Warren Buffett: How to Turn $10,000 Into $51 Million

We have operated in this country with the greatest tailwind at our back that you can imagine. It's an investor's—it means you can't really fail at it unless you buy the wrong stock or just get excited at the wrong time. But if you owned a cross-section of America and you put your money in consistently over the years, there's just no comparison against owning something that's going to produce nothing.

Giving you a little perspective on how you might think about investments as opposed to the tendency to focus on what's happening today or even this minute as you go through, and to help me in doing that, I'd like to go back through a little personal history. We will start; I have here the New York Times of March 12, 1942, and I'm a little behind on my reading.

If you go back to that time, it was about just about three months since we got involved in a war, which we were losing at that point. The newspaper headlines were filled with bad news from the Pacific, and I've taken just a couple of the headlines from the days preceding March 11th, which I'll explain. It's kind of a momentous day for me. You can see these headlines; we've got slide two up there, I believe, and we were in trouble—big trouble in the Pacific. There's only going to be a couple months later that the Philippines fell.

Here we were getting bad news; we might go to slide three for March 9th. I hope you can read the headlines anyway. The price of the paper is three cents incidentally. Let's see, we've got March 10th up there, a slide. I want to get to where this advanced technology of slides is. I want to make sure I'm showing you the same thing that I'm seeing in front of me.

So anyway, on March 10th, when again the news was bad, full clearing path to Australia, and it was like the stock market had been reflecting this. I'd been watching a stock called City Service Preferred Stock, which had sold at 84 the previous year. It had sold at 55 the year before, early in January, two months earlier, and now it was down to forty dollars on March 10th. So that night, despite these headlines, I said to my dad, "I think I'd like to pull the trigger, and I'd like you to buy me three shares of City Service Preferred."

The next day, that was all I had—I mean, that was my capital accumulated over the previous five years or thereabouts. My dad, the next morning, bought three shares. Well, let's take a look at what happened the next day. Let's go to the next slide, please. It was not a good day. The stock market—the Dow Jones Industrials broke 100 on the downside. Now they were down 2.28, as you see, but that was the equivalent of about a 500-point drop now.

So I'm in school wondering what is going on. Of course, incidentally, you'll see on the left side of the chart the New York Times put the Dow Jones industrial average below all the averages they calculated. They had their own averages, which have since disappeared, but the Dow Jones has continued. The next day, we can go to the next slide, and you will see what happened. The stock that was at 39, my dad bought my stock right away in the morning because I'd asked him to buy my three shares.

So I paid the high for the day; that 38 and a quarter was my tick, which is the high for the day. By the end of the day, it was down to 37, which was really kind of characteristic of my timing in stocks that was going to appear in future years. But it was on what was then called the New York Curb Exchange, then became the American Stock Exchange.

Things, even though the war until the Battle of Midway, looked very bad. If you'll turn to the next slide, please, you'll see that the stock did rather well. You can see where I bought at 38 and a quarter, and then the stock went on actually to eventually be called by the City Service Company for over 200 dollars a share. But this is not a happy story because if you go to the next page, you will see that I—well, as I always say, it seemed like a good idea at the time.

So I sold those; I made five dollars on it. It was again typical of behavior, but when you watch, you go down to 27—it looked pretty good to get that profit. Well, what's the point of all this? We can leave behind the City Service story, and I would like you to again imagine yourself back on March 11th of 1942. As I say, things were looking bad in the European theater as well as what was going on in the Pacific.

But everybody in this country knew America was going to win the war. I mean, it was—you know, we'd gotten blindsided, but we were going to win the war, and we knew that the American system had been working well since 1776. So if you'll turn to the next slide, I'd like you to imagine that at that time you had invested ten thousand dollars, and you put that money in an index fund.

We didn't have index funds then, but you effectively bought the S&P 500. Now, I would like you to think a while and do not change the slide here for a minute. I'd like you to think about how much that ten thousand dollars would now be worth if you just had one basic premise. Just like in buying a farm, you buy it to hold throughout your lifetime, and you look to the output of the farm to determine whether you made a wise investment.

You look to the output of the apartment house to decide whether you made a wise investment. If you buy a small apartment house to hold for your life, let's say instead you decided to put the ten thousand dollars in and hold a piece of American business and never look at another stock quote, never listen to another person give you advice or anything of the sort.

I want you to think how much money you might have. Now, let's go to the next slide, and we'll get the answer. You'd have 51 million dollars, and you wouldn't have had to do anything. You wouldn't have to understand accounting; you wouldn't have to look at your quotations every day. Like I did that first day, I'd already lost 3.75 cents by the time I came home from school.

All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well. You didn't have to pick out winning stocks; you didn't have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life.

That wasn't the only time to do it. I mean, I could go back and pick other times that would work out even greater gains. But as you listen to the questions and answers we give today, just remember that the overriding question is how is American business going to do over your investing lifetime? I would like to make one other comment because it's a little bit interesting.

Let's say you've taken that ten thousand dollars, and you listen to the profits of doom and gloom around you, and you'll get that constantly throughout your life. Instead, you use the ten thousand dollars to buy gold. Now, for your ten thousand dollars here in your safe deposit box, you'd have your three ounces—100 ounces of gold. You could look at it, and you could fondle it, and you could—I mean, whatever you wanted to do with it, but it didn't produce anything.

It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942, and it would be worth approximately 400,000 dollars. So if you decided to go with a non-productive asset, gold, instead of a productive asset which actually was earning more money and reinvesting and paying dividends—and maybe purchasing stock, whatever it might be—you would now have over 100 times the value of what you would have had with the non-productive asset.

In other words, for every dollar you made in American business, you'd have less than a penny gain by buying in the store value, which people tell you to run to every time you get scared by the headlines or something disorder. It's just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine.

It's an investor's—I mean, you can't really fail at it unless you buy the wrong stock or just get excited at the wrong time. But if you own a cross-section of America and you put your money in consistently over the years, there's just no comparison against owning something that's going to produce nothing. And frankly, there's no comparison with trying to jump in and out of stocks and pay investment advisors.

If you'd followed my advice, incidentally—or this retrospective advice, which is always so easy to give—if you'd follow that, of course, there's one problem, buddy; your friendly stock broker would have starved to death. I mean, you know, and you could have gone to the funeral to atone for their fate. But the truth is you would have been better off doing this than a very, very, very high percentage of investment professionals have done or people have done that are active.

It's very hard to move around successfully and beat really what can be done with a very relaxed philosophy. You do not have to know as much about accounting or stock market terminology or whatever else it may be or what the Fed is going to do next time.