Someone who reads my articles asked me this question:

Do you know which specific investments that Buffett made in his early career gave him his biggest returns and generated his initial wealth?

What did he see in these companies that led him to invest in them?

– Ryan

If you read Alice Schroeder’s “The Snowball” you can easily find the investments that generated Warren Buffett’s initial wealth.

Here, I’ll talk about just the first $100,000 Warren Buffett made investing in stocks.

We’ll start after Warren Buffett first read “The Intelligent Investor” but before he started taking Ben Graham’s class at Columbia. Buffett already owned Marshall Wells before he took Ben Graham’s class. He still owned the stock when he went asked David Dodd (co-author of “Security Analysis“) if he could skip Dodd’s class and go to Marshall Wells’s annual meeting. This is where Buffett first met Walter Schloss.

Let’s take a look at Marshall Wells when Buffett owned the stock.

Marshall Wells

? Biggest hardware wholesaler in America

? $200 stock price

? $62 earnings per share

So, the stock was selling for a little over 3 times earnings. The earnings yield – “E” divided by “P” – was about 30%.

This brings me to the first point I need to make about Warren Buffett’s early investing career. Warren Buffett worshipped Ben Graham. But there’s this idea that Warren Buffett started out as a Ben Graham type investor. That’s false. Buffett bought some Ben Graham type stocks – like net-nets. Graham had a big influence on which stocks Buffett picked. But Warren Buffett never invested the way Ben Graham did.

More on that later.

For now, the big difference we need to discuss between early Warren Buffett and Ben Graham is that Warren Buffett is, was, and always will be a return on investment investor. He’s not a value investor in the sense that he sees some static value and buys at a 50% discount to that.

Buffett is obsessed with the idea of compounding.

When Warren Buffett started taking Ben Graham’s class there was already a big difference between Graham and Buffett in that Graham was thinking about earning a good return on his investment capital, protecting the safety of his principal, and beating the market over time. Warren Buffett was thinking about compounding wealth. He was interested in getting rich.

There’s a huge difference there. Ben Graham – and later Walter Schloss – made a habit of returning a lot of their partnership’s gains. So, if you had $100 invested in Graham-Newman and they earned 15% on your money – the default idea was not necessarily to take that $115 and try to turn it into $132.25 next year. The first idea in Graham’s head was: “I can earn 15% on $100 safely”. So, he was concerned with how much capital the partnership could operate with and still beat the market while taking less risk.

Graham was never concerned with compounding the partnership’s wealth over time.

This is a huge difference from Warren Buffett. When Buffett ran a partnership, he took $1 and turned it into something like $27. That was always his goal. To grow wealth. Not just earn a decent return safely.

This is something Buffett wanted to do even before he knew anything about value investing. Buffett’s obsession with compounding wealth over time predates his conversion to value investing. And it was never something he had to “learn” after his time with Ben Graham. He was always obsessed with return on investment as being the key to compounding. That doesn’t mean he was obsessed with the company’s return on its own capital. But, from the earliest days, he thought of stocks in terms of the return they generated for him – not in terms of the discount to some fixed intrinsic value.

This caused Warren Buffett to invest very differently from Ben Graham – even while he was working for Graham.

It’s interesting to note that Buffett managed to invest very differently from Ben Graham even while he bought almost the same exact kinds of stocks Ben Graham bought. In fact, sometimes he literally bought the same stocks Graham bought. But Buffett always got much better results.

Why?

Because he focused. Warren Buffett told Charlie Rose that “focus” was the key to his success. He’s repeated over and over again that he doesn’t necessarily have more good ideas than other investors – he just has fewer bad ideas. Buffett focuses on his very best ideas and puts as much money as possible into those ideas.

If it sounds like I’m exaggerating when I say “as much money as possible” – check out the next stock:

GEICO

Buffett found out that Ben Graham was the Chairman of GEICO. Graham-Newman bought a huge block of GEICO stock in the past. They got the stock at a Ben Graham type price. But GEICO turned out to actually be a wonderful growth stock. Investors who kept their shares of GEICO when Graham-Newman distributed them made a lot of money over time.

GEICO’s headquarters were in Washington. So, one Saturday, Buffett took a train from New York (where he was going to school) down to Washington. You’ve probably heard this story before. Buffett knocked on the door. The only person there was Lorimer Davidson. Davidson later became CEO of GEICO. He put together the Graham-Newman deal.

Anyway, he knew a lot about GEICO. There was no better person for Buffett to meet. So, Buffett started asking him questions. And he kept answering them. And this went on for hours. Davidson explained to Buffett that GEICO was the low-cost operator in the car insurance business because they did not use agents. Buffett was sold on GEICO’s future prospects. Here is Buffett’s response as described in The Snowball…

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