How Warren Buffet Built His Legacy By Finding Value No One Else Could See from Business History

Pushkin. Too quick? No, it was perfect. Pushkin.

Stop.

You got it. Hey, it's Jacob Goldstein, co-host of the podcast Business History. And I'm here talking to you now because Warren Buffett has just said he is stepping down as chairman of Berkshire Hathaway, a company that he ran for more than 50 years. He stepped down as CEO less than a year ago. Now he is stepping down as chairman. So this is an important moment in business history.

And to mark it, we are rerunning a show we did last year about young Warren Buffett, about how Warren Buffett became perhaps the greatest investor of the 20th century. Hope you like the show. Here it is.

Jacob, I wanted you to see one of my prize possessions. I hid it in a bag so that you would not see it in advance. It is a round, cuddly, plushy Warren Buffett.

He's got like an argyle sweater and a golf club, which is weird. Like it should be a cherry Coke, a box of See's candy, even like a financial document. An annual report. Yeah, why a golf club?

I think people who golf like Warren Buffett. And it's just a product that you can buy. A student got it for me who went to the most recent Berkshire Hathaway shareholders meeting.

The Berkshire Hathaway shareholders meeting. Always wanted to go. It's a famous event.

And this was the one where he announced his retirement. My student eagerly like texted me the whole time.

So excited.

He knows that I love Warren Buffett. And I brought it because it's such a weird, unlikely thing. It is hard to buy soft plushie dolls of billionaires because who would want to sleep with a little Elon Musk doll at night?

Yeah, this finance seems less likely, right? Like, it's not going to be a plushie Jamie Dimon or a plushie like Ken Griffin. No, no, no, no.

Ken Griffin will cut you in the night. And I think that they made a plushie of him because Warren Buffett is.

Sort of.

Extraordinary in the history of finance. I mean, there's a raw amount of money, right? $ 145 billion net worth, according to Forbes, right? But there's also the way he earned his billions. Most billionaires, if you think about it these days, started a company, a tiny company that became huge. They owned all the stock in it. And so on paper became rich.

Or the children. Or the children. Or the children of the children.

Yeah.

Warren Buffett did it by investing in other people's companies. He hasn't really like made a product himself. He buys companies that have good products.

Which in a way makes it all the more amazing that he is this like beloved, I'm going to say beloved figure, right? Like people generally don't like finance people and they like Warren Buffett.

He is a symbol of what people want finance to be, right? Oh, you buy good companies at good prices and you hold them through thick and thin like he's legendarily honest. You know, his word is his bond. His handshake does not need lawyers, Jacob.

I mean, I'm sure he has lawyers. He has a lot of lawyers, right?

But, you know, he eats at McDonald's every morning. He swigs cherry Coke all day long. Then he goes home to a tiny house in Omaha and plays bridge. I mean, if he didn't exist, you would have to invent a Warren Buffett just for those days, you know, when the stock market, like, does something terrible. You can always just say, well, there's Warren Buffett, right? Why can't you be more like Warren Buffett?

The honest $ 145 billion financier.

Yeah, you can be a decent fellow. And today, on the show, as part of our investing series, I'm going to show you that Warren Buffett is a complete fraud.

Yes. No, he's totally not. He's a great guy. Is he kind of a fraud?

I'm just going to say that he is not as cuddly and feel-good as you might think.

Well, I would hope not.

He is a very shrewd man. He's a shark, really, when it comes to business deals. And today on the show, we are going to show you how he.

Got that way. Young Buffett. I'm Robert Smith. I'm Jacob Goldstein.

And this is Business History, a show about the history of business. This is part of our series on stock market legends. We already told you the story of Jesse Livermore, a very different story in a very different time, the Wild West of speculation and tomfoolery, you know, in the Gilded Age and right before the great stock market crash.

And today we're going to pick up a few years later because Warren Buffett was born in 1930, right at the start of the Depression. And before he was a legend, before he was a billionaire, he was a He was just a young man who didn't want to work hard and figured out a giant flaw in the stock market.

Yes.

To understand how Warren Buffett cracked the code of finance, you have to put, where's cuddly guy?

He's way over there. You have to put cuddly.

Warren Buffett out of your mind and you have to picture Warren Buffett, weird kid. Born in 1930, as I said, Omaha, Nebraska. It's after the great stock market crash, beginning of the depression.

His father died. Is a stockbroker.

Not a well-respected profession after the great crash of 1929.

Yeah, yeah, yeah.

