The (Critics) History of Warren Buffett's 80 Year Career

0:00 Even people who know nothing about business

0:02 or finance will know the name Warren Buffett.

0:05 As the story goes, he purchased his first shares over 83 years ago and since

0:10 then has had what many consider to be the greatest investing career of all time.

0:15 His prudent approach to picking and sometimes creating winning businesses

0:18 has made him one of the richest men in the world

0:21 and in the process he has minted over more

0:24 than a dozen other billionaires who followed in his wake.

0:28 Perhaps most interestingly though,

0:30 he has done all of this while remaining largely popular with the general public.

0:35 Today, even after a long enough lifetime to collect potential scandals,

0:40 he is one of the few global

0:42 billionaires to enjoy a positive net approval rating,

0:45 which when you think about it, doesn't make that much sense.

0:49 If you actually look into details of his business's extended history,

0:54 you will find that he has stripped companies for parts,

0:57 helped to kick off the private equity boom,

1:00 lobbyed for favorable regulations at the expense of consumers,

1:03 been embroiled in antitrust lawsuits,

1:05 union fights, and has had more than his fair share of double standards.

1:10 Like the time when he called derivatives financial weapons of mass destruction

1:15 right before his company sold billions of dollars worth of those same

1:19 derivatives or made a big deal about how financially conservative he was

1:24 driving a secondhand car right before purchasing a fleet of private jets.

1:29 During the global financial crisis, he owned businesses which allegedly gave out

1:34 predatory loans to bad borrowers while also owning

1:37 a significant stake in the company that was

1:41 supposed to be overseeing the same market.

1:43 After that whole system imploded,

1:45 he then swooped in and made billions of dollars through

1:48 favorable deals with names like Bank of America and Goldman Sachs.

1:53 This is not to mention that literally his entire business model

1:56 is just moving money around to make rich people even richer.

2:00 We should hate this guy, right?

2:03 And yet we don't.

2:05 But why?

2:05 Well, some point to his folksy downto-earth image.

2:08 He drives a beat up car, eats McDonald's,

2:11 and lives in an old house just like you.

2:14 How much of this is real and how much of this is

2:16 played up for the media is something we will need to get to.

2:20 But there is another theory.

2:21 Buffett has been investing in US companies

2:24 for onethird of the existence of the USA itself.

2:27 He has been compounding returns through 15 presidents, 13 major recessions,

2:32 and the most intense period of global wealth creation in recorded history.

2:38 During that time, and up until his planned retirement in just a few months,

2:44 his career has shaped American history as much

2:47 as it's been shaped by American history.

2:51 Maybe he really is as humble and sagely

2:53 as the infested events would have you believe.

2:56 Maybe time heals all wounds.

2:58 Or maybe it just hasn't mattered.

3:00 Warren Buffett shocked tens of thousands of people,

3:03 dulging his plans to retire as CEO of Berkshire Hathaway at the end of the year.

3:08 The time has arrived.

3:10 Greg should become the chief executive officer.

3:13 Warren Buffett is the only person who from scratch built

3:17 a company that is in the top 10 of the Fortune 500.

3:20 One of the lessons of the 2008 was the fact that every company in the United

3:25 States was a domino and those dominoes were placed right next to each other.

3:29 In 1942 at the age of 11 or 12, Warren Buffett made his first formal investment.

3:35 He purchased three shares in the gas and utility company's Services.

3:39 The exact details of this first trade are a bit murky.

3:43 Some historical publications claim that he also

3:45 purchased three additional shares for his sister.

3:47 But in a 2018 letter to shareholders,

3:49 the man himself claimed that he only purchased

3:52 three shares which were for him and him alone.

3:55 Now, regardless of cutting his poor old sister out,

3:59 there were three interesting details about this very first trade.

4:02 The first is something of a historical side note,

4:04 but the company he invested in, City's Services,

4:07 is still technically around today, although not under the same name.

4:11 The business was merged with another company

4:14 in the 1980s before being acquired by 7Eleven's

4:18 holding company before being sold again

4:20 to the Venezuelan State Oil Company in 1986.

4:24 That means today this American oil and gas company, now known simply as Citigo,

4:30 is owned by a government openly hostile to the country it is operating in.

4:35 The committee to humiliate and shame America.

4:38 Yes, it is Hugo Chave's passion project.

4:41 Now, this little detail didn't matter for Buffett because the second point about

4:45 this investment is that he didn't hold on to it for very long.

