Warren Buffett's $200 Billion Mistake Started With Just 12.5 Cents

The 96-year-old investment guru Warren Buffett has retired. What does he do every night? He watches YouTube, and he watches it for hours on end. Recently, the Wall Street Journal published an exclusive report stating that Buffett now sits in front of a huge TV at home almost every night, watching clips of female celebrities, documentaries about a prominent lawyer who took a young Trump to New York back in the day, old TV commercials from the 1950s, and even Uzbekistan's Got Talent. This old man, sitting on a net worth of over $140 billion, suddenly has so much free time on his hands. Because this year, he handed over both of the keys he was holding. He handed the CEO position to Greg Abel, and the chairman position to his son, Howard. Many people say that Buffett has finally passed his empire down to his eldest son. Well, that's only half right. The real power to manage the money and the company, and to oversee hundreds of billions in investments, is in the hands of an outsider, Abel. His son, Howard, got the chairman position, but he can only manage one thing, upholding Berkshire's rules. Buffett said, you should just think of Howard as an insurance policy you've bought, but one you hope you'll never need to use. Why? What exactly are Berkshire's rules? Did they need his son specifically to guard them? The answer to that is hidden within Buffett's 96 years of life. Today, we're going to talk about Buffett's legendary story. There's a lot of content to cover. So, for the sake of your viewing experience, I'll be splitting this into two episodes. In this episode, we'll first look at his path to success. How did a little boy who was already flipping sodas for profit at age 6 figure out the secrets to making money? And how did he end up losing $200 billion over a petty grudge worth 12.5 cents? In the next episode, we'll talk about his path to becoming a legend. How did he go from being just an investor who was good at making money to becoming the anchor of the entire U.S. financial system? And how did he transform from a mere capitalist into an icon for all of Wall Street? How did he manage to stand tall and survive time and time again through several global financial crises? And how did he put his famous quote into practice? Be fearful when others are greedy and greedy when others are fearful? We'll tell it all through real stories. It's going to be fascinating, so don't miss it. Trust me, after watching these two episodes, you'll understand why, among so many smart people and fund managers in the world, there is only one Warren Buffett. Most importantly, let's see if we can learn a thing or two from his experiences. On August 30, 1930, Warren Buffett was born in Omaha, Nebraska, in the heart of the United States. What was 1930 like? The Great Depression. The stock market had just crashed and banks were closing one after another. Less than a year after Buffett was born, the bank where his father, Howard, worked went under. His dad lost his job, gritted his teeth, and opened a small brokerage firm. From the time little Buffett could remember, all he heard about was stocks, interest, and compound interest. When he was six, he made his first business deal. He spent 25 cents to buy six bottles of Coke from his grandfather's grocery store and then sold them to his neighbors for five cents a bottle. With that flip, he made a nickel profit, a 20% margin. When he was seven, he borrowed a book from the Omaha library titled One Thousand Ways to Make One Thousand Dollars. He read this book over and over again. Buffett's biography, The Snowball, records that after finishing it, young Buffett made a bold declaration. I'm going to be a millionaire by the time I'm 35, and if I don't, I'll jump off the tallest building in Omaha. Folks, remember this statement, because he's going to have to answer for it later. At 11 years old, young Buffett actually entered the stock market. He took his savings and bought three shares of Citi's service-preferred stock for himself and three for his sister at $38 a share. Unexpectedly, right after he bought them, the stock price started to drop. $38, $35, $30. It fell all the way down to $27, a drop of nearly 30%. During that time, his sister would nag him every day on the way to school, saying, the stock dropped again. What did you do with my money? The 11-year-old boy gripped his backpack straps tightly and didn't say a word, but he held his ground. When the stock price finally climbed back to $40, he immediately sold one share and made a $2 profit. But that stock later went on to hit $200. In that moment, he learned that you have to hold on to good things. But even though he learned it, he couldn't quite do it yet. In 1942, his father, Howard, was elected to Congress, and the whole family moved to the capital, Washington, D.C. Twelve-year-old