And he'd eventually become a congressman. His father, also not a respected profession ever.

I know, I know.

And Warren Buffett is an awkward kid and an obsessive kid. Like one of the things he does is he loves collecting things in a very Warren Buffett way, right?

He starts to collect bottle caps.

But not just the bottle caps on his own bottles. He goes to all the filling stations, the gas stations in town, to where they sell the drinks. He goes into the ice chest where they have them and digs around for excess bottle caps. And then he puts them in piles in his basement. And at night, he sorts the bottle caps, the rare ones, the popular ones. He thinks it's information that no one else has for some reason, right?

And he's not in this to make money, right? He's just trying to sort of understand the world. Like in New York, it reminds me of in New York, there's a certain kind of, frankly, it's usually a little boy who's really into like trains and buses. And there's a sense of like the maps and the organization. It feels like a Omaha 1930 version of that.

At one point, Warren Buffett and his friend recorded the license plate number of every car that came by their house.

Yes. Just in case. Just in case. Just like there's some order in the world. There's some. Yeah. Warren Buffett had a job early, you know.

Newspaper route. He worked as a delivery boy for his grandfather's grocery business. He told Alice Schroeder in her book, Snowball, it's a biography of Warren Buffett. He said, quote, I didn't learn anything except I don't like hard work.

I actually think an aversion to hard work is a quality you see in people who are entrepreneurial, like successful in a certain way. Like Thomas Edison loved hard work, but there's another version, which is like people find what feels like play to them. And then they do it all the time. All the time. But it turns out you love reading financial reports or building cars, and that doesn't feel like work.

Yeah, I think that's right. Warren Buffett, you know, he didn't have good grades. He just didn't want to do what other people told him to do. He lived a life of petty crime.

That is shocking.

I know.

I love this.

So he and his friends would case out the local seers. This is another quote from the book. It's so good. We would steal the place blind. We'd steal golf bags and golf clubs. I walked out of the lower level, where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the clubs were stolen, and so was the bag. I stole hundreds of golf balls.

That explains the golf club on the Warren Buffett plushie. It's about his crime. It's about his crime. He's a friendly old man who stole that golf club.

Now, Buffett was also making money as a kid, like he filed tax returns at the age of 14. That's how much money he made from his newspaper route.

Or was he selling the stolen golf clubs and filing taxes? And filing taxes. Very Buffett, right? Honest thief.

But I come back to this obsession thing that he clearly had, right? I mean, this ended up being a very important time at a very particular moment in the stock market. where in order to succeed, you had to do the equivalent of writing down license plates. You had to do the detailed work to figure out what things were worth in the stock market. So Buffett drifts through college, doesn't do very well with the ladies, or so he says, ends up at Columbia Business School, my alma mater. And this is the 1950s. And by this point, all of his fellow students want jobs in big businesses.

They want to work for GM and U.S. Steel. It's that post-war era is all about that, right? Like there's not like crazy new businesses starting up like there were in the late 1800s or the late 1900s, right? It's this very steady, stable economy. Everyone wants to be safe.

And honestly, like the safe economy is growing, so you can make money and you can do well.

You're just riding up. You're just the organization man.

But not Warren Buffett, right? He's obsessed with this larger-than-life investing professor at Columbia.

Yeah. named Benjamin Graham. A legend. A legend.

So he'd read this book by Benjamin Graham called The Intelligent Investor. You can get it to this day. People still read it, right? This book completely changed the way Buffett and a bunch of other investors at the time thought about stocks. When we talked about the stock market before the great crash of 1929, Jesse Livermore, we talked about the market like it was a rigged game, really.

Because it was.

Speculators would buy a stock and bid up the price of it, try to sell it to each other. They call them painting the tape, right? They try to get their money out before it crashed. But it went up and it crashed. And this is what the stock market was.

It was like all meme stocks. Yeah, exactly. All the time, right?

All momentum trades, psychology of the market. But Buffett's mentor, Benjamin Graham. He said something that sounds very obvious, but it's missed by a lot of people, even today. He said that stocks are real companies. Stocks represent ownerships in companies that make things. They're not just numbers that go up and down. They represent this physical thing in the world.

And so just as if you're buying a sweater or a car, you want it to be good, you want it to last a long time, and you want to get a deal on it. You want it on sale, right? He said, just do the same thing for stocks. Look for stocks in companies that are good companies that will last for a long time that you can find on sale.