4:49 There are two reasons why his first share purchase

4:51 gets so much attention in the business history books.

4:54 The first is that Buffett uses it as an example of his missed opportunities.

4:59 He reportedly sold the shares for a small $6 profit.

5:03 But had he held on to them, he would have sold them for over $600,000,

5:08 which even when adjusted for inflation,

5:11 is a clear and practical example of long-term investing doing its thing.

5:15 The second reason this gets talked about so much,

5:18 if you were being a little bit more cynical,

5:20 is that letting everybody know about how you were trading stocks before

5:24 learning to shave is a great way to build a personal brand.

5:27 as someone who was just destined to become an investing genius.

5:31 It sounds silly, but little quirks like these and stories about how he invested

5:37 in pinball machines in college have all

5:40 cultivated a reputation worth billions of dollars.

5:43 But again, more on that later.

5:45 The third detail of this share purchase, which is important to know,

5:49 is that he made it through his father,

5:51 who at the time was working as a stock broker.

5:54 Back in those days, share purchases were obviously

5:56 not handled by tech platforms like they are today.

6:00 Wouldbe investors would work directly with an actual

6:03 middleman who would research the markets for them,

6:06 make recommendations, and execute trades on their behalf for a commission.

6:10 It was a respectable job, but not necessarily comparable to the stock

6:14 brokers of the 1980s making millions of dollars.

6:17 It was more akin to a mortgage broker today.

6:20 Usually they were educated people with skills

6:22 in their particular field but still mostly middle class.

6:25 This was especially true during the years when Buffett was growing up.

6:29 The Great Depression and the Second World War.

6:31 Not exactly boom years for people working in the stock market,

6:34 but the family did have many good fortunes on their side.

6:38 The Buffets may not have been exceptionally well off,

6:41 but they were still a prominent family.

6:44 Shortly after processing young Warren's first stock trade,

6:47 his father gave up stockbroking when he was elected to Congress

6:52 where he would go on to serve four terms in total.

6:56 Howard Buffett actually went against the popular political grain

6:58 on a lot of big issues at the time.

7:01 He spoke strongly in favor of maintaining

7:03 a strict gold standard and warned against international

7:06 overreach by America during the Second World

7:08 War and even in the decades after it.

7:11 These isolationist ideals were not necessarily

7:13 shared by Warren in his own careers,

7:15 but he did certainly inherit a slow considered approach

7:18 to dealing with the hot trends of the day.

7:22 It is however worth recognizing that Buffett

7:24 was not exactly starting from nothing.

7:26 Even back then, having a daddy in Congress was a privileged position,

7:30 even if they weren't all mysteriously multi-millionaires like they are today.

7:34 But anyway, young Warren had another stroke

7:37 of fortune early in his life as well.

7:40 Ironically, another investor essential, and that was simply timing.

7:44 Buffett's father was just slightly too old

7:47 to be drafted into the Second World War, and Warren himself slightly too young.

7:51 This was a turn of good luck that was not common for a lot of families

7:53 at the time who would have had at least one generation going overseas to fight.

7:58 Now, to be fair, Buffett has acknowledged his luck

8:01 of being born in the right place at the right time.

8:05 The luckiest day in my life is the day I was born.

8:09 you know, but I was born in the United States.

8:12 Being born in the 1930s at the onset

8:14 of the Great Depression was also a blessing in disguise.

8:18 His childhood was still comfortable, but he wasn't yet competing for jobs

8:22 with everybody else left behind by the crash.

8:25 He would effectively sit out that period of economic

8:28 history and start his career in the 1950s,

8:31 right before the most intense period of prosperity growth in American history.

8:35 As far as timing goes, he literally bought the dip with his own birth.

8:41 Now, the context of his early life is

8:44 important because when biographers and bootstrap enthusiasts talk about

8:48 his early investing exploits and the childhood side

8:51 hustles that amassed him $100,000 before he left college,

8:55 they often leave out that he was clearly

8:58 born into a privileged family at a privileged time.

9:01 He got into good universities despite by his own

9:05 admission not being a particularly passionate student.

9:08 And he had access to people that most aspiring business owners just didn't.

9:13 I didn't want to go to college and but my dad

9:15 wanted me to go to college and we didn't have SATs then,

9:18 but he practically would have done the SATs for me.

9:21 So he in the truth I always wanted to please my dad.

