Warren Buffett: How to Make Your First $100,000 (5 Steps)

If you want to make your first or next one hundred thousand dollars, you need to follow these five simple lessons from Warren Buffett. The majority of content out there about Warren Buffett gets it completely wrong. That content focuses on how Warren Buffett invests and makes money right now. But there's one big problem with that: Warren Buffett is currently a billionaire, and unfortunately for us, we aren't yet billionaires.

The way a billionaire goes about making money is different from that of the average person. So, this video is going to be different. This video is going to focus on how Buffett made his money when he first was starting out, a topic incredibly valuable if you're watching this video.

By the time Buffett was 30, in 1960, he was worth over 1 million dollars. Adjusting for inflation, that comes out to a mind-boggling 10 million dollars at just 30 years old. The craziest part about this is that what Buffett did was super simple and can be replicated by you.

So, with that background, let's get into the list. The first lesson from Warren Buffett's early years is to look in the inefficient markets. Today, Warren Buffett is known for investing in blue-chip large companies, and that list includes household names like Apple, Coca-Cola, American Express, Bank of America, and Amazon. Given that Warren Buffett's stock portfolio consists of nearly exclusively large companies, one would think that Buffett loves investing in big companies, right?

Well, that's not actually the case. Due to Berkshire Hathaway's massive size, Buffett has no choice but to invest in almost entirely large companies. Berkshire's current market cap is nearly 750 billion dollars, and this means that even a massive 7.5 billion dollar investment would only represent one percent of the value of Berkshire. Buffett has actually referred to Berkshire's large size as a significant disadvantage when it comes to generating high investment returns.

If it was up to Buffett, he would prefer to instead be able to focus on smaller companies. The smaller the investment opportunity, the more likely it is going to fly under the radar of large investors. This is why Buffett has repeatedly said that he recommends individuals focus on what he refers to as inefficient markets. Inefficient markets are investment opportunities that, for one reason or another, are getting overlooked by most people.

Here is a story from Buffett's early days and how he took advantage of an inefficient market. The year was 1954. Buffett was a bright-eyed, ambitious 24-year-old. As a side note, it's kind of strange to imagine Buffett as anything but an old man. In our story here, Buffett was determined to do whatever it took to reach his 1 million dollar net worth goal. Buffett was living in the New York metropolitan area, working as an investment analyst for his mentor Ben Graham's fund when he caught wind of an interesting investment opportunity.

Rookwood and Company, a chocolate maker in Brooklyn, was making quite an unusual offer to investors. The price of cocoa beans, a key ingredient used in making chocolate, had recently skyrocketed from five cents a pound to north of 60 cents due to a temporary shortage. The company was eager to capitalize by selling its excess inventory. However, a straightforward sale would incur almost a 50 percent tax on the proceeds, so management of Rookwood devised a clever way to escape the levy.

There is a tax loophole that allowed a company to avoid a tax hit if it distributed inventory among its shareholders. Following that rule, Rookwood stopped selling cocoa butter and assigned 30 million pounds of its cocoa bean inventory to be distributed to shareholders. The confectioner then offered to buy back its stock from investors in return for cocoa beans at an exchange rate of 80 pounds per share.

The repurchase program allowed it to leverage the elevated price of cocoa, avoid hefty taxes, and reduce its outstanding shares in the process. However, Buffett realized that Rookwood was effectively selling its beans at a discount to the current market price of the commodity. He spent the next few weeks buying shares, exchanging them for cocoa beans, and selling the beans on a commodities exchange.

Using numbers to demonstrate what was happening, Buffett could buy shares in the company for sixty dollars each and then would receive eighty dollars worth of cocoa beans from the company in exchange for each share. He then would turn around and sell those cocoa beans, netting Buffett a quick twenty dollars per share in profit without any risk. "The profits were good, and my only expense was subway tokens," Buffett said in his 1988 letter to shareholders.

This is just one example, but it sure as heck demonstrates the point of why it's so important to look at these so-called inefficient markets. There are attractive profit opportunities if you're willing to get a little creative. The next lesson from Buffett on how to make your first one hundred thousand dollars is to start a side business. Buffett was the king of side hustles before they even became trendy.

After spending some time working for his grandfather in his grocery store, Buffett decided that he never wanted to work for someone else ever again. He knew right away he wasn't cut out for manual labor, and he hated getting bossed around. Now, you don't have to go to the extreme of never working for someone ever again, but there is still something to be learned from Buffett here.