And like, it's worth pausing here for a minute, right? Because still today, it sounds almost naive to talk about stocks in this way, but also it is what a stock is, right? You own a share, a part of a company. And in the sort of platonic ideal of the world, that should be worth some share of all of the company's future profits, right? They call this a discounted cash flow model, which you have built, which you have showed me. And like, in the long run, it's more or less true, right? In the long run, on average, the price of a stock does represent the best guess the world can make today about the value of that company's profits from today until forever.

But a lot of investors don't think about the long run. They're just like, will more people buy it tomorrow? And can I sell it for more money than I bought it?

It's so weird to me, frankly. Very weird. The way it's like, what did it do today? And what is it going to do tomorrow? Nobody knows what it's going to do tomorrow.

Now, to be fair, it was hard at the time that we're talking about, the 1950s, to get the kind of information you would need to figure out what a company is really worth. You know, there wasn't a Yahoo Finance. There were annual reports, but you had to search for them. You had to get them in the mail. You had to go to the library.

And importantly, right, there wasn't this giant industry like there is today of people who are pouring over those things and getting all the information they can out of them.

Luckily, Warren Buffett is a collector of weird things and is willing to go the extra mile to find them. He was perfect for the situation. So he signs up for Graham's investing class at Columbia. And this is where it tips over into actually disturbingly crazy, right? Buffett essentially starts to stalk Professor Graham before he takes the class.

He finds out everything he can about Benjamin Graham, including the fact that Graham was chairman of the board of a company called Government Employees Insurance Company.

Ah, Geico. Geico.

It will eventually be known as Geico. This is way before the gecko, right? And Buffett is like, huh, what is up with this Geico company? And again, he's 20 years old.

He's in school.

This is his professor. He hasn't even taken the course. He gets on a train from New York to D.C. to go visit Geico to find out more about it.

Knocks on the door. What does he do?

On a Saturday, doors are locked. A janitor lets him in. Because Buffett says, oh, well, my professor is the chairman of the board. And the chairman is like, whatever, kid.

Like, come on in.

Only one person is working on this Saturday at Geico, the vice president of finance. And Buffett, like, knocks on his door, says, can I ask you a question? And I saw an interview with the vice president of finance later who was like, yeah, I thought I'd answer this kid's question, right?

Four hours go by. Four hours. Four hours.

The vice president said this was like talking to, you know, an investor in the insurance business, an analyst who knew all of these things. And Buffett later, he talks about this moment a lot because what he sees is he sees that certain companies have certain strategic advantages. And Geico is one of them. It's a stock that he would buy and end up eventually controlling the company, right? But here's what he learned about Geico.

Two things.

First of all, it's an insurance company. They take money in. When things go wrong, crash your car, they pay out the money. What they figured out is we need good drivers. How do you know who's going to be a good driver? Well, back in those days, they're like, we're only going to insure government workers who, for some reason, or maybe statistically, right, are less likely to speed and get in a crash and drink and drive.

You could make up a theory, right? Like, if you're risk-averse, if you want to be a very stable, steady person, go get a government job. You're not going to get super rich, but you're probably not going to get fired. Sounds like a A lower risk driver than the average person.

So he sees a company that has identified a way to lower their costs and to basically choose their customers and have a competitive advantage because they specialize in government employees. Where else are they going to go but your company, right?

So this is the moat, right? This is one of the big Buffett ideas. It's not just a company that is beating its competitors, but a company that has a durable competitive advantage. That's like classic Buffett. Classic Buffett.

The other thing he learns... is the insurance company has piles and piles of cash because people pay their premiums every month on time. The money comes in and the company doesn't have to pay out that money until much later when there's a crash. Maybe they don't pay it out at all, right?

This is called the float. This is called the float.

And so he saw that this company was constantly looking for things to invest in because they had so much money. Young Warren Buffett is like, huh. And by the way, this is all before he takes the investing course.

He's 20. He's got a pile of bottle caps back in his childhood bedroom.

He starts to buy Geico, right? Shows up in the class, front row, raises his hand, A +.

Sure, I would hope so.

He wants to work for Benjamin Graham. That's all he wants to do. Focused, focused young man, right? So Warren Buffett goes to Benjamin Graham and says, A +, can I come work for your company? And Benjamin Graham says, no. Interesting reasons. Benjamin Graham was Jewish, and he said it's very hard for Jews to get jobs in Wall Street and finance at this time.

Depends on the firm.

At this time, yes. So he said that he would only hire Jewish investors for his firm as a sort of affirmative action.

I'll be honest with you, that story, as you may know, I'm Jewish, and I feel a little awkward about that, but I'm interested. Go on.

