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You're listening to Tip over the course of six decades while leading Berkshire Hathaway, Warren Buffett has beaten the S&P 500, including dividends, by more than 150 times. It's a record that almost just defies belief. But what makes it even more remarkable is just how he did it. He accomplished this by utilizing minimal leverage and avoiding the whims of Wall street and their pursuits of short term results, all while conducting business in an admirable, transparent and really well aligned manner. He's one of the best examples in business of patience, discipline and a razor sharp focus on intrinsic value. So today we're going to explore Warren Buffett in more detail through the lens of one of his biographies that was written about him, which is Buffett the Making of an American Capitalist by Roger Lowenstein. The book does an exceptional job of sharing the details on some of Buffett's legendary deals, but also showing the more human side of Buffett, highlighting both his good and not so good qualities. We'll cover his early fascination with numbers, like counting soda bottle caps from a nearby gas station and how he delivered 500 newspapers a day as a teenager. You'll hear about the profound influence of his father, Howard Buffett, and how the teaching of Ben Graham transformed Warren Buffett from a precocious entrepreneur into an investor with a winning system. We'll also explore a period that interests me significantly, which was when Buffett achieved his most astounding results, compounding his personal account at 56% per annum in the early 1950s. We'll also analyze Buffett's journey from investing in low quality cigar butts to his evolution to investing in high quality businesses. And we'll highlight why Buffett's philosophy kept him highly concentrated in his highest conviction positions. So if you've ever wondered why Buffett runs a public company while living an intensely private life, or why he's mastered simplicity in a world that rewards complexity, or just pondered about what truly separates the great investors from the top 001%, Buffett's story is an absolute masterclass. Now let's get right into this week's episode on the book the Making of an American capitalist. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve. Foreign welcome to the Investors Podcast. I'm your host Kyle Grieve and today I'm excited to speak about one of my favorite investing biographies, Buffett the Making of an American Capitalist by Roger Lowenstein. I read this book a second time to prepare for this episode, and I must say, it's a very, very well written biography. Lowenstein does a great job of narrating Buffett's early life and weaving in just some excellent, excellent storytelling along the way. So today we're going to go into some of the stories that have helped shape Buffett into who he is, as well as some of the stories that have shaped the public's perception of Warren Buffett. But as with all biographies, we're going to start at the beginning and look at how Buffett's childhood shaped him. Now, Buffett was obsessed with a few things at a very young age that I think are very, very rare. One of his first money making ventures began just at the age of six years old. Now, during that time, he would do things such as buy a six pack of Coke for 25 cents, sell them each for 5 cents, and then pocket a nickel for himself in profit. He did this for his grandfather's grocery store and even took some time from a rare family vacation in Iowa to sell some Coca Cola bottles. Now, by the age of nine, Buffett was showing an additional affinity for numbers. Buffett would count bottle caps of different drinks from a nearby gas station with his friend. And it's funny to think about it, because this was sort of an entrance into scuttlebutt, which was a type of research that Warren became very well known for. He wasn't just counting all the caps haphazardly. He was doing it with purpose. He was separating them into specific brands. Therefore, you know, he was really examining the microcosm of the competitive landscape of the soft drink industry. And it's funny to think he wouldn't start buying Coca Cola for nearly five more decades. These idiosyncrasies were just one of many. Buffett also enjoyed thinking about things like memorizing city populations, looking at the frequencies at which individual letters appeared in newspapers, looking at lifespans and how often a ball would bounce off a paddle that he was playing with. One of Buffett's major influences was his father, Howard, whom we'll talk about quite a bit today. One of his first lessons to Warren and his siblings was to understand the value of tangible assets. So when Roosevelt was president, Howard believed that he would destroy the dollar. So he gave the children things like gold coins, and he purchased items such as crystal chandeliers, silver flatware, Oriental rugs, and even a farm. All things that are Obviously tangible, right? And he did this specifically because he felt that these kinds of items provided good protection against inflation. Now, Howard was a primary influence that sparked Warren's interest in the stock market. Howard worked as a stockbroker for a time, and Warren would visit him at work and spend hours just infatuated with stock and bond certificates. Now, near his father's office was another building that had stock quotations that Warren would frequently. As a result of spending time at his father's office and reading, he got the courage to purchase his first stock at the ripe old age of only 11 years old. Now, the first stock that he ever bought was something called Citi's Preferred Shares. And just to give you an idea of Warren's incredible memory, at the age of 88, he wrote in one Berkshire letter, the year was 1942. I was 11 and I went all in investing $114.75. I had began accumulating at age 6. What I