Buffett hated Washington. Why, no friends, homesick. As a result, his grades plummeted. The most rebellious thing he ever did was run away from home with two classmates, hitchhiking all the way to Hershey, Pennsylvania. As it turned out, they were stopped by the police and sheepishly sent back. His dad gave him an ultimatum. If your grades don't improve, you can forget about that paper route of yours. Well, that trick worked. Because delivering newspapers was the only thing young Buffett enjoyed in Washington. Because it meant making money. Back then, paper boys were essentially independent contractors for the newspaper. Paper boys would get the newspapers from the publisher at a wholesale price and then deliver them door-to-door every morning. At the end of the month, he would go door-to-door to collect subscription fees from customers. The money collected, minus the wholesale costs paid to the newspaper, was all his to keep. Buffett turned this into a real business. How did he do it? He took on delivery routes for both the Washington Post and its rival, the Times-Herald, at the same time. This way, if a subscriber canceled the Post, he would immediately pitch the Times-Herald, and the customer remained his. Plus, he specifically targeted high-end apartment buildings. With hundreds of households in one building, he could finish all his deliveries in one go, saving him a lot of legwork. At his peak, he could deliver up to 500 newspapers in a single morning. At 15, Buffett was earning $175 a month delivering newspapers, which was more than his teachers at school were making. By the time he graduated from high school, young Buffett had already saved up $5,000 or $6,000. That was more than the annual salary of an average American at the time. He did the math and figured that at this rate, going to college would be a complete waste of time. But his dad insisted and pushed him into college anyway. He first went to the Wharton School at the University of Pennsylvania, studied for two years, and felt he already knew more than what the professors were teaching, so he transferred back to the University of Nebraska near his home. He graduated with his bachelor's degree at 19, and that same year, he stumbled upon a book in a bookstore, The Intelligent Investor by Benjamin Graham. He later said that this was the best investment book he had ever read in his life, bar none. The principle of this book can be summarized in one sentence. A stock is not a lottery ticket, but a small piece of ownership in a company. You first calculate how much the company is worth, and then you wait until it's ridiculously cheap to buy the stock. The difference in between is your insurance, which is called the margin of safety. Buffett closed the book, and at that moment, he had only one thought. I have to become his student. He first applied to Harvard Business School, but was rejected on the grounds that he was too young. Buffett wasn't discouraged. He kept digging through materials, and as it turned out, he discovered that his dream mentor, Graham, was actually teaching at Columbia Business School in New York. You have to understand, at that time, it was already August, and the application deadline for new students had long since passed. But Buffett didn't want to give up, so he wrote a letter directly to the assistant dean, David Dodd. Dodd was actually Graham's longtime partner. In the letter, Buffett wrote, I had always assumed that both of you were no longer with us, but now I've discovered that not only are you alive, but you're also teaching. I really, really want to come. Dodd accepted him. Years later, Buffett said that being rejected by Harvard was the best thing that ever happened to him. At Columbia, he was the only student in Graham's class to receive an A+. Buffett has this drive. Once he sets his mind on something, he'll go knock on the door himself. Next, he really did knock on a door, and it was an important door that would change the rest of his life. On a Saturday in January 1951, Buffett took a train back to Washington and knocked on the door of an insurance company called Geico. Graham was actually its chairman. It was a Saturday, so the company wasn't open, And the front door was locked. He just kept knocking and knocking until a caretaker came out. And he asked, is there anyone else in the building? The old man said, there's still one person on the sixth floor. That person on the sixth floor was named Lorimer Davidson, who later became the CEO of Geico. And Davidson spent a full four hours talking to this college student who had just knocked on his door. A complete stranger. Talking about what? He talked about how the insurance business makes money. GEICO sold insurance cheaper than others because it didn't use middlemen, saving a huge amount in commissions. Plus, it specifically sold car insurance to government employees because this group of people drove carefully, had fewer accidents, and resulted in fewer claims. Also, insurance companies collect premiums before they have to pay out any claims. During this period, a large sum of money just sits in the insurance company's accounts. 