He was able to save up the equivalent of fifty-three thousand dollars in today's money, working part-time after school and on weekends. There is no reason why you can't do something similar, especially with how easier the internet has made things. By today's standards, Buffett's side businesses seem awfully primitive. At 13, he took what would have been a mind-numbing job as a paperboy and turned it into a competition with himself.

Buffett woke up at 4:30 in the morning to deliver copies of the Washington Post, and he challenged himself to find ways to serve each of his five buildings faster. Then he found ways to track when the houses along his route had subscription magazines expiring and sold new subscriptions on the side, along with calendars. My personal favorite side business of Buffett was his pinball machine empire.

Buffett and one of his buddies bought a broken pinball machine for 25 dollars. His friend was in charge of fixing up the machine while Warren was the one responsible for finding locations for the machines. Buffett made the pitch to local barbers to let them put the machines in the waiting area in exchange for half the profits. The idea was a huge success, bringing in four dollars, or roughly 55 dollars in today's money, on its very first night.

Both the barber and young Buffett were thrilled. After a week, Buffett walked away with 25 dollars and reinvested it into another machine. He continued until there were seven or eight machines around town making him money. Talk about passive income! Buffett went on to sell this pinball business for twelve hundred dollars, or the equivalent of nearly 16,000 dollars in today's money. Quite an impressive accomplishment for a teenager.

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Now, back to the video. Here's a little story to demonstrate the power of a side business. Let's say we have two people, John and Adam. John and Adam make exactly the same amount of money at their day jobs; let's call it sixty thousand dollars a year. After paying for their respective living expenses, John and Adam each are able to save five thousand dollars a year.

After gaining some inspiration from an investor-centered video, Adam decided to start a side business. Which, as a side note, if you made it this far into the video, hopefully you're finding it helpful. Make sure to hit that subscribe button because it's my goal to help you build wealth by studying the world's greatest investors.

Okay, back to our story. After some trial and error, Adam is able to start a business that is producing an additional twenty thousand dollars for him each year after-tax income. Because Adam's day job covers all of his living expenses, the entirety of that 20,000 is able to be saved and invested, thus growing Adam's net worth.

Because of the side business, Adam is now saving twenty-five thousand dollars a year—five thousand from his day job and an additional 20,000 from the business. This is five times that of John, and this demonstrates why it's so powerful to have a side business. For me, my day job as an investment analyst in New York City covers all of my living expenses.

This means that every dollar I make from this YouTube channel is able to be invested, helping me increase my ability to build wealth. This leads into lesson number three from Warren Buffett from his early years: work in a job where your income isn't tied to the hours you work. Here's what I mean by that. When Warren Buffett worked for his grandfather's grocery store, he was paid an hourly wage.

Back in those days, it was maybe something like 25 cents an hour. This meant that if Warren wanted to make more income from his job, he had one choice: work more hours. Well, the problem is that this job taught young Warren an important lesson about himself: he hated doing any type of physical labor. Working at the grocery store was physically demanding and exhausting for him, and he did not like that at all.

Buffett realized at a very early age the value of having a job that isn't tied directly to the number of hours he worked. Compare Warren's grocery store job to when he worked at his mentor Ben Graham's investment fund. Warren was an analyst responsible for identifying attractive investment opportunities. In modern-day language, he worked for a hedge fund.

Hedge fund analysts are paid in two ways. The first is in the form of what is referred to as a base salary. This is what an analyst is paid regardless of his performance. However, that only makes up a portion of their pay in any given year. In addition to the base salary, they are also paid a bonus if they perform well. In many funds, this bonus is essentially a portion of the profits the analyst earns the fund over the course of the year.

Analysts can have a base salary of 150,000 to 250,000 a year. However, that performance bonus can bring total compensation into the high six figures and even over one million dollars a year in total pay. While obviously not everyone can or should be a hedge fund analyst, these numbers demonstrate the importance of finding a career where your income is not directly tied to the number of hours you put in on the job.

This is why some of the highest-earning people I know work in sales, consulting, or own a small business. If they perform well, they get paid—and can get paid big time. It doesn't even matter how much you earn if you aren't following number four on our list: live below your means.

