't have any more puffs."

Transformation: Buffett transformed Berkshire Hathaway from a struggling textile mill into a diverse conglomerate:

• Shifted focus from textiles to insurance and investments

• Used insurance float to fund acquisitions and investments

• Acquired high-quality businesses across various industries

Key acquisitions:

• National Indemnity Company (1967): Provided significant insurance float

• See's Candies (1972): Demonstrated the value of strong brands and pricing power

• Buffalo Evening News (1977): Entry into the newspaper industry

Investment strategy: Berkshire's approach evolved to focus on:

• Businesses with strong competitive advantages ("moats")

• High-quality management teams

• Companies with potential for long-term growth and profitability

"Charlie had a lot of children early on. That hindered him a lot in getting independent. Starting early with no encumbrances is a big advantage."

Meeting of minds: Buffett and Munger's partnership began in 1959, leading to:

• A shift from Graham's strict value investing to a focus on high-quality businesses

• Emphasis on the importance of competitive advantages and brand power

• Willingness to pay fair prices for excellent businesses

Complementary skills:

• Buffett: Financial analysis, deal-making, capital allocation

• Munger: Broad knowledge, strategic thinking, intellectual rigor

Key collaborations:

• Blue Chip Stamps: Joint investment that led to the acquisition of See's Candies

• Wesco Financial: Munger's company that eventually merged with Berkshire

• Berkshire Hathaway: Munger became vice chairman and Buffett's trusted advisor

"Her skill," wrote reporter Bob Woodward, "was to raise the bar, gently but relentlessly."

Strategic investment: Buffett's purchase of Washington Post stock in 1973 was significant because:

• It demonstrated his ability to identify undervalued, high-quality businesses

• It established a long-term relationship with Katharine Graham and the Graham family

• It showcased the power of investing in companies with strong competitive positions

Building trust: Buffett's approach to the Washington Post investment included:

• Signing an agreement not to buy more stock without Graham's permission

• Providing business advice and support during challenging times

• Respecting the editorial independence of the newspaper

Long-term impact:

• The Washington Post investment became one of Berkshire's most successful

• It enhanced Buffett's reputation as a trusted advisor to business leaders

• The relationship with the Grahams opened doors to other media investments

"Warren, those are your children—you recognize them, don't you?"

Family dynamics: Buffett's relationships with family members impacted his business approach:

• His father's influence instilled a strong work ethic and interest in investing

• His wife Susie's support and social skills complemented his business acumen

• His children were expected to make their own way, without relying on inherited wealth

Key personal relationships:

• Charlie Munger: Business partner and intellectual sparring partner

• Katharine Graham: Friend and confidante in the media world

• Bill Gates: Later in life, a close friend and philanthropic partner

Work-life balance: Buffett's intense focus on business often came at the expense of personal relationships:

• Limited time spent with family

• Delegation of personal matters to his wife

• Difficulty in maintaining close friendships outside of business circles

"I said, 'We represent Wilson's Coin-Operated Machine Company, and we have a proposition from Mr. Wilson. It's at no risk to you. Let's put this nickel machine in the back, Mr. Erico, and your customers can play while they wait. And we'll split the money.'"

Building trust: Buffett emphasized the importance of maintaining a strong reputation:

• Refusing to engage in unethical or questionable business practices

• Providing transparent communication to shareholders and partners

• Honoring commitments, even when financially disadvantageous

Long-term perspective: Buffett's focus on reputation led to:

• Preferential treatment in deal-making and acquisitions

• Ability to attract high-quality managers and businesses

• Sustained success and positive public perception over decades

Lessons for others: Buffett's emphasis on integrity influenced:

• Berkshire Hathaway's corporate culture

• The broader business community's approach to ethics

• Public perception of successful investors and business leaders