This is what Benjamin Graham thought. Warren Buffett, famously, not a Jew. Yes. Could not get a job at the company, right? So he gets a job as a stockbroker like his dad did. And Buffett hates it.

Huh.

Hates being a stockbroker. And if you think about it, being a stockbroker means you are a salesman and you have to sell new companies to your investors all the time. Buffett wants to buy one company. He wants everyone to just buy Geico and to never sell it ever. And if you're working on commission. That's a really bad business. I got one stock for you to buy. Never sell it. You can't make money off of it.

So what's he do?

He eventually does go back and gets a job with Graham, convinces him. And this is where the two of them, they cook up the system that is going to make Warren Buffett rich.

After the break. After the break.

It's the mid-1950s, and Warren Buffett is living the dream. Maybe not his dream, but a classic American dream. He's living in Westchester, outside of New York City. He's working for his hero, Benjamin Graham. He's got a wife, Susan, two kids, soon to be three kids, Susie, Howie, and Peter. And Buffett spends almost no time with them. He basically eats dinner, goes upstairs, and reads one financial report after the other.

50s dad. That's what he loved, right?

And the key idea that he and Benjamin Graham had was to find something that they referred to as a cigar butt company. And the joke, I guess it's a joke after the depression, right? The joke is that you could find a cigar butt thrown in the gutter and there'd be just enough tobacco left to get like two good.

Puffs out of it. And then you could throw it away, right? So this is different than the classic Buffett. This is not the way we think of Buffett today. No, that's right.

This is how young Buffett made his money because there was this information gap in the market. If he could find a cigar butt company that felt like I can get a little bit of money out of this and sell it, then I'll be able to like multiply my money. I'd be able to like, you know, make it happen. Right?

So here's an example.

He found the Union Street Railway in New Bedford, Massachusetts. It's 1955. This is a company that owned a bunch of buses. I don't know where the rail was, but a bunch of buses.

I bet they started out as one of those little urban streetcar companies.

So they may have run a trolley car at some point, but at this point they are buses at an amusement park.

Amazing. Sure.

So there's nothing remarkable about this company, but.

Warren Buffett starts to- Buses at an amusement park is mildly remarkable. It's fun, right? It's like the Chinese army. They own a lot of weird things.

We have the amusement park and the way you get there. So he starts to research the company and he finds out that in addition to the Tilt-A-Whirl, they have about a million dollars in treasury bonds and cash, just like sitting in the company. He does the math, figures out the company is worth like $ 60 per share if you include all this money laying around, stocks selling for $ 30 or $ 35 a share.

Amazing.

So one of the reasons why there's probably this huge gap is that stocks weren't all traded on a central system back then, right?

So just to be clear, this stock is not on the New York Stock Exchange. It's some weird little company that trades at some random little exchange. So people working on Wall Street don't even know this stock exists.

No, only a man who would spend every night whoring over companies and company documents would know that this tiny company exists, right? So Buffett puts an ad in the newspapers saying, I will buy shares for a certain price. He wants all the shares he can get his hands on, hoping that there's like old retirees of the company who have these stocks who are reading the newspapers.

Like certificates, right? They probably have a drawer with a piece of paper. Send them to me. It sounds like such a scam, doesn't it? Like if you saw an ad in the newspaper to send your stock certificate in, I would think it was a scam.

But maybe more trust back in those days to Warren Buffett, right? So he builds up his position in this company and he does what I guess apparently is one of his tricks. He shows up again on the weekend, like to like barnstorm into the company, meets with the CEO and whether he convinces the CEO to do something or whether the CEO was going to do it anyway, we don't know.

But soon afterwards, the CEO is like, okay, we will offer dividends, payments back on the stock and we will pay out our cash.

Oh, wow. I know. Buffett makes $ 20, 000.

Look at that. Buying up cheap stock, selling it high, which is good. Like if you're a 20-something back in those days, $ 20, 000 is awesome, right?

Yeah. I'd take it today.

Put it out in the newspaper, Jacob. He starts to find more and more of these cigar bots. And, you know, if you read his biography, there's just like, he has like intricate details of each one. I think the man has never forgotten a stock price.

Yeah. Right? Yeah.

But I'm struck by, the bigger picture of American finance at the time, right? In the decades after the Depression, American companies were really cautious, right?

They stockpiled cash.

And bonds and emergency funds because there was this feeling like the bad times can come again very quickly. So what you had was... companies that were really being overly cautious. And that's what Buffett saw.