9:25 I mean he was a hero to me and still is.

9:28 Now, the big difference is he actually does acknowledge this luck.

9:32 Unlike a lot of other billionaires who

9:34 try to talk up their self-made credentials,

9:37 Warren has spoken frequently and passionately about just how

9:40 fortunate he was to have his opportunities and to be

9:44 born during a period of history where reading

9:46 financial documents was a skill that society actually valued.

9:50 To that end, his first real job out of college

9:53 was at his dad's stock broking firm as an investment salesman.

9:57 This is exactly what it sounds like.

9:59 Back in the 1950s, people didn't have sketchy finances

10:03 or crypto bros telling them about the next hot investment.

10:07 Even looking up company financials or price charts

10:10 was extremely difficult for most people before the internet.

10:13 So, they relied on their stock brokers for advice.

10:16 Buffett's job was effectively a a toned down version

10:19 of what you see in the Wolf of Wall Streets.

10:22 He would get on the phone, call clients, and try to get them to make trades

10:26 earning a processing commission every time they did.

10:29 According to his own recounts in the biography The Snowball,

10:32 he hated this job because it was

10:35 just high pressure sales rather than genuine analysis.

10:38 It did however bestow him with the skills to talk up

10:42 a company to investors whether he really believed in it or not.

10:46 Something that even he admits has paid dividends over his lifetime.

10:49 It was at this time that Buffett made

10:52 what he claims was his single best investment ever.

10:55 He enrolled in a public speaking course taught by Dale Carnegie,

11:00 best known as the author of How to Win Friends and Influence People.

11:05 In several press interviews he has given throughout his lifetime,

11:08 Buffett has made special efforts to point out that he displays

11:12 this certificate in his office rather than his master's degree from Colombia.

11:16 He would use his newfound public confidence

11:19 to hold lectures about the stock market

11:21 at a local college in Nebraska where apparently

11:24 most of the students were double his age.

11:26 The point is that for a man who

11:28 wanted to make his whole career about technical analysis,

11:31 he spent his first years in the real world honing his interpersonal skills.

11:36 He eventually left his dad's firm to take

11:38 a job with the one and only Benjamin Graham.

11:41 Graham was one of Buffett's college professors,

11:43 but he also ran a successful investment firm built

11:46 on the ideas of what he called value investing.

11:49 The simple idea was that Graham and his firm would

11:52 try to figure out how much a company was really worth.

11:56 They'd look at earnings, assets, and liabilities,

11:58 but also brand appeal, ongoing contracts, intellectual property, market power,

12:02 and even their long-term track record of predictable dividend payouts.

12:07 Based on this, he would give a company an intrinsic value,

12:11 and if that value was greater than the company's market capitalization,

12:15 he would buy up the stock.

12:17 It was kind of like doing a a blind appraisal of a house based on bedrooms,

12:21 bathrooms, and school districts.

12:22 And if your educated guess of what the home was

12:24 worth was more than what the sellers wanted for it, you would buy it up.

12:28 This sounds easy in theory, but of course, the real skill was in coming up

12:32 with an accurate appraisal of a business's true worth.

12:35 Any schmuck could look through some financial records and make

12:37 a case for a company being worth twice its market capitalization.

12:40 Likewise, someone overly cautious might think

12:43 that the market is overpricing everything.

12:45 At Graham's firm, Buffett learned to scour through business after business,

12:49 finding something that the market was undervaluing,

12:52 so his firm could swoop in and profit off the discount.

12:55 Today, the same kind of operation would

12:57 be next to impossible because algorithms constantly scour

13:00 the market and instantaneously do the work

13:02 that Buffett and his peers were doing by hand.

13:05 But back then, this analytical and measured

13:08 approach to investing was really quite revolutionary.

13:10 It was a good business where Buffett

13:12 learned a lot about actually managing investor money.

13:15 On top of that, he was paid very well.

13:18 By 1956, after just two years with the firm, he had saved up over $170,000.

13:23 That's equivalent to $2.1 million today, and all at the age of just 26.

13:30 But just as Buffett's career was really taking off, his mentor,

13:34 Benjamin Graeme, shut his whole investment firm down so he could retire.

13:38 After just six years working for his father and his college professor,

13:42 Buffett now had to go out on his own to prove his worth against the market.

13:45 His first move was to return back to his childhood home of Omaha, Nebraska.