20-year-old Buffett's eyes lit up when he heard this. After he went back, he immediately did the math and realized the company's true value was far higher than its stock price. He decisively bet most of his net worth on Geico stock. Friends, remember, this Saturday, these four hours. The seeds of Buffett's Berkshire Empire were planted on that very afternoon. In May 1956, Buffett established his first partnership fund with a starting capital of $105,100. There were seven partners, including his mother, sister, aunt, and other friends and family. How much did Buffett put in himself? Guess. $100. His earnings came from the profit sharing. If he did well and made a lot of money for everyone, he would get a larger share. If he didn't make any profit, he wouldn't take a single cent. Over the next 13 years, this partnership fund never lost money in a single year. And the $100,000 invested turned into over $1.7 million. By 1962, the 32-year-old Buffett had already become a millionaire, a full three years ahead of the goal he had set for himself at age 7. The tallest building in Omaha was safe. How did Buffett do it? What he relied on early on was the trick Graham taught him, picking up cigar butts. It's like a cigarette butt someone threw on the side of the road. You can pick it up and still get one last free puff. In the stock market, that means specifically looking for those broken companies. Buffett would flip through thousands of pages of company data in the Moody's manuals, page by page, to find those broken companies whose stock prices were lower than the cash, factories, and inventory on their books, buy them, and then sell them once they return to their proper value. However, what truly transformed him from a student who just picked up cigar butts into an investor with his own unique approach was a fraud case involving salad oil. What kind of experience led Buffett to realize his own investment approach? In 1963, on a harbor in New Jersey, a vegetable oil company was opened. There was a row of massive oil storage tanks there, which were said to be filled with soybean salad oil intended for sale to Europe. So, the American Express subsidiary sent people to inspect the goods. They would take a pole, probe the top of the tank, and, hey, oil would stick to it, so they would sign off and clear it. Also, some of the oil tanks were connected by pipes. After the inspector finished checking one tank, the boss would quietly pump the same batch of oil into the next tank, letting them check it again, and it would still come up as oil. And just like that, the American Express subsidiary kept issuing warehouse receipts to this boss, one after another. What exactly is a warehouse receipt? It's basically proof that there's actually that much inventory on site. And with these warehouse receipts in hand, the boss could go to the bank and use them as collateral for loans. So this boss took these warehouse receipts and went around to various banks and brokerage firms to borrow money, ending up with over 100 million U.S. dollars in loans. But what was actually inside those oil tanks? There was indeed a layer of oil floating on top, but underneath, it was all seawater. According to a later report by Fortune magazine, the total amount of salad oil warehouse receipts issued by the American Express subsidiary during those years added up to more than twice the total amount of salad oil in the entire United States. By the end of that year, the truth couldn't be hidden anymore. The scandal broke, and dozens of banks and brokerage firms were swindled, with some even going bankrupt. At this point, everyone turned their eyes toward the guarantor who had signed the warehouse receipts. American Express. On November 20th of that year, the news hit the papers. Two days later, President Kennedy was assassinated in Dallas. The United States fell into chaos. The stock market plummeted, and American Express's stock price dropped from over $61 to $40 in less than 10 days. Everyone was dumping American Express stock. So what did Buffett do? He went to a steakhouse in Omaha, didn't order any food, and sat by the cashier to see if customers were still using their American Express cards to pay. Table after table, people were still using them just fine. He then went to ask the banks, asking the tellers, had the number of people coming in to buy American Express traveler's checks dropped recently? No. He then went to talk to American Express merchants, cardholders, and even their competitors. The result was that everyone gave him the same answer. People were still using it just like they always had. Buffett reached a