Becoming Warren Buffett: Financial Accounting Analysis
Warren Buffett’s Beginning
The documentary Becoming Warren Buffett shows the viewers how Warren Buffett became the third richest person in the world, from start to finish. Warren started as a boy who came from a middle class family. He was not born into riches. Warren’s father was a stockbroker and his mother was a housewife. Warren had two sisters: Doris and Roberta. He started off by reading his father’s books on finance and accounting. He used to study the stocks and write them in his father’s office. He found an interest in investing at a young age. When Warren was younger, he learned that he could make money doing simple tasks for people. At an elementary school age, Warren started selling coke and gum to people going door to door. He also became the paper boy in his neighborhood to make extra money on the side. Because Warren always had an interest for money he would save up all the money that he made doing these small tasks for people. He invested in his first share of stocks when he was just eleven years old. He even brought in stocks to school to convince teachers that a certain stock was going to go down. He had an interest in stocks and investing, so much so that he decided when he was ten years old that he was going to be a millionaire before he was thirty years old. As he grew older, Warren excelled in school most of the way through school. He graduated high school and went to the University of Nebraska and Columbia University. In order to pay for the schools that he wanted to go to, he made his own money to put himself through school. He invested in land to create a business in order to create his own opportunities for himself. He went to college and also took a public speaking class, which is the favorite achievement, because he says that it is the most important thing he ever learned how to do. After his schooling Warren worked for Benjamin Graham, his professor and mentor. He eventually moved to Omaha where he bought a cost effective house. After working as a salesman for a few years Warren began to start investing and creating more companies, like the one he is most known for Berkshire Hathaway. Buffett started Buffett Partnership with his partner Charlie Munger.
In 1964 Buffett started his partnership with the Berkshire Hathaway company. Berkshire Hathaway started as a textile company, and merged with a manufacturing company to make a complete merged company called Berkshire Hathaway. Buffett invested in the company early, and it paid off for him. The company has over 50 assets or companies associated with them. The company also owns shares to some of the most successful revenue gaining companies. The overall net worth of the company and of Buffett is about 84 billion USD. This is the most financially successful asset that Buffett owns.
On top of owning companies, Buffett owns shares in some of the most expensive companies. Buffett started investing at the age of eleven, he went to the New York Stock Exchange and bought his first stock. Warren has been investing in the stock market from a young age. One of the reasons for his vast success is investing in stocks. To play the stock market you have to choose stocks carefully. It is the principle of buy low sell high. Warren has had some of his stocks since he first started investing. Buffett has invested in a lot of the top companies around the world. Some of the stocks that he is investing in are, American Express, Apple, Coca Cola, Bank of America, Costco, Delta, US Bank, McDonalds, and Walmart. Those are some of the most notable stocks he has invested in. All of which he has thousands of shares. All of these companies have had success in the stock market and he made good investments. Each of the companies that are a branch off of Berkshire Hathaway, allow higher ranked employees such as C-Level employees to have shares of the Berkshire Hathaway stock as a form of salary. That is proof of how his company has flourished in the past decades.
Warren Buffett’s main key to success is investing in insurance companies. Berkshire Hathaway owns a wide range of insurance companies most of which bring in a lot of capital each year. Successful insurance companies run on the idea of FLOAT. Float is the idea that there is a difference in the premiums that the company gets and the amount of the claim that is paid to the customer. With that remaining difference there is revenue left for the company. That revenue can then be transferred into a new investment. Insurance companies provide a constant cycle of revenue and reward is the company is functioning as it should. Buffett believes his investment in insurance companies are the reason that he is so successful. With stocks and the market you have to be patient and hope that the stocks go your way. With insurance companies there is a better way to success. Investing in so many insurance companies is investing in the hope that the company is long lasting and that it will be successful for a long time. Insurance is a type of company that everyone will need even if the economy of the world goes down. There are many types of insurance, such as medical and auto insurance. These are necessities and that provides protections on insurance companies. Insurance companies allow for a highly profitable company if there is an investment strategy. Warren Buffett had investment strategies which in turn allowed him to create successful companies.
Buffett’s Strategies for Investment
Warren Buffett uses strategies for investments in order to create the most profitability. There are four main categories. These categories are business, management, financial measures and value.