13:50 He figured that with the money he had saved,

13:53 he could live much longer out there than

13:55 in an expensive city like New York or DC.

13:57 On top of that, his style of investing worked better

14:00 the farther away he was from the noise of Wall Street.

14:04 Coming up with an objective and unbiased valuation

14:07 for a business is a lot easier when you

14:10 aren't chattering with thousands of other market speculators

14:12 day in and day out in big financial hubs.

14:15 Using Benjamin Graeme's old firm as a template,

14:18 he started a series of investment partnerships,

14:20 raising money from family members and contacts he had made

14:24 in his short but successful gig at his father's firm.

14:27 Over the next 5 years,

14:28 he would make a lot of money using a strategy called cigar butting.

14:32 Buffett would look for companies that had more

14:36 assets than their liabilities and market capitalization combined.

14:39 He would then take a large stake

14:41 in those companies and use his influence to encourage

14:44 them to liquidate their assets and cut down

14:47 on expenses to get the business working again.

14:50 For example, one of the biggest early successes was the Sanborn Map Company.

14:54 The company itself had accumulated assets in its

14:57 own share portfolio which was worth around $8 million.

15:00 But the business also had debts of $1 million.

15:03 But overall, the company was trading at a market cap of just $5 million.

15:07 So Buffett correctly summized that he could buy the business, pay off its debts,

15:12 and get $7 million worth of shares in other companies for just $4.5 million.

15:17 Put another way, the market was effectively valuing the operation part

15:21 of the business that actually produced MAPS at a negative $2 million.

15:25 Now, he never actually purchased the entire company because he didn't need to.

15:29 By the time he had amassed a large enough stake in the business,

15:33 company management saw what he was up to and made a deal.

15:35 They would give Buffett a portion of the company's financial

15:38 assets in exchange for Buffett's shares in the company itself.

15:42 This little deal netted him more than a 50% return in just 2 years,

15:47 and it didn't involve any major hostilities.

15:50 Other deals were not quite so pleasant.

15:52 Buffett tried to do effectively the same

15:55 thing on a company called Dempster Mill.

15:58 But turning that company around involved a lengthy

16:00 process of liquidating assets and cutting costs.

16:03 It was profitable, but it made Buffett deeply unpopular amongst workers who

16:08 lost their jobs just so he could take advantage of a market discrepancy.

16:12 But this was why it was called cigar butting.

16:15 The companies that he was targeting were essentially finished.

16:18 But if he could get one last puff out

16:22 of them without having to actually spend any more money,

16:25 they were in theory still a good investment.

16:28 Today, it's essentially impossible to find these kinds of businesses.

16:32 And Buffett's reputation is worth more than any value he

16:35 could suck out of the corpse of a failing company.

16:38 And even if he were a completely heartless

16:41 businessman with a time machine back to the 1960s,

16:44 these deals still carried a lot of risk.

16:47 In 1965, Buffett found this out firsthand when he

16:51 made what he himself calls his worst investment ever,

16:54 a small textile company called Burkshereaway.

16:57 So, it's time to learn how history works to see how Buffett took

17:03 this from the worst investment ever to one

17:06 of the most valuable companies of all time.

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18:33 Okay, here's a question for you.

18:35 What is Burkshire Hathaway?

18:37 Just like Lehman Brothers and a lot of the other

18:39 financial firms we have delved into on the channel before,

18:42 the answer is not as clear as people think.

18:45 You might just say it's an investment firm, a hedge fund,

18:48 an asset manager with a private equity wing,

18:51 or or maybe even a glorified insurance company.

18:53 If you are a real history buff,

18:55 or you were paying attention before the outbreak,

18:57 you might even say that it was a textile manufacturer.

19:00 Well, over the company's history,

19:01 it was simultaneously all of these things and none of them at the same time.

19:06 I know I am being deliberately ambiguous here,

19:09 but truly understanding how Burkshire changed over

19:11 its nearly 200year history reveals a lot

19:14 about the man who was at the helm for 55 years of that time.

19:18 It can also help to clear up some pretty logical questions

19:21 like if Warren Buffett really was the greatest investor of all time,

19:25 why doesn't everybody just try to copy this business model?

19:29 Well, Burkshire itself was founded almost 100 years before Buffett

19:32 was born as the Valley Fools Company of Rhode Island.

19:35 The business would buy cotton from the southern states and turn it into textiles

19:39 that could be exported across the country and the rest of the world.

