How Warren Buffett Made His First $1 Million

So, in this video, we're going to talk about how Warren Buffett made his first million dollars and what you can learn from it to make yours. Warren Buffett is currently worth $100 billion and built a company that is worth $650 billion. If you're watching this video, I'm assuming you probably aren't yet a billionaire based purely on the fact that there simply aren't many of them out there.

Nearly all of the content that is created on Warren Buffett is about how he's investing now. As someone who is worth a hundred billion dollars and manages an investment empire that is approaching $1 trillion in value, what if I told you that while it's helpful to study what he's doing now, it is even more helpful to study what Buffett did before he was insanely rich? This is because the strategies that Warren Buffett used to get to a million dollars are vastly different from the strategies he uses now, due to the large amounts of money he is now managing.

We are going to dive deep into the strategies Buffett used to hit that first million dollars, so you can take the teachings from this video to help you out on your own wealth-building journey. But first, make sure to like this video and subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Now, let's jump into the video!

So, our story starts in the booming metropolis of Omaha, Nebraska, in the year 1936. Warren Buffett is 6 years old. This is where the seeds of Buffett's current fortune would be planted. Buffett was laser-focused on getting rich. In fact, he even told his family when he was a kid that if he wasn't a millionaire by the age of 30, he would jump off the tallest building in downtown Omaha. Talk about a reason to be super focused on getting to that first million!

One of the key takeaways you will learn from studying Buffett is the power of compound interest. Buffett compares compound interest to rolling a snowball down a long hill full of wet snow. The snowball starts out very small, but by the time it reaches the bottom of the hill, one's tiny snowball is now massive. One of the key variables in compound interest is time, and Buffett wasted no time getting started on his wealth-building journey.

At 6 years old, he would go door-to-door selling whatever made sense: gum, Coca-Cola, even magazine subscriptions. The business model worked like this: he would buy a pack of six whatever for 2 cents and would sell that same six-pack door to door for 30 cents, making a little less than a penny per can in profit. While this door-to-door sales business was a good way for Buffett to get started, he learned pretty quickly that he needed a better business.

He learned two very important business lessons in this venture. The first is the importance of what is referred to as margins in business. Put simply, a margin is just the difference between what you buy something for and what you sell it for. This door-to-door sales business was low margin but made less than 1 cent for each can he sold. In order to hit the $1 million target, Buffett would have had to sell well over 100 million cans of Coca-Cola. Given that the entire population of Omaha was only 220,000 in 1940, that means Buffett would have had to sell every single person in Omaha 455 cans of Coca-Cola to make $1 million in profit. Very tough for one single kid to do.

The second lesson is the importance of scalability in business. Buffett needed a business idea that he could scale, or put another way, a business that would make him money without him working. During these early ventures is when Buffett made his first investment in the stock market at just 11 years old. Having never been a big believer in portfolio diversification, Warren put virtually his entire net worth into just one stock: City Services Preferred.

Now, by this time, Buffett had saved up a whopping $120. Okay, now before you laugh at that seemingly small amount, keep in mind that the same amount would be worth around $2,300 in today's money. Quite the impressive amount for an 11-year-old! Even at that young of an age, Buffett had already realized the power of compound interest and wanted to start having his money work for him by generating investment returns. So, Buffett went all in and purchased three shares of this company, using nearly every single dollar he had to his name.

And since he is Warren Buffett, after all, I'm sure you're assuming the stocks skyrocketed as soon as he bought it, right? I mean, Buffett is the Oracle of Omaha, after all. Well, that's not entirely the case. Nearly the day after he put his entire net worth into this one stock, the stock price began a steady decline—a feeling that all of us investors can relate to all too well. Buffett watched in terror as seemingly every day the stock price declined, shrinking his net worth by the day. This fact was made even worse by the fact that Warren convinced his sister to invest alongside him.

The story goes that his sister would consistently remind him how much money he had lost her by recommending that stock. Eventually, the stock price did recover, and Buffett cashed out for a measly profit of $5. Young Warren couldn't handle the stress of watching the price fluctuate. It turns out that Warren sold too early, as the stock price went on to double, triple, and even quadruple in price. This experience taught Buffett some early lessons on investing that would be foundational in turning him into the greatest investor of all time.