Well, and also investors were clearly overly cautious, right? I mean, A, they weren't doing the work of like finding these obscure companies, but it's easy to forget now when we just assume that, you know, the stock market, the S & P is going to return whatever it is, 8% on average year after year. Like it took decades after the depression for the stock market to get back to where it was.

Like if you bought in 2019, you were probably still underwater in like 1950, certainly like into the 40s, you know? So like, not only were companies being cautious, but so were investors.

Yeah, who would want to buy these big names, the General Motors, right? But they didn't want to look at some tiny company in New Bedford, Massachusetts. Buffett would get something called the pink sheets, which were the prices of these tiny companies that would come out once a week. I assume that they were actually pink. And that was like the most up-to-date knowledge about the stocks once a week in the mail.

Running to, running to the mailbox, ripping over the pink sheet envelope.

That's when Warren Buffett would do the Warren Buffett thing. He'd start to call him on the phone. He'd start to research the company. He'd ask for all their stuff. Like he is putting in the extra work and that is how he is finding these companies. And no one else was doing it other than Benjamin Graham and a few other people who follow this philosophy. And so this is the flaw. This is the flaw he found in the market. And this is what he started to ride.

He crosses $ 100, 000 in net worth in the mid-1950s. He's in his mid-20s, still a young man. Managing other people's money at this point. Millionaire around the age of 30.

Has $ 10 million by the late 1960s.

Wow.

And just these little companies, one after another, getting in, getting out. That's his move the whole time?

He does some bigger companies. There's like a play on Amex, American Express, that was because of a cooking oil scandal.

Too hard to get into. Too hard to get into.

But the weird thing about this is that he is a very successful investor, right? Making millions of dollars on this technique. He's back in Omaha at this point. And nobody knows much about him. He's not on the front page of the Wall Street Journal. People are not writing about him really into the late 60s, like when he is already almost middle-aged. And he starts to twist these ideas.

Benjamin Graham retires. Buffett gets his own investors. And he starts to kind of take these ideas and do it slightly differently, which is Benjamin Graham preached diversification. His idea, the flip side of the cigar butts, was buy a lot of them. You never know which one's going to make it and which one's not. So, like, diversify, right?

Warren Buffett is like, no.

I have good ideas.

I have this success rate so far, so I'm going to kind of go all in on these companies I love, right?

That's counter not just to Benjamin Graham, right, but to, like, math. Math, right. So Markowitz, right, there's this whole modern portfolio theory that's coming in right around this time, right? The 60s. Yeah. And, like, It's a pretty compelling case that diversification is good, that it is a free lunch, that you get basically the same return with less kind of idiosyncratic risk. And Warren Buffett is disagreeing. Here's what he says about that. Diversification is protection against ignorance. It makes little sense if you know what you're doing.

Huh.

Boom. It's for chumps, Jacob, like us. I mean, fair. Tough but fair.

I mean, it worked for him. I do not advise this for everyone, right?

Yeah.

It did give him a certain advantage over the Benjamin Grahams of the world, which was if you pile into certain companies in particular, you don't have to rely on them to do the right thing to release this money that they're keeping to their investors, right? If you assemble enough stock, they have to listen to you. You can get elected to the board. You can make them do things, right?

And this was the next sort of turn of the screw that Warren Buffett was doing. He would find these undervalued companies and then he would make them give him back the money.

Uh-huh. Sanborn Map. Map. It's a map company. Do they also own a chain of ice cream parlors? That would be great, right? No.

But they could tell you how to get there because they made maps. So they specialized in selling very detailed maps.

I remember maps. Did you have the Thomas Brothers guide at the back of the car? Oh, yeah. Yeah, I absolutely did. It was a whole book. It was a whole block in the county. It was a whole book, yeah.

So this is even more detailed than the Thomas Brothers maps, right? They would sell these maps that were basically diagrams of specific buildings in every floor. So you knew where the entrances and exits were, you knew where the windows were, all of this sort of thing. And they would sell it to insurance companies who needed to know how safe the buildings were, and the fire departments, so they knew how to get in and out of the building if there was a fire.

It's a moat, by the way. Yeah. Who's going to make maps of every building in America once one company already has it? Exactly right. Exactly right.

So Buffett starts to buy some of their stock, buys enough that he gets on the board of directors, shows up for the board meeting, right?

He's ready. Looks around at the board of directors.

And he realizes... They don't really own much stock. They are the board of directors because I assume they are old men who have been on the company board a long time, friends of somebody way back when. And he's the one that actually owns a large share of the company. The rest of them, they're just there for, you know, just for fun, right?