19:42 The early company merged with five other

19:44 mills to stay alive during the great depression.

19:46 These merged businesses collectively

19:48 became Burkshshire Fine Spinning Associates.

19:50 At the same time, Horatio Hatheraway had started

19:53 a competing mill in the same region of America.

19:56 Just to give you a sense of how old these businesses are, Mr.

20:01 Hathaways original business pitch was that textile manufacturing would

20:05 offer a better return to investors than the whaling industry.

20:09 These businesses eventually faced increasing pressure,

20:12 not from overseas, but from within the United States.

20:16 The South slowly developed their own mills, and back then,

20:20 workers down there were paid much less than they were up north,

20:23 even in the early 20th century.

20:25 We don't have time to get into why, but you can probably make an educated guess.

20:29 Anyway, the two companies were struggling.

20:31 So in 1955 they joined in a desperate attempt to stay relevant.

20:35 In the book the complete financial history of Berkshire Hathway.

20:38 Adam me put their business situation like this.

20:41 Berkshire Hathaway at this time was a melting snowball trying

20:45 to maintain its size by furiously appending other wet melting snow.

20:49 Instead of recognizing the heat and seeking shelter or changing course,

20:54 the managers of the 1955 Berkshire Hathway conglomerate stayed on the same path,

20:59 hoping for a different result.

21:00 This book and all of the others that I mentioned

21:03 in this video will be linked down below like always.

21:06 Anyway, despite the merger just 7 years later,

21:08 Berkshire Hathaway was struggling so much that it had become

21:11 a cigar butt which caught the attention of Warren Buffett.

21:14 His early plan was to repeat what

21:16 he had already done with several businesses before.

21:19 take control of the company, sell down its considerable assets,

21:23 and refine its bloated business operations

21:25 for a quick turnaround and a nice little payday.

21:28 He started buying up shares in the business

21:31 and quickly caught the attention of then CEO Sbury Stanton,

21:35 who knew what Buffett was up to.

21:37 In 1964, Berkshire company leadership went to make a deal with Buffett.

21:42 They would sell their assets to buy back his shares at $11.50 each.

21:48 That's an almost 50% premium from his initial purchase.

21:51 Though, what should have been another neat

21:54 little deal went sour when the paperwork

21:57 for the sale came back with a purchase price of just $11.35 per share.

22:03 That's 15 less than the company's management

22:06 had agreed to in their handshake deal.

22:08 Out of principle or pride, Buffett walked away from the deal and continued

22:12 to buy up a controlling interest in the company

22:16 before ousting the management who had insulted him

22:18 and then replacing them with his own directors.

22:21 It was some major big Richard energy.

22:24 But the problem was Buffett was now stuck with a company that he didn't

22:29 really know how to run in a failing

22:31 industry being eaten alive by global competition.

22:34 He sunk a lot of money into getting the business working again,

22:37 but it didn't really achieve much apart from throwing good money after bad.

22:41 So, he pivoted.

22:42 He dissolved all of the separate investment

22:44 partnerships he had built up before and either

22:46 paid out his early investors or gave them stock in his new textile business.

22:51 He figured that Burkshere as a public

22:53 company was effectively just an investment vehicle.

22:56 It was a machine that turned investor money into even more money.

23:00 It's just that in the 1960s that machine

23:03 was trying to achieve this goal by making textiles.

23:06 So instead of throwing it out altogether,

23:08 Warren just got under the hood and changed some of the components.

23:11 Buffett and his early investors never actually

23:13 bought all of the shares in Birkshshire.

23:15 So there are still people around today who

23:17 bought some stock in a failing textile mill

23:20 after the war and accidentally saw it turn

23:23 into one of the most successful investment vehicles ever.

23:26 Not that I think they would complain.

23:29 By 1970, Buffett had appointed himself CEO

23:32 of Burkshere and set about transforming it entirely.

23:35 Sitting at the helm of a company he had purchased effectively by accident,

23:39 he took the advice of a business partner

23:42 who had started working with him along the way.

23:45 Charlie Munger and Warren Buffett met during the late 1950s

23:48 and the pair started working together on various investment partnerships.

23:51 But now that a decade's worth of work had been sunk into this single business,

23:56 Munger made a suggestion.

23:58 How about instead of buying bad businesses at a great price,

24:02 they should instead buy great businesses at a fair price?

24:05 It was a nice sentiment that went on to serve them well.