conclusion. This scandal hurt American Express's wallet, but it didn't hurt their brand. So over the next two years, Buffett kept buying American Express, pouring in a total of $13 million, which accounted for nearly 40% of his partnership fund. A few years later, he liquidated his position, but this single investment made $20 million for the partnership fund. It was also in this year that Buffett set his sights on another cigar butt. And this cigar but was already burning down to the fingers. Berkshire Hathaway was an old textile mill in Massachusetts, a decades-old establishment, but business was getting worse year by year, as it was being steadily pushed back by low-cost factories in the South and overseas. In 1962, Buffett started buying its stock. Why? Because this company had a habit. Every time they closed a factory, they would use the money to buy back stock. Buffett's plan was simple. I'll buy in at a low price, and when they do a buyback, I'll sell it back to them and make a profit on the difference. It was a classic cigar butt investment. In 1964, he made a special trip to meet with Berkshire's boss, Seabury Stanton. Stanton asked him, we're planning a buyback. At what price do you intend to sell? Buffett said, $11.50. Stanton stared at him and asked, do you promise? Buffett replied, Mr. Stanton, I promise you, as long as you proceed with the buyback soon, I'll sell it to you at $11.50. cents. Stanton stood up decisively and shook his hand. It's a deal. Buffett returned to Omaha. A few weeks later, the buyback offer arrived in the mail. Buffett opened the envelope and looked down. It was 11 and 3/8 dollars, or 11 dollars and 37 and a half cents. That was one-eighth of a dollar less than what they had agreed on in person, 12.5 cents less per share. Buffett was furious. In 2010, Buffett even personally pulled out this 1964 letter in front of the CNBC cameras, spread it out before the host, and said, he docked me an eighth. I went back to Omaha, and a few weeks later, I opened the mail. Oh, you have this? And here it is, a tender offer from Berkshire Hathaway. That's from 1964. And if you look carefully, you'll see the price is 11 and 3 eighths. Um, uh, if you chisel me for an eighth. He didn't care about the 12.5 cents. He cared about what they had agreed upon beforehand. This was going back on his word. He immediately decided not to sell his shares. Not only did he not sell, but he decided to buy instead, buying aggressively. In 1965, he took control of Berkshire. The first thing he did after taking over was fire Stanton, just to settle the score. But he had taken on a huge mess, because the textile mill was a bottomless pit. He had no choice but to keep pouring money into it, replacing machinery, keeping workers on, and he stubbornly held on for 20 years, but it still didn't make any money. In 2010, he said that if the money he had poured into the textile mill back then had been used to buy an insurance company from the start, Berkshire would be worth twice as much today. In other words, that moment of spite back then cost Buffett $200 billion. That's why he said the stupidest stock he ever bought in his life was Berkshire. Buying Berkshire for an eighth of a dollar? If it were you, would you think it's no big deal and just sell it at the $11.37 and a half cents price the other party offered? Or would you feel just as annoyed as Buffett and decide to dig in your heels and fight him to the end? If you're the former, type A. If you're the latter, type B. This incident really reveals Buffett's true character. In his eyes, a person's word is more important than money. It was also at this time that Buffett encountered a truly significant turning point in his life. The textile mill was bleeding money every year, and Berkshire still had a little cash on its books. Buffett faced a choice. Should he use this money to keep plugging the holes in the textile mill, or should he take it out and trade it for a business that could actually lay golden eggs? He recalled that Saturday, 16 years ago, those four hours on the sixth floor of the Geico building. Insurance companies collect money first and pay out claims later. There happened to be an insurance company right in Omaha called National Indemnity, and the owner was a guy named Jack Ringwalt. This Ringwalt was a bit of an eccentric old man. In 1940, he started with $125,000, specializing in providing insurance for businesses like taxis that others didn't want to touch. Shrewd, yet honest. This Ringwalt had a quirk. Once a year, for about 15 minutes, he would suddenly get fed up with his company and start clamoring to sell it. Once that moment passed, well, he couldn't bear to let it go. In early 1967, a mutual friend tipped Buffett off saying, hey, old Ringwalt is having another episode. Buffett immediately arranged to meet him. Ringwalt named his price, and Buffett agreed on the