I mean, they're getting paid. Maybe they're friends of the CEO, right? Classic CEO move is like pick the people who are notionally your boss, who are actually your buddies.

Buffett says to them, hey, okay, we got to do the thing, right? You got all this extra money. Why don't we just give it back to your shareholders, which is kind of me. And they're like, yeah, no. And then he says, they light up some cigars and laugh.

And he's thinking, I paid for those cigars. I paid for the room.

I paid for you guys to sit here, right?

There's a classic... problem with public companies, right? People have been aware of it for hundreds of years, the principal agent problem. When one person or group of people owns the company, like the shareholders, and somebody else runs it, the people running it are not going to naturally act in the best interest of the owners. They're going to act in their own best interest.

The incentives are not aligned, right? So he threatens a special meeting. He's going to, like, take this to all the shareholders. Eventually, the rest of the board relents. They offer to give back some of the company's excess money, right?

Mm-hmm. So this is his strategy. Meaning pay it out to shareholders, pay it out as dividends to the shareholders.

Exactly right. So this is the strategy. You find the undervalued company, you buy the stock. If the price goes up, great, you can sell the stock. If the stock price goes down, you buy more and more and more. And now you have an underpriced company that you own a big chunk of and you can bully them into doing what you want.

Which is arguably the right thing. You can bully them into acting in the best interests of the owners of the company.

Now, they might say another depression's around the corner. This could happen at any time, No, that's true. And we can't live on the edge, Mr.

Buffett.

And he's like, it's my company, and I want the money.

Yeah. Usually worked.

The one time it didn't work, maybe Warren Buffett's most famous investment. And we'll do that.

Berkshire Hathaway. After the break. Oh, you're funny. I'm going to go to the bathroom. That is the end of the ads. So, Robert, when we left... Warren Buffett was collecting cigar butts, bullying, recalcitrant boards. Now he's about to make a big move.

Yeah, it's the 60s, swinging 60s. Clearly not in Omaha, Nebraska. Never really came there. But Buffett's looking around for these tiny companies, cigar butts, and he finds what he thinks is a great one. It is a textile manufacturer also in New Bedford, Massachusetts, home of a lot of Dying Industries, yes.

Is it a whaling company? Yeah, exactly right.

No, it is a textile manufacturer known as Berkshire.

Hathaway, right? Just this great regal name. I've heard of this textile company somehow.

So they make fabric, and eventually they'll specialize in the lining to men's suits. You know, like that kind of rayon, sateen kind of thing, right? Now, even in the 1960s, nobody thought.

that there was going to be a.

Renaissance of textile manufacturing in Northeast United States, right? It just was not happening. Most of the textile mills had moved to the Southern United States. They were about to move overseas. This is an expensive, low-margin business. And anyone can make the lining to a suit.

Yes, there is no moat. There is no moat.

So the owner of Berkshire Hathaway was, and I love this name, Seabury Stanton.

Not a Jew.

I'm not saying he was wearing a top hat, but he definitely owned a top hat.

I'm thinking more yachting hat. Like a captain's hat, right? Seabury Stanton in New Bedford. That guy definitely was on a yacht.

So, young Buffett starts doing his thing. He's acquiring shares of the company, right? Secretly, as he often did, because he didn't want anyone to know that he was accumulating this large position, right?

So, he looks at it, right? It's $ 7. 50 a share. He thinks....

The company's probably worth $ 19 a share.

Okay. Right? Double, right?

But Seabury Stanton also knows the company is too cheap. Seabury Stanton is also accumulating shares in his own company, right?

So Buffett does the thing, stops by. Oh, hi.

Just wanted to stop in and tell you I own a large part of your company. What are you going to do about it, right? And Seabury Stanton says, I know you're buying Berkshire Hathaway, and I want to buy it back. What will you sell it for, Mr.

Buffett? And Buffett goes... $ 11.

50 a share.

Bought it for $ 7.

50, sell it for $ 11.

50, good profit, right? Yeah, yeah.

And Seabury says, if I make that offer to you, will you promise to take it?

Huh. And Buffett says, sure.

I mean, if it's in the near future, I will take $ 11. 50 a share. Then eventually, Buffett gets the letter from Seabury Stanton.

It is not $ 11. 50 a share.

Seabury is offering $ 11.

038. Three-eighths, because stocks traded in eights at that time. And so three-eighths is.

One-eighth of a dollar less than he promised.