24:10 But truthfully, the days of flipping undervalued

24:12 businesses were coming to an end anyway.

24:14 More competition had moved into the market,

24:17 so made those already rare cigar butt opportunities even harder to come by.

24:22 Also, or again, if you want to be cynical,

24:25 new capital gains laws introduced in 1969 meant that buying and holding

24:30 became more tax efficient than buying and selling for incremental profits.

24:35 Whatever the real motivation was,

24:37 Burkshere's first step in building its portfolio

24:40 of great businesses was to get into insurance.

24:42 Today, the company is one of the largest insurance businesses in the world.

24:46 On top of its own white label operations,

24:48 it also owns industry giants like Geico.

24:50 But there is a very good reason for this.

24:53 Insurance companies gave the business an enormous

24:56 amount of cash through something called a float.

24:59 Basically, when you go to get insurance,

25:02 you pay your premiums upfront for coverage

25:04 that normally lasts for the next year.

25:06 And when millions of people are paying

25:08 their premiums at the beginning of the year,

25:10 that can add up to billions of dollars.

25:12 You might think how insurers make their money is by writing contracts in such

25:16 a way that less money will be paid out for claims that they receive in premiums.

25:20 Now sometimes this happens if the acties

25:22 do a good job of accurately assessing risk.

25:25 But the real opportunity is actually the simple fact that in the meantime

25:29 the insurance company gets to hold onto this bag of cash.

25:33 To simplify, imagine you are an insurance company who ensures 10,000

25:37 people against the risk of flipping a tail in a coin toss.

25:41 The premium you charge them for this insurance is $1,

25:45 and the payout if they flip a tails is $2.

25:48 Once everybody is lined up to have their turn flipping the coin,

25:52 you should statistically at least break even on the whole endeavor.

25:55 But in the meantime, you could have been collecting interest on the pot.

25:59 By targeting the insurance industry,

26:00 Buffett was essentially playing the same game just on a much larger scale.

26:05 Insurance companies could be purchased for a fraction

26:07 of the money they actually held in their floats.

26:09 This is kind of like how banks hold on to money that isn't really theirs.

26:13 JP Morgan Chase has $3.7 trillion in assets under management,

26:17 but the company itself is only worth $830 billion.

26:21 The difference between banks and insurance companies is that clients

26:23 can take their money out of banks at any time.

26:26 With insurance, clients only get paid if some particular event happens,

26:31 and those events are much less likely to happen all at once.

26:36 In 1967, just 2 years after taking control of Berkshire Hathaway,

26:41 Buffett purchased National Indemnity Company for $8.6 million in total,

26:47 but that gave him access to over $19 million in the company's float,

26:51 which he could then invest.

26:53 This was a particularly smart move because it created a feedback loop.

26:57 If Buffett made good investments,

26:58 it actually didn't matter if the insurers lost a bit of money on premiums

27:02 versus claims because the investment returns

27:04 would cover the difference and then some.

27:06 In a sense, the clients of the insurance company were effectively

27:10 just giving Buffett and Burkshshire a very low interest rate loan.

27:14 But if Buffett made exceptionally strong returns,

27:17 the insurers could lower their premiums even further.

27:19 Yes, they would statistically lose more money on the insurance side,

27:23 but it would attract more new clients, giving Buffett even more cash to invest.

27:28 All of this profit also gave Berkshire the money

27:31 to go and buy even more insurance companies.

27:33 So then, if all of this was working so well,

27:36 why does Buffett insist that Burkshire was his worst investment ever?

27:39 Well, this has more to do with the things he could have invested in instead.

27:45 If he had first built an insurance investment

27:47 vehicle from the ground up instead of, you know,

27:50 just buying and remodeling some random textile meal,

27:53 he would have made a few million extra right at the very beginning

27:58 of his career if he had used

28:00 that money to buy an extra insurance company instead.

28:02 He calculated that he would be about $200 billion further ahead today.

28:07 But he made do with what he had.

28:10 For the first few decades under Buffett's stewardship,

28:13 Berkshire was effectively just an insurance conglomerate

28:15 that happened to invest their float really well.

28:18 Even today, insurance is still one of the central pillars of the business.

28:21 But getting your hands on other people's money is the easy part.

28:24 Turning that into predictable and consistent returns

28:26 was a bit more of an art form.

28:29 Buffett was now flush with plenty of cash.