And hey, this should make any investor watching this feel a little bit better about having ever sold a stock too soon! So, fast forward to Buffett at age 14. His net worth has grown to $1,000, or approximately $155,000 in today's money. This is around the time Buffett came across the first book that would truly change his life. Buffett had read through nearly every book in the Omaha Public Library about investing and business, but there was one book in particular that caught his eye.

The book was titled 1,000 Ways to Make $1,000. I must admit, a brilliant title for a book! As you probably guessed by the title, this book contained a thousand different ways that someone could make $1,000. Remember how Warren had the goal of hitting that $1 million net worth goal? Well, I don't think it was lost on him when he saw the book that if you multiply the 1,000 ways by the $1,000, it got you a million.

If this book was legit, this was all Buffett needed to hit that first million. This book was published in 1936 and had a powerful message: never had it been easier for someone with little amounts of capital to start their own business; all they had to do was start. Now, this book was written over 80 years ago, well before the age of the internet, software, and social media. Just a quick aside: even though it may have been the easiest time in history to start a business back when this book was written, I think now it is literally a hundred times easier. This is because of the internet and software. I would love to see an updated version of this book made for the year 2022.

Anyways, I digress. Buffett used the book 1,000 Ways to Make $1,000 to give him even more ideas for his entrepreneurial ventures. Buffett's various little businesses helped him continue to progress towards his $1 million goal. The next year, at the age of 15, Warren's net worth had doubled from the year before. His net worth now stood at $2,000, or around $30,000 in today's money.

This is the year he bought his first entire business—all at the age of 15. Buffett bought a 40-acre farm in Nebraska for $1,200, putting 60% of his net worth into one asset. Having never been much of a fan of hard manual labor, Buffett partnered with a local farmer. Buffett would provide the land and the farmer would do all the work. The pair would then split the profits.

At the age of 15, Buffett understood a lesson that most people never fully understand: the power of passive income. Now, I cringe a little every time I say that word because now the word passive income is associated with online internet gurus. These gurus are far from entirely honest. When the teenage Buffett bought the farm, it produced income for him without him having to do any more work.

Let's say 15-year-old Warren was able to earn $1,000 a year from his various entrepreneurial endeavors. Additionally, let's say that his farm is able to generate an additional $400 a year for him. This means that his ownership of the farm business was able to increase his earnings by 40% without him doing any more work. This was an important shift in the progression of Warren's net worth trajectory. Previously, his income was a function of his time, meaning how much he made was based on how much time he spent delivering newspapers or selling things door to door.

Now, he was able to use his money to generate income for him, as opposed to just his time. In effect, his money was doing the work for him. This is a concept that has made Buffett one of the richest people in the world. Now his company, Berkshire Hathaway, will buy a business for, let's just say, a billion dollars. Buffett will not be involved in the day-to-day operations of the business at all yet each month the manager of that business, Buffett bought, will send the profits the business made to Buffett at the headquarters in Omaha. The money will be used to buy even more businesses.

Now, these additional businesses will also send their profits to Buffett at the headquarters. This so-called flywheel effect of having money work for you is how Buffett built Berkshire Hathaway into one of the largest companies in the world. But in order to get this flywheel moving, you first have to have money. This brings us back to the story of teenage Warren.

By age 16, Buffett was making $175 a month delivering newspapers. Just to put that in perspective, the median household income in the United States around that time was $275 per month. At just 16 years old, and while being a full-time high school student, Buffett was making around two-thirds of the national median household income. That's a ton of money for a high school student!

However, it wasn't always that way. Growing up, Buffett worked for his grandpa, Ernest, at the local grocery store he owned. The way Warren Buffett tells the story is that he would work 10-hour shifts for $2. This works out to an hourly wage of 20 cents. This taught Warren an important lesson about the importance of working for yourself.

In Buffett's job as a newspaper delivery boy, he was paid not on an hourly wage, but instead on how many newspapers he delivered. Buffett, always trying to earn as much money as possible, came up with clever ways to maximize the number of papers he could deliver during his morning route. Knowing that the more papers he delivered, the more he got paid, had Warren instead stayed working for his grandfather at the grocery store, there is no way he would have been able to make so much money as a teenager.

This is around the same time Buffett started what would probably be his most successful business in percentage terms, turning a $25 initial investment into $1,200 in the span of just a couple of years. This business was an empire of pinball machines. The business plan was simple: Buffett would buy an old, broken pinball machine for $25. While new pinball machines would sell for $300, he would then get his friend to fix up the pinball machine to make it look new again.