bought was three shares of Citi's preferred stock. I had become a capitalist, and it felt good. But, you know, his experience with his first stock investment was probably pretty far from good. So Buffett bought three shares for himself and three for his sister at around $38. After purchasing, the share price plummeted to $27, which obviously caused a lot of concern for both Warren Buffett and his sister Doris. Warren ended up holding and selling for a small profit when the stock price went back up to $40. Unfortunately, the stock price continued to rise to about 200, leaving Warren with his first major lesson regarding the mistake of omission, which is to sell too early. Warren was more skewed towards learning about business the old fashioned way. He had a slew of different money making activities in his teenage years, helping him understand how business was conducted and run. So a couple of the different ventures he had, you know, he would go around golf courses, find golf balls, then resell them to other golfers. He built a small paper delivery empire, delivering about 500 newspapers daily and netting himself about $175 a month. He even bought farmland. He rented a car that him and a friend restored and made income that way. And perhaps my favorite story was just the pinball business. So a friend of Warren's, Donald Danley, bought a pinball machine in the senior year of high school. Now picture an adolescent Ward and his friend Danley playing pinball in the basement, frustrated that the machine can just continue breaking down. Now, luckily for Warren, Danley had expertise in fixing the device each time that it broke Down. This got Warren thinking. What if they put a pinball machine in a local barbershop and rented it out? Dan could handle any of the needed maintenance. So Warren and Donald approached a barber who agreed to have a machine in his shop with a 5050 split. And at the end of the first day, Warren And Donald found $14 in their machine. Warren's eyes lit up as he calculated the potential profits from this business venture. That taste of success led him to continue pressing on. Within a month, their pinball machines were in three more stores. That led to continued growth into even more barbershops. They eventually called the business Wilson coin operated machine company, and they were making about $50 a week. Warren's part of the business was to buy the pinball machines for about $25 to $75 and write regular financial statements. Donald Danley would fix them. And that was just the business model. However, since Warren and Donald were only in high school at the time, they had to invent a story that they actually worked for someone else, which they obviously found very, very amusing. Now, I like the story because it's just so easy to relate to. When I was in Omaha this past May to see Warren at his final Berkshire annual general meeting, we got a chance to go to one of his favorite stores, which is Hollywood Candy. Now, if you want to understand what Hollywood Candy's like, picture your favorite candy store, then quadruple its size, and you're probably going to be in the right neighborhood. There's even a video floating around on the Internet of Warren Buffett and Bill Gates walking through the store. It's very wholesome, and they have a little shrine to it inside of the store. Now, to tie this back to the pinball story about Buffett, Hollywood Candy has this room that's full of pinball machines that appear to be built probably around the time that Buffett would have been running his pinball business. So while walking around this room, it really made me think about the pinball business and if any of the machines that were maybe inside Hollywood maybe once belonged to the Wilson Coin Operated Machine Company. One part of the book that I found fascinating and telling of Warren's future abilities as a father and a husband was his relationship with his mother. It was rocky, to say the least. Warren's mother, Layla, was a sweet natured woman, but she could turn on a dime without any warning. She could become just furious. She'd rage at Warren and his sisters for hours at a time. She would compare them to other children, criticize their every single behavior, and bring up their failings. From the sounds of it, these mood changes were completely unpredictable, which made them all the more shocking to Buffett and his sisters. Concerning this, Lowenstein writes, once in more recent years, one of Warren's sons who was home from college called Layla to say hello. She suddenly lit into him with all her fury. She called him a terrible person for not calling and detailed his supposedly innumerable failings of character. And this went on for about two hours. When Warren's son put down the phone, he was in tears. Warren said softly, now you know how I felt every day of my life. I think this likely would be considered a pretty traumatic event for Warren, and it's hard to assume just how much of an impact it's had on him for his entire life. But it's hard to imagine it hasn't had some sort of effect on him, especially as a father. Perhaps his distance from his children was born out of a fear that he would have some of his mother's fury inside of him as well. We'll never know for sure. And then in terms of ambition, perhaps some of his ambition came from wanting to show his mother that he had more value than she was attributing to him. This is all speculation, of course. Warren is an intensely private person, but it's hard not to see how events like this could have shaped him, for better or worse, into the person that he is today. Let's now chat about another one of Buffett's biggest inspirations, Benjamin Graham. Buffett went to Columbia to take Graham's course on investing. This was about a year after the Intelligent Investor, Graham's most well known book, was released. Buffett already knew that Graham was his guy. His concepts