28:32 He started looking for good businesses that he

28:34 could get control over and own forever.

28:37 Often the best businesses were not listed on public stock markets,

28:40 so he had to delve into everybody's

28:42 favorite financial buzzwords, private equity.

28:44 It's true, some of Buffett's best investments were private equity deals,

28:48 like his purchase of the Nebraska Furniture Mart,

28:51 which Berkshire still owns to this day.

28:53 Now, here's the thing.

28:55 Most people who know about private equity hate private equity,

28:59 and for good reasons.

29:00 But, and if you can hold the tomatoes for a second,

29:03 I would argue that you don't hate what private equity is,

29:06 you hate what it has become.

29:08 Private equity is really just the purchase of shares, also known as equity,

29:13 in any business that is not listed on public markets.

29:16 So, if you buy a stake in a local cafe,

29:20 you are technically a private equity investor.

29:22 The problem is that major investment firms figured out that they

29:26 could pull a lot of financial shenanigans with private companies,

29:29 which is how we ended up with the buyout funds of today.

29:33 Now, we have made a lot of videos

29:35 about exactly how these firms work or don't work,

29:38 so we aren't going to get into the details here, but Berkshire was different.

29:42 Instead of saddling companies with lots

29:44 of debt and cutting everything they could, Buffett and Munger tried to find good

29:49 businesses that they could actually give some

29:52 of their huge cash reserves to for them to reinvest and expand their operations.

29:57 The wider the portfolio of these businesses got, the more secure they became.

30:01 If one business hit hard times or had an expansion opportunity,

30:04 Berkshire could move money from the other

30:07 businesses into the portfolio or the insurance

30:09 float to give them the capital needed without needing to take on debt.

30:13 For a long time, this approach was

30:15 one of Berkshire's most attractive aspects to investors.

30:18 Anybody could buy shares in Berkshire off regional stock

30:21 exchanges and then later the New York Stock Exchange.

30:24 But not everybody could buy entire private businesses

30:27 and even fewer could still do it successfully.

30:30 Ironically, at around about this time, Berkshire Hathaway,

30:34 which was originally listed on those markets as a textile mill,

30:38 closed down its last textile factory and became purely an investment vehicle.

30:44 Berkshire gave regular investors indirect access to an asset class

30:49 that they wouldn't be able to afford or manage themselves.

30:53 But as the company started compounding more and more money,

30:56 Buffett eventually ran out of good small businesses to buy

30:59 and simultaneously started having enough cash to make major public acquisitions.

31:05 Starting in the 1970s,

31:07 Berkshire bought up large stakes in companies like American Express,

31:11 the Washington Post, and Coca-Cola.

31:14 Berkshire and by extension Warren Buffett didn't

31:17 get a controlling interest in these companies, but they didn't really need to.

31:21 Coca-Cola has become perhaps the company's most famous long-term investment.

31:25 Yet, Berkshire owns less than 10% of the business.

31:29 This means that technically Buffett is a minority shareholder like any other,

31:34 and he can't single-handedly force the company to do anything he wants,

31:38 like he could with his wholly owned private businesses.

31:41 However, he still does represent the largest single voice on shareholder votes.

31:47 So, company leadership does want to keep him happy.

31:51 But more importantly than that, these companies value his opinion.

31:55 Berkshire may be the company that owns shares in Coca-Cola,

31:58 but some would argue that Coca-Cola got

32:00 an asset just as valuable because now they have the ability to pick up the phone

32:06 and directly ask Warren Buffett for advice.

32:09 This intangible value is no accident,

32:11 and it's something that the business takes just as seriously

32:15 as any of the other assets in its growing portfolio.

32:19 I hate to be the one to break this to you,

32:22 but the reason you have seen so many clips about Warren

32:25 Buffett's humble lifestyle is because he wants you to see them.

32:29 Talking about his average suburban home and secondhand car makes him look

32:33 like a prudent manager who doesn't waste money on frivolous displays of wealth.

32:38 When he holds an interview in a rundown diner,

32:41 it's not because clearing out an old restaurant was the easiest way to meet.

32:45 It's so he can talk about how he

32:48 prefers it there to some other fancier establishment.

32:51 Of course, it's not just Buffett that does this.

32:54 Workingass people love pretending that they are richer than they are,

32:57 and billionaires love pretending they are poorer than they are.

33:00 Maybe there is some kind of psychological angle to look into there.

