WASHINGTON - NOVEMBER 14: Berkshire Hathaway Chairman and CEO Warren Buffett listens during a hearing before the Senate Finance Committee November 14, 2007 on Capitol Hill in Washington, DC. The hearing was to examine the uncertainty in federal estate tax planning under current law which will change every year from 2008 through 2011. (Photo by Alex Wong/Getty Images)
Investment

The early days of Warren Buffett – a guide for family offices

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Warren Buffett might be the most famous investor in the world, but it took him a long time to become so. A new book looks at the early days of Buffett’s extraordinary investment career and provides a useful guide for investors like family offices looking to build a lucrative -and satisfying – portfolio of investments.

Entitled, The Deals of Warren Buffett: Volume 1, The First $1m and written by Glen Arnold, an academic and investor, the book tells the story of how Buffett’s investment philosophy was developed and provides lessons for today’s investors. Arnold makes the point that it took Warren Buffett nearly four decades to make his first $100 million, and there were many mistakes along the way. It shows “the get rich slowly approach” that is often forgotten in the high-octane get rich quickly tech world of today when looking at the Buffett story.

“Many other writers on Buffett address what he invested in and how much he made from it,” says Arnold. “But I wanted to know why. What were the special characteristics about the companies Buffett chose that made them stand out? Was it in the balance sheet numbers, the profit history, the strategic positioning and/or the qualities of management? I wanted to know the detail. How did Buffett go from step to step, from having virtually no money to being very rich?”

The book does this by looking at case studies of Buffett’s early investments and considers the lessons learnt from each of these investments. One that stands out from the perspective of a family office looking to purchase direct stakes in privately controlled businesses is Buffett’s purchase of Illinois National Bank and Trust in 1969.

The purchase was perhaps one of the early examples of Buffett’s ability to invest in outstanding businesses at reasonable prices. It also shows his ability to identify great business through their management. And to chose managers who would “run their businesses for Berkshire with every bit of the care and drive that they would have exhibited had they personally owned 100% of these businesses”.

Another useful lesson Buffett learnt in these early years was to buy high proportions of great companies like he did with the purchase of Illinois National Bank, buying 97.7% of the bank.

The book also has a foreword by the academic Lawrence Cunningham, arguably the greatest expert on Buffett and Berkshire Hathaway.

As Cunningham says in the foreword: “By returning to Buffett’s earliest investments – such as GEICO and See’s Candies – and adding a contemporary understanding, professor Arnold contributes useful history and lucid investment analysis, providing context, color, and lessons from Warren’s school days through Berkshire circa 1978… All but the most expert aficionados of the Berkshire saga will find valuable knowledge here.”

Well worth a read for those family offices looking to emulate the great investor and build mini-Berkshire Hathaways, which in Family Capital’s experience most of them want to do.