What is it? It's like 12 cents. So it's like 11.38 instead of 11.50. Yeah. Buffett goes ballistic. Right? This is not the bottle cap I was promised.

So this guy's trying to chisel me for 12 cents.

And Buffett's in at $ 750 a share, just to be clear. It's still basically a 50% return. Buffett says, I don't want this company, but I certainly don't want Seabury Stanton to have this company. And Buffett says, I'm not going to sell. I'm going to keep buying and keep buying, keep buying. And suddenly, like the theory, right? You're going to take a few puffs off the cigar butt and throw it away. All of a sudden, he controls the company.

He's chewed up the cigar butt and swallowed it.

And he's like, I have a dying manufacturer in, frankly, a dying corner of the country, right?

Shout out to Bedford.

He would later call it his biggest investment mistake.

And just to be clear, as one knows, the company he controls, the company that he rode to fame and fortune, is called Berkshire Hathaway. Yes.

They shut down the mills eventually, 1985, right? There is no textile manufacturing in Berkshire Hathaway now. But he kept the name. It became the company that he used to buy other companies and to grow this empire. And I think he keeps the name just to remind him. I think there's some sort of moral in.

It for him. It was this moment when he acted irrationally, presumably.

I mean, maybe it's a kind of screw you to Seabury Stanton to this day. Seabury's dead and buried. But I think it was more just to say like, Don't let your emotions rule you, you know? And he wakes up every morning and looks at that name and maybe part of him is like, that was almost a mistake.

I mean, it's great. So it's like, he's arguably the greatest investor of the 20th century and he more or less chose to name his holding company, is holding company the right term? After his worst investment or one of his worst investments.

It is elegant.

It's kind of like the, you know, the memento mori coin that like, remember, it's a little bit has that kind of vibe. Yes. Like, Remember, you are imperfect. Yeah. Oh, that's very... The Zen of Warren Buffett.

I'm surprised.

I'm sure that book exists. Yeah, absolutely.

So he's got this company, this textile manufacturer. He's doing all these other investments. He needs more and more money about to keep the textile maker going and to.

Continue to expand.

And this, this is where he finally puts all these pieces I've been talking about together because... He buys.

An insurance company. Yes. The float, like we talked about with Geico. The float.

This one is called National Indemnity.

Okay.

They make unusual insurance policies.

Like, for example? Circus performers. No. Yes.

Lion tamers. Which, you know, who's going to insure a lion tamer, right? The body parts of burlesque stars. It's like Lloyd's.

Like, people talk about Lloyd's of London. Like, a famous tennis player might insure their hand or something. Yeah, yeah, yeah.

You know, I mean, our voices, obviously insured by national indemnity, right? Radio station treasure hunts.

What?

Well, you know, they would do all these, like, giveaways at the radio station. Someone needed to insure that, like, there would be enough money and that they would pay off.

Recently. So they're still kind of in that business. I remember there was, was it Yahoo? Somebody had a, like a. a college basketball tournament, you know, the NCAA tournament bracket, where if you got every single one right, you got, I think, a billion dollars. And I think Buffett insured that. Same idea. Yeah.

And I mean, eventually he would move into the reinsurance business, which is insurance for insurers, right? But it works exactly the same way, right? That all of these lion tamers and circus performers are paying money. I guess the owners of the circus are paying money There probably won't be an accident. They won't have to pay it out. And so this money is coming in. And this, you know, even.

If they do have to pay it out, it'll be later, right? Like that's the key thing is that you get to hold the money. Yeah, exactly right. So by the way, National Indemnity, it was a good company. It was doing well.

But apparently he learned that the CEO once a year would say like, I can't stand being this business. I just want to like go to Florida and retire and be on vacation. I'm going to sell this whole place. And Warren Buffett said to someone in the company, the next time he says he wants to sell the whole company, call me. Yeah. Call me. And apparently the whole thing happened.

He goes, he buys national indemnities, and the guy goes on vacation the next day. He just makes it happen really quickly, right?

So now. Calling Warren Buffett becomes a feature of the American capitalist landscape after this, right? This is a great moment in business history.

You'll have a big phone, a big red phone that says Buffett on it, right? So now the pieces are in place. got money coming in from National Indemnity, a few other insurance-like companies. You've got the mills. You've got all these different investments he has in different small companies, right? And Buffett calls this the golden age of capital allocation.