resonated with him more than others because speculative techniques, charts and hot tips had burned Warren in the past, and Graham was the antithesis of these speculative strategies. What was the core learning that Buffett took from Graham? I think there are three big ones that he used for the entirety of his investing career. The first one is simple. It's the margin of safety concept. The second One is the Mr. Market analogy. And the third one is just treating shares as fractional ownerships of a real business. Let's go over the three of these in a little more detail. So for those who are unfamiliar with the margin of safety, the book has one of the most eloquent definitions of the margin of safety that I've ever read. To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age, or that a man is heavier than he should be without knowing his weight. Taking this one step further, we can observe how Buffett applied this exact mental model to a company that he acquired for Berkshire Hathaway in 2008. While reminiscing about the investment, Buffett said, I came to the conclusion that PetroChina was worth a hundred billion. And then I checked the price, and it was selling for roughly 35 billion. Now, if I thought the company is worth 40 billion and had been selling for 35 billion, then at that point, you have to start trying to refine your analysis a little bit more. But there's just no reason to refine your analysis. I mean, I didn't need to know whether it was worth 97 billion or 103 billion if I was buying it at 35 billion. Any further refining of analysis would be a waste of time when what I should be doing is buying the stock. If you have to carry it out to three decimal places, it's just not a good idea. It's like if somebody walked in the door here and they weighed somewhere between 300, 350 pounds. I might not know how much they weigh, but I would know that they were fat. That's all I'm looking for, something that's financially fat. And whether PetroChina weighed $95 billion or $105 billion didn't make much difference. It was selling for 35 billion. Now, the second major learning here was the Mr. Market analogy. This one is probably very well known by all of our listeners, but if you missed it, here it is. Picture the stock market as an ornery, moody neighbor. Each morning, they shout across their friends the stock prices that they're willing to buy and sell to you. On days where they're elated and happy, they might buy stocks from you at inflated prices. And on days when they're depressed or sad, they'll sell you their shares at a steep discount. The concept is simple. Use the market as a tool to serve you, not the other way around. When the market is feeling exuberant, you're less likely to find attractive deals. In that scenario, holding or selling is often the necessary action that you should take. But when the market is depressed, there will be opportunities everywhere, and that's when it's time to deploy capital. There are innumerable examples of Buffett using the Mr. Market analogy in his favor. Basically, whenever the stock market has been shocked by an event which caused mass selling, Buffett licked his lips and got to work. You can look back at events such as, you know, the 1973, 1974 bear market, which happened after he decided to close a partnership because he couldn't find any ideas. So in 1987, after Black Monday, Buffett was in there buying, buying, buying. Just, you know, name your crash and Buffett's probably there making large purchases. Other examples of the dot com bubble, the great financial Crisis and the 2022, 23 market decline. Buffett was very busy during all of those times. Then, the final investing lesson here that Buffett learned was the importance of treating shares as a fractional ownership of a business. When listening to Buffett, he often imagines himself buying the entire company. I think this is a mental model that is in complete alignment with Graham's concept of thinking of shares as a fractional ownership. If you imagine yourself buying an entire company and like those prospects, then chances are you're also going to enjoy the prospects of being a fractional shareholder as well. Now there's one area of learning that I focused on, which is the share structure of a business. Buffett liked businesses where going forward, if you owned 5% of that business, you'd likely own 5% or more of that business in the future, your ownership stake would stay the same because the company tended to be light on stock based compensation or dilution through things like warrants. Instead, Warren looked for companies that had excess cash to reinvest into the business at high returns and then pay a dividend or repurchase shares. Now, I know I personally sometimes overlook this. If you own a business in its entirety and think that the cash flows will increase at, let's say, 20% per year for the next three to five years. You also have to forecast where the outstanding shares will end up. For instance, when I first bought Inmode, I didn't really take this into account. I purchased it in about 2020, and during that period I owned it until early 2023. My ownership was diluted by about 6% compounded annually. If I assume that my returns would approximate the cash flow growth of the entire company, I would have been sorely mistaken. Because of dilution, the cash flow growth per share would have shrunk to about 13% instead of that 20% example that I had before. And you know, even if you owned a private business, you could still end up lowering your ownership stake if you were forced to, let's say, refinance your business in exchange for shares. So if you use this metal model, which I think all investors definitely should, just don't forget to examine the capital structure and take that into account to ensure that you can live with any future dilution. Let's take a quick break and hear from Today's sponsors.