Using this method, Buffett was able to purchase pinball machines that looked new for a fraction of the cost. He has always been a fan of inefficient markets. Buffett would then go around to local barber shops and present the owner with a proposition: let me put this pinball machine in your barber shop, and I will give you half the profits. This was a win-win situation for Warren and the barber shop owner. The shop owner would get a new revenue source, and Buffett would get free real estate for his pinball machine and a steady supply of customers.

The business was a hit from day one. Warren kept reinvesting his profits, purchasing more used pinball machines until he had a small empire of them throughout the community. Just like the farm he bought a couple of years before, this fleet of pinball machines generated cash for Warren without him having to be directly involved in the work. He could just be sitting in class or delivering papers on his paper route, and the pinball machines would still be producing cash for him.

Before graduating high school, Buffett sold this pinball business for $1,200. Just a couple of years after starting it with an original investment of $25, Buffett was able to increase his money by a factor of 48 in just a couple of years—by far Warren's best investment of all times in percentage terms.

So, this brings us to 19-year-old Warren Buffett. Buffett's net worth at this age was $9,000, or around $100,000 in today's money. This year marked an important change in Buffett's goal of getting to $1 million. This is when Buffett shifted from being Warren the small-time entrepreneur to Warren the investor. This was caused by Buffett stumbling across a book that changed his life and put him on the path to becoming the greatest investor of all time.

This book was The Intelligent Investor by Ben Graham, the father of what is referred to today as value investing. This book laid out a framework of fundamental analysis in stocks that immediately clicked with Warren. He was so impressed by this book that he wrote a letter to Ben Graham, who was a professor at Columbia University in New York City. The letter went something like this: I love your book. I thought you were dead, but now that I know you're alive and teaching at Columbia, I would really like to come learn from you.

To Warren's amazement, he got admitted to the school, even though he applied after the deadline. This was the true beginning of Warren the investor. Warren Buffett excelled in Ben Graham's class. He was the star student and the first and only student to have ever received an A+ in the class. As graduation approached, Warren practically begged Ben Graham to let him work at his fund as an investment analyst. The story goes that Buffett even offered to work for Graham for free.

Graham's sponsor to Buffett's offering of working for him for free was that it was still too much money to pay. It took years of back and forth until Buffett was finally hired as an analyst at the firm. Buffett was 24 years old when he moved back to New York City to work for Graham's investment fund. Warren was immediately the star of the firm. Buffett's salary was $1,000 a month, but his successful investing earned him way more.

At this time, Buffett and Graham's fund weren't investing in blue-chip stocks such as AT&T, General Electric, and General Motors. Instead, they were investing in tiny, obscure stocks that were flying under the radar. These stocks were referred to as "cigar butts." Now, these companies were very low quality, meaning many of them were destined to go out of business soon. However, these stocks had one very good quality—they were so darn cheap! Many of these stocks were trading for less than their net asset value.

Let me explain what I mean. Let's say there was a company that made horseshoes back in the 1950s when Buffett worked at Graham's firm. As cars became more accessible and cheaper, many people would trade in their horses for cars. It was clear that these horseshoe manufacturers would eventually be put out of business. This is just the nature of capitalism. However, these kinds of stocks would be so unfavorable with investors for obvious reasons that the stock price would plummet.

So, no investor wanted to invest in such a lousy company. Sometimes, these stocks would become unpopular and so cheap that they would actually become great investments. This is where the concept of the cigar butt comes in. Let's say our horseshoe manufacturer had a factory, inventory, real estate, and cash that was worth $1 million, and let's say because of how unpopular the stock was, the entire company was selling in the stock market for, let's say, $400,000. Buffett would invest in the stock and wait for the stock market to realize the huge discount the stock was trading at to its net asset value.

Once the company was back to trading at the $1 million value that its assets were worth, Buffett would sell, having more than doubled his money. Buffett got so good at this type of investing that he was producing amazing returns and making the firm and himself so much money that he was having so much success that after working for Ben Graham for only two years, Graham offered to make Buffett a partner with the firm as Graham wanted to retire. Surprisingly, Buffett turned his mentor down. He said no! Always true to his entrepreneurial roots, Buffett moved back to Omaha and decided to start out on his own.

At the age of 26, Warren Buffett opened his own investment partnership. Having been extremely successful investing while at Graham's firm, Buffett had seen his net worth skyrocket; he was worth $175,000, or approximately $1.7 million in today's money. At this point, Buffett thought he was going to retire. His idea of retirement was investing his money and just living off the investment returns he generated to support his wife and kids. Imagine how much different things would have turned out if this actually happened!