And what he means is if you have enough different businesses putting off different amounts of money, you can direct that money to where it's going to make the most difference and make the most return. He's essentially saying, this self-funding machine at this point. He doesn't need investors to come in. He doesn't have to beg or borrow money for his companies. He just has to move the streams of money around. And he is about to hit the 1970s, which was a terrible economic time in America where there's a huge recession, the prices of companies go down, and somebody, well, Warren Buffett, because that's what we're talking about, and Warren Buffett has the cash and the confidence to to go wild in the 1970s.

So the bad stock market is just what he needs. It's exactly what he needs.

And he takes stakes in the Washington Post. He buys more Geico. He bought National Presto. I don't know the names of these companies. Which makes pressure cookers and popcorn poppers.

I love that. I love that.

He puts a big stake into Pinkerton's detective agency.

A little weird. Not that I'm important in business history in their own way.

By the end of the 1970s, Buffett's worth around $ 100 million, right? And it's all under this umbrella of Berkshire Hathaway. They don't make fabric anymore. They just make, well, popcorn makers.

They make money. They make money, right?

And so this is the point that I would say young Warren Buffett has become essentially the investor that we see today. Not a collector of cigar butts. not like making these tiny little plays to get some money back from these companies, but an owner of big American companies that he thinks are at great prices that he likes to hold and do the capital allocation thing. So it's around this time, late 60s, early 70s, when he starts to appear in the newspapers, right?

In the magazines.

Forbes wrote an article called How Omaha Beats Wall Street. I'm sure everyone's like, hmm, what was this about? And it talked about Buffett's investment firm, which had been running about 12 years at this point after he left, Benjamin Graham. And he said they'd never lost money in this time. $ 10, 000 had been turned into a quarter of a million dollars.

If you'd invested $ 10, 000 at the beginning. Yeah.

And it was the first sort of articles that started to talk about the Buffett weirdness, right? Oh, he lives in a small house. Like he drives a small car. Like he's a big deal in Omaha, but nobody knows him. He eats like a six-year-old boy. He just likes hamburgers and french fries, and that's pretty much all he eats.

Cherry Coke. And Cherry Coke. It's before the Coke era, right? Oh, right.

Young Buffett, and one of the reasons why I wanted to tell this story is that, like, that was really this, like, rare moment, both in American finance and for Buffett himself. This idea that, like, there were such vast mispricings and so little information in the stock market. that someone with his particular personality could end up making this huge amount of money. Of course, he'd go on to make billions and billions and billions and billions that would dwarf this.

But this was the important part, that the weird kid had his moment. Now, of course, there's no end to the amount of information you can get about all these companies, all these stocks. And there's a million people, well, first of all, that read everything Warren Buffett writes and that want to do what he does, pour over returns and how much inventory do they have and what's their working capital and all these tiny little measures of how well a company is doing. They're doing the same thing. And so it's harder to do that. Warren Buffett has moved on.

You have to go farther afield, right? Actually, what I think of here is Jane Street. You know Jane Street, right? It's this little trading firm owned by the people who work there. They're all super smart math people. And like the most recent time they were in the news, it was because they had figured out that in the Indian stock market, you could make some weird move where if you bought the options and the stock, you could make prices move in a way that was like basically a guaranteed profit, right? Like that actually seems kind of Buffett-esque, even though it doesn't have the like, oh, fundamental grandpa Buffett, that's the later Buffett. It has the like, I'm really into details and I'm going to look all over the

world for some financial detail that is going to make me a buck. I feel like that's the 2025 version of it.

Or even high-speed trading that finds a mispricing that occurs in a millisecond and taking advantage of it.

So now it happens with math, right? Now that kind of move in the U.S. markets, as far as I can tell, rarely happens with reading the financial reports. And it usually happens with math, with quants. Yes.

And they do not show up on the weekend to meet with CEOs.

Their machines do it for them.

Their machines talk to each other. I mean, that's the big picture. You know, in finance, successful strategies don't last for long. You can only pull the young Buffett trick one or two times, and then you've got to become old Buffett.

Next time on Business History, a show about the history of business, how does Warren Buffett find a new edge? How does a guy in the business of insuring lion tamers and buying up bus companies manage to make $ 100 billion in an era dominated by technology? It's not going to be easy. Our producer is Gabriel Hunter-Chang. Our engineer is Sarah Bruguier.

And our showrunner is Ryan Dilley.

I'm Jacob Goldstein. And I'm Robert Smith. We'll be back next week with another episode of Business History. A show about the history. Wait for it. Of business.

How Warren Buffet Built His Legacy By Finding Value No One Else Could See from Business History

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