When Warren was in his mid-20s, he got very well compensated in his role at Ben Graham's fund. His starting base salary was over one hundred thousand dollars in today's money—that's not even counting any bonuses he earned and income from his successful investments. Despite this high income, Buffett didn't live in a glamorous luxury Manhattan apartment. Instead, he lived in a lower-cost suburb called White Plains in order to save money.

Buffett could easily have afforded a swanky Manhattan apartment by most people's standards. He liked his job working for Graham, but he still wanted financial independence and was willing to make sacrifices to get there. Once Buffett learned about this beautiful little thing called compound interest, it completely changed the way he thought about money.

Here's a story to demonstrate the power of compound interest. Let's go back to our characters, John and Adam. John was able to save, in a vast, five thousand dollars a year from his job. But on the other hand, Adam could save and invest twenty-five thousand dollars. This is because even though Adam was making more money from his successful side business, he still focused on living below his means and resisting what is known as lifestyle inflation.

Lifestyle inflation is where people spend more money as they make more money. This essentially creates a treadmill-like effect that prevents people from being able to build wealth. The rewards from being able to resist lifestyle inflation are wonderful. Here are some numbers to prove it.

If John is able to continue to invest five thousand dollars each year for 40 years, with an eight percent return, at the end of the 40 years he will have an investment portfolio worth nearly 1.3 million dollars—not too shabby at all. However, unfortunately for John, inflation will have made that 1.3 million worth a heck of a lot less than it is today.

On the other hand, we have Adam. Adam is able to invest 25,000 dollars a year over the same 40 years, and at the same eight percent return, take a guess at how much money Adam will have—2 million, 3 million, maybe even 4 million? Nope. Adam will have a staggering 6.5 million dollars. That is over 5 million more than his buddy John.

This example demonstrates the power of living below your means, and this is why Buffett lived in a cheaper apartment in a cheaper area when he could have easily afforded a fancy penthouse. Buffett understood the power that comes from living below your means, and now you do too.

The fifth lesson from Buffett is to be a learning machine. According to Warren, being a learning machine means always learning new things and upgrading your skill sets. Buffett's business partner Charlie Munger had this to say when talking about what has been the secret to Buffett's success: "If you take Warren Buffett and watched him with a time clock, I would say half of all the time he spends is sitting on his butt and reading. If you take Berkshire Hathaway, which is certainly one of the best regarded corporations in the world and may have the best long-term investment record in the entire history of civilization, the skill that got Berkshire through one decade would not have sufficed to get it through the next decade.

With the achievements made without Warren Buffett being a learning machine, a continuous learning machine, the record would have been absolutely impossible. Without lifelong learning, you're not going to do very well. You're not going to get very far in life based on what you already know." As always, a very valuable lesson from Charlie Munger. Ultimately, by continuously improving your knowledge and skills, you are upgrading your earnings capacity.

At one of the legendary Berkshire Hathaway annual meetings, Buffett was asked what his best piece of advice was for someone worried about the economy and inflation, which, by the way, is again pretty topical here in the year 2023. Given how Warren Buffett is universally regarded as the greatest investor of all time, naturally, one would expect his answer to focus on a certain type of financial investment—maybe buying a certain type of stock, or buying index funds, or maybe even employing a specific type of investing strategy.

Instead, Buffett's answer caught the crowd off guard. He said, "The best investment anyone can make is an investment in themselves." Now, I know at first that sounds like an extremely lame answer. However, he went on to clarify that by continually investing in yourself, you are becoming better and better at what you do. If you keep up with it enough, it's not too long until you are the best in town at what you do.

When you're the best accountant, dentist, or plumber in town, you can charge whatever price you want for your services. It's essentially a license to print money. After hearing this wisdom from Buffett, it made me think deeply, and I realized I've seen this concept first-hand in my own life.

One of the wealthiest people I know is an electrician. To most people, an electrician isn't the first thing that comes to their mind when they think of the word “rich.” However, this person was one of the most highly respected electricians in the area, and he built a small company of a handful of employees and established a reputation for doing high-quality work and being very professional. He could charge whatever price he wanted, and his schedule was always full.

This electrician is now in his 50s, and he has three houses paid for, all of his kids' colleges, has nice cars, and is able to travel the world with his family. In accordance with Buffett's advice, I guarantee you this wouldn't be the case if he wasn't extremely skilled at his chosen profession.

So, there you have it. Make sure to hit that subscribe button because it helps keep me motivated to keep putting out this free content for you guys. Thanks so much, and talk to you again soon.