Instead, people in Omaha heard about an investment prodigy returning back home. So, these people approached Buffett and asked him to invest money for them. This was the beginning of what was referred to as the Buffett partnership. The Buffett partnership was, in many ways, an early version of what is referred to today as a hedge fund. Buffett would invest money on behalf of the group, and he would get a percentage of the profits as compensation. Ultimately, the payout structure was set up in a way that would result in Buffett getting a quarter of the profits he generated after surpassing a 6% annual return.

The Buffett partnership generated incredibly impressive returns using the same cigar butt method of investing that Buffett mastered while working under Graham. From 1957 to 1968, the Buffett partnership earned a 31.6% average annual return with no losing years, compared to 99.1% for the Dow. Put in another way, Buffett's partnership returned 1,500% for investors over that time period compared to just 161% for the Dow.

Warren Buffett's investment strategy focused on investing in favorable companies—companies like Dempster Mill, which Buffett invested in in the year of 1956. Dempster Mill was a manufacturer of farm equipment. The company had made good profits in the past, but not anymore. As a result, the stock price cratered as other investors sold. Each share was selling for around $30. However, what attracted Buffett was that each share had $75 in book value—book value meaning the value of the inventory, real estate, equipment, and cash that the company owned.

Buffett knew that if he bought the stock at such a big discount to its book value, he could more than double his money as the price he paid for that stock increased closer to its book value. Buffett, through his partnership, gained control of the company by purchasing a substantial amount of its stock. Buffett had the company sell off some of its assets to make it more efficient. Eventually, he was able to find a larger company to acquire Dempster Mill at $80 per share. This price was actually more than the company's $75 book value at the time Buffett acquired shares.

This generated an impressive 185% return for Buffett and his partnership. Dempster Mill is just one example of the kind of company Buffett invested in on behalf of the partnership. Because of the small size of these companies, Buffett didn't have much competition and was always able to find stocks selling for cheap.

At the end of 1961, Buffett was 31 years old. At this time, he was able to grow the size of the partnership's stock portfolio to $7.2 million in assets—around $65 million in today's money. A far cry from the $105,000 portfolio the partnership started with just a handful of years earlier. Buffett's stake in the partnership was worth $1,255, or roughly $9 million in today's money. At just 31 years old, Buffett sure accomplished his goal of a $1 million net worth— even more impressive when you consider that this was in the year 1961. As the old saying goes, the rest was history.

Buffett went on to continue generating amazing investment returns. Buffett's current net worth is in excess of $100 billion. After spending hours researching for this video, I have realized that there's a ton you can learn from Warren Buffett's path to $1 million that you can begin applying to your own wealth-building journey right now.

Now here are my biggest three takeaways. The first takeaway I learned from studying Buffett's path to $1 million is to be entrepreneurial. A big reason why Buffett was able to hit the $1 million milestone so early was because he was able to get a sizable amount of money to begin investing through his entrepreneurial ventures. Whether it's delivering newspapers or selling Coca-Cola door to door, Warren was making more money doing his entrepreneurial ventures than if he was working a more traditional job.

There's no way Buffett would have been able to save $100,000 in today's money at 19 years old had he kept working at his grandfather's grocery store for 20 cents an hour. This brings us to lesson number two: buy assets that work for you. Buffett used the money he earned from his entrepreneurial ventures to buy assets that generated income for him without him doing any more work. Whether it is a 40-acre farm or an army of pinball machines, Buffett learned a concept early on that most people never fully grasp: the way to truly build wealth is to own assets that produce cash for you.

Whether that is farmland, real estate, or stocks, owning assets is how you get wealthy. Lesson number three is to be frugal. There's an old saying that goes like this: it's not how much you earn; it's how much you keep. Even though Warren was making a ton of money in the form of income, the only reason he was able to build wealth so quickly was because he didn't spend that money. Going back to the previous lesson, he instead used that money to purchase assets that generated even more money for him. This created a wealth-building flywheel.

So, there we have it! I hope you learned a lot from this video, and make sure to like this video and subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. If you liked this video, make sure to check out the video I did on Charlie Munger and how to hit your first $100,000. It's full of practical, life-changing wisdom from one of my favorite people to study. As always, thanks for watching, and talk to you soon!