spot. No audit, no haggling, no complicated terms. Because Buffett knew full well that with this eccentric old man, the moment things got complicated, he'd just walk away. It took all of 15 minutes, and the deal was done for $8.6 million. What did Buffett buy for those $8.6 million? Float. What is float? Simply put, it's the money that customers pay in premiums that sits in the insurance company's account before it's paid out in claims. Strictly speaking, this money is owed to the customers, but before it's paid out, the insurance company can use it for investments, and they get to keep the profits. As long as the insurance business is run well and the premiums collected exceed the claims paid out, this money acts like a perpetual motion machine of free leverage. It allows him to use other people's money to buy high-quality assets, borrowing a hen to lay eggs, and keeping all the eggs for himself. When Buffett bought this company in 1967, the float was over $19 million. Today, the float held by Berkshire is over $170 billion. At this point, Berkshire had changed. It was no longer a textile mill, but a machine. The insurance company collects the premiums, Buffett takes that money to invest, and then uses the profits to buy even more great businesses. This is Buffett's third move, using other people's money to roll his own snowball. In 1969, the U.S. stock market was in the midst of a frenzy, historically known as the go-go years. Young fund managers were chasing a few hot stocks, and the share prices were doubling and tripling. Buffett's partnership fund was at its peak at the time, but he made a decision that no one could understand. He announced that he was closing the fund and returning all the money to the partners. Why? Because he couldn't find any more cigar butts to pick up in the stock market. All the stocks had been bid up to the sky. He said that continuing to operate in a market like this was just taking a gamble. He only kept one thing, and that was Berkshire stock. At the time, many people laughed at him for being timid and missing out on the big bull market. But as we all know, he had the last laugh. Four or five years later, from 1973 to 1974, the U.S. stock market crashed, and those hot stocks that had been bid up to the sky plummeted to just a fraction of their value. Just as everyone else was panic-selling to save their skins, A Forbes reporter went to Omaha and asked Buffett, what do you think of the market right now? Buffett replied with a rather crude remark, I feel like a sex addict who's just been dropped into a room full of beautiful women. The implication was that there were great opportunities everywhere and everything was cheap. In 1969, when everyone was greedy, he closed up shop and left. In 1974, when everyone was fearful, he jumped in and bought heavily. That famous investment mantra, be fearful when others are greedy and greedy when others are fearful, was something Buffett was already putting into practice back in the 70s. He was already doing exactly that back in the 70s. It was also during this period that Buffett's second secret weapon had already been by his side for 10 years. His name is Charlie Munger. Munger was also from Omaha and later worked as a lawyer in California. The two of them hit it off immediately. Once they met, they couldn't stop talking. At this time, Munger kept repeating one principle to Buffett. Stop picking up cigar butts. Buying a great company at a fair price is far better than buying a mediocre company at a cheap price. Buffett thought about that textile mill at Berkshire. That was a bloody lesson indeed. In 1972, Munger dragged him to look at a candy shop in California called C's Candies, and the seller was asking for $30 million. $30 million to buy a candy shop. By Graham's standards, this price was ridiculously expensive because the value of C's factory equipment and inventory on the books didn't even come close to that amount. Buffett thought it was too expensive. It was only willing to pay $25 million at most. It wouldn't pay a penny more. In the end, the seller made a concession and the deal was closed at $25 million. But this candy shop had a certain magic to it. What kind of magic? Every Christmas and Valentine's Day, Californians would only buy this brand for gifts. It raised prices every year, yet customers still lined up and bought it year after year. Even if someone else opened a new candy shop and made identical chocolates, they couldn't steal his customers. Because people weren't just buying candy. They were buying the See's Candies brand. This box of candy helped Buffett understand a concept, the moat. Competitors can't break in, and you can raise prices whenever you want. Over the following decades, this box of candy generated over $2 billion in cumulative pre-tax profit for Berkshire. Do y'all remember American Express? The moat for American Express is