33:04 But anyway, the point is that Bezos, Zuckerberg, Gates, Jackmar,

33:08 and even Sam Bankman Freed have all done exactly the same

33:11 kind of press tours talking about their crappy old automobiles.

33:14 Why?

33:15 Well, because it works.

33:17 In reality, Buffett and the rest of them all get

33:21 driven around in big black SUVs with a large entourage.

33:25 And honestly, that's perfectly fine.

33:27 They are high profile public figures

33:29 that can easily justify security and support staff.

33:33 Buffett also flies private jets just like all those other billionaires.

33:36 In fact, he has probably done more than any other

33:40 man to make private aviation as mainstream as it is today.

33:44 One of his largest private acquisitions was the company NetJets,

33:50 which allows mere multi-millionaires to buy time shares in jets

33:54 if they aren't rich enough to buy one all for themselves.

33:58 So, no, none of them are living the simple life

34:01 that their carefully choreographed media appearances would have you believe.

34:04 But if they can win some easy publicity points, why wouldn't they do it?

34:08 Buffett has just been committing to the bit

34:10 harder and longer than the rest of them.

34:12 And it's paid off in more than just good PR.

34:15 Buffett has built up a reputation as not only a shrewd investor,

34:18 but also an honest operator.

34:20 And that reputation has given him access

34:23 to opportunities that nobody else would be considered for.

34:27 Following the 2008 mortgage crisis,

34:29 Buffett was approached to make major strategic

34:32 investments into Goldman Sachs and Bank of America.

34:36 Buffett's slow and steady,

34:37 low debt investment approach meant that by the time of this downturn,

34:41 he had plenty of money in the bank and wasn't

34:43 sweating it like almost every other financial institution in the world.

34:47 That cash was a vital lifeline for these banks to ensure that they

34:51 had enough money to keep on operating if the downturn dragged on.

34:54 But getting that money from Buffett gave them something else.

34:57 It was a tick of approval from someone who

35:00 had built a reputation on being slow and careful.

35:03 If old man Buffett, who apparently won't even spend money on a new car,

35:08 is spending money on your firm,

35:10 it's a pretty good sign to everybody else that you are in a good position.

35:15 It was because of this good PR that he

35:18 got what most analysts considered a sweetheart deal

35:21 that returned over 80% annualized returns over just

35:25 the next 5 years with a large degree of security.

35:29 Today the net asset position of Berkshire Hathaway is around $670 billion

35:34 depending on the markets of the day you actually watch this video.

35:40 But that company itself has a market capitalizations of almost $1.1 trillion.

35:46 Put another way, if you somehow managed to buy

35:50 the entire company for its current market price,

35:52 you would get a pool of assets with a sticker

35:55 value worth just over half of what you paid for it.

35:58 So then why are profitdriven investors paying almost twice as much

36:03 to buy assets through this company

36:05 instead of just buying similar assets directly?

36:08 This is especially confusing when you realize that they

36:11 publicly share which companies they are invested in.

36:14 So if you wanted to, you could just copy them.

36:17 But really, there are three reasons why people still pay the Berkshire premium.

36:20 The first is because there is some accounting trickery that does make

36:24 their asset portfolio look a little bit skinnier than it actually is.

36:28 The second reason is to get access to private market investments without

36:31 having to deal with all of the nonsense of typical private equity firms.

36:36 And the third is because people believe

36:38 that Buffett is the best steward of their money.

36:41 They are not just buying an overpriced bag of assets.

36:44 They are also buying the man filling it up.

36:47 Now, this could present a problem in 3

36:50 months time when Buffett officially steps down.

36:52 He has trained some very competent successes.

36:54 But whether it's logical or not, Buffett's ability to win friends and influence

36:59 people has also won deals and influenced markets.

37:01 A lot of people buy stock in Berkshire just so they can

37:06 attend the now infamous shareholder meetings just to hear Warren Buffett speak.

37:10 The company may technically be the same without him,

37:14 but it also won't be the same without him.

37:18 There probably won't ever be another investor quite like Warren Buffett.

37:23 partly because he was a talented

37:25 operator who recognized his privileges and partly

37:28 because one of his biggest privileges was

37:30 the historical time frame he operated in.

37:33 Go and watch this video next to find

37:35 out why inequality only gets worse over time,

37:38 apart from those few years when Warren Buffett was just getting started.

37:42 And don't forget to like and subscribe to keep on learning how history works.