trust, while the moat for See's Candies is its reputation. Buffett realized that what he was looking for was no longer cheap, run-down houses, but castles with moats. As long as the castle is sturdy enough, it's worth paying a higher price. From then on, he stopped picking up cigar butts and started buying castles. It took Buffett 20 years to complete the journey, from being Graham's student to becoming Buffett himself. In 1988, he spent $1 billion to buy a 6.7% stake in Coca-Cola, because in Buffett's view, Coca-Cola has the deepest moat in the world. Billions of people around the world recognize this brand. To this day, he hasn't sold a single share of that stock. Nowadays, the annual dividends Coca-Cola pays to Berkshire alone amount to over $800 million. The annual dividend is already almost catching up to the original purchase price he paid back then. But just as his business was running smoother and smoother, something happened in Buffett's family. His wife of 25 years, Susie, moved out. She moved to San Francisco on her own because their three children were all grown up, and she wanted to live her own life, pursue singing, and do her charity work. As for Buffett, he had spent his whole life focused entirely on annual reports and numbers, and he was practically helpless when it came to daily life. But what happened next was something outsiders couldn't understand. They didn't get a divorce. Before Susie left, she introduced her husband to a woman, a waitress at a French restaurant in Omaha named Astrid Manx, and asked her to help take care of Buffett. Not long after, Astrid moved into Buffett's home. Buffett and Susie never divorced. They talked on the phone almost every day, and for important occasions, they would still attend together as a married couple. Susie later even joined the Berkshire Board of Directors. The key is that Susie and Astrid also remained good friends. Every Christmas, the holiday cards the Buffett family sent to friends were signed with all three of their names. The children also accepted this arrangement. Buffett said that Susie put me together, and Astrid kept me from falling apart. This way of life went on for over 20 years. In 2003, Susie was diagnosed with late-stage oral cancer, and Buffett would fly to San Francisco every weekend to be with her. In 2004, she passed away suddenly from a cerebral hemorrhage while visiting a friend. and at the funeral, the lead singer of the band U2 came to sing for. Buffett did not appear. His son Howard later wrote in a book that his father was too grief-stricken to bring himself to attend his mother's funeral. Two years later, in 2006, on his 76th birthday, Buffett officially married Astrid. This seemingly unusual relationship status would, decades later, directly determine the ultimate destination of the more than $100 billion of wealth in Buffett's hands. Where is this destination? We will reveal this foreshadowing in the next episode. Having reached this point, we have finished telling the story of Buffett's rise to success, from his early growth in practice, to finding his dream mentor, from learning to pick up cigar butts and gaining hands-on experience, to fulfilling his promise before the age of 35 and becoming a millionaire, and finally, through the salad oil scandal, realizing that brand and reputation are more valuable than assets. Because he bought Berkshire out of spite over a 12.5 cent difference, he inadvertently unlocked the insurance secret that Geico had revealed to him 16 years earlier, the float. The final box of See's Candies helped Buffett realize the true essence of a moat. By this point, Buffett was already a successful investor with a unique business philosophy, but simply knowing how to make money wasn't enough to elevate him to legendary status. In the next episode, fate will pour a bucket of cold water on him just when he's riding high. In the past, Buffett only bought traditional businesses he could understand, and he had always kept Wall Street investment banks at arm's length. But soon, faced with an attractive, can't-lose proposition, this usually calm investment master will make an exception and reach out. But he never expected that what awaited him with this move wasn't the sweet returns of a Coca-Cola, but a catastrophic disaster that would nearly destroy the reputation and wealth he had built up over decades. In the next episode, we'll talk about Buffett's path to becoming a legend. Subscribe to TrueView, and we'll see you in the next episode. Alright, that's all for today. One last reminder, friends. If you haven't liked the video yet, please remember to hit that like button. If you enjoy this series on iconic figures of the era, be sure to leave a comment and let me know. I'll dig up some great stories to share with you all more often. Thanks for watching, everyone. I'll see you all in the next episode of TrueView. Buh-bye!