Having a clear strategy allows to see the clear path to earning more revenue. He looks to all these things to decide if he is going to invest in the company. The company has to be worth the risk in order for him to invest.
Category 1: Business
First category is business. Buffett says that in order to make a business profitable or to earn anything, the person must learn how the business and the business world function. If you do not know how the business world is operated, you will not be able to conduct a business let alone a successful business. To invest in a business, Buffett takes many steps before investing. First he looks at the business as a whole to assess how they are doing financially and product wise. He then looks at the operating history of the business, in order to get a gauge for how they have been doing prior to his investment. Finally he looks at the long term of the business. He looks at the forward plan and does not just focus on the past of the business. He looks to make sure that the business will be worth the investment.
Category 2: Management
The second category is management. Buffett needs to make sure that for each investment he has the management behind the company is favorable. For example will the management of the company be able to be responsible for the company’s retained earnings and turn those earnings into dividends for the people that hold their stock. He then asks if the management is able to manage the cash flow that comes in and out of the company. There is also the question of if the management will form a team that creates opportunities for the company. Are the people that are being hired right for the company? There has to be a trust that the management can handle that with caution, especially higher level jobs. Finally there is the question of integrity of the management. Are the leaders of the company in it for the personal profit or are they going to help the company flourish. There needs to be a steady management in order for business to prosper.
Category 3: Financial Measures
Along with looking at the backbones of the company, Buffett of course has to look at the numbers and finances of the company. Without looking at the finances of the company, how would one know whether to invest in the company or not. Buffett looks at the finances of the company. How the company is doing treasury wise at the moment, and how the company is projected to do in the future. The future is more important to Buffett than how the company is doing at the moment he is going to invest. He looks more towards the future, because to him that is more important. Buffett mostly looks to the amount of money the shareholders will earn based on the amount of retained earnings the company will get. He looks at how much one single dollar is worth in accordance with the shares for the company.
Category 4: Value
Overall Warren Buffett tries to see and look for the ultimate value of the company in the future. He of course wants to know how the company will be able to make him money as well as the company prosperity. He wants to know what he will gain in the long term from the company. Buffett looks for obvious reasons why the company would succeed in the market. For example say if the company was new to the market or if the company is bringing a new product to the market that people will like, the company is more likely to make more money.
Buffett Saving Money
Warren Buffett since a young age has been saving money. He watched his father deal with finances and he decided that is what he was going to do. Not only did he make money doing small things, he was able to save a lot of that money so that he could invest it. Warren Buffett has always been an investor at heart. He has always loved to make money and to save money. Even from a young age, when he sold things for small amounts of money. Even now as an older adult with money that he could potentially spend, he does not spend as much as he could. He lives in the same place and only spends what he needs to spend. He is also consistent. Every morning he gets McDonalds on his way to work. There are three options to his morning breakfast run everyday. He only goes with those three choices everyday. And based on the day in the morning his wife lays out the amount of money he will get to spend on breakfast everyday. He likes to save his money even though his net worth is billions of dollars. He has been using the practices of compounding and value investing in his everyday accounting life. When he was younger he invested in a penny machine. The machine would be able to take the weight of the person standing on it for just a penny. But the more people you get to stand on it for just one penny, the more pennies you are able to earn. In that case all of those pennies can add up really fast when everyone you know is trying to weigh themselves for a penny. Young Warren Buffett did calculations to see what would happen if thousands of people stood on his penny weight machine everyday, and he also did calculations for what would happen if the people not only stood on the machine for once a day but if the people stood on the machine a couple times a day for a penny per each person. He learned that there are a lot of easy way to make money and to save money.
Compounding is when you get interest on the interest. So in other words you would be adding interest to an already existing loan or deposit. Warren Buffett liked to learn about this at a young age. He read books on compounding and how that would help make the company successful. Profit wise that will help if there is more interest added to the loan or deposit. Warren Buffett has a famous saying that you can turn fourteen dollars into a thousand dollars with the compounding method. You can use compounds and dividends to create wealth for yourself. So Buffett recommends this method for people who are trying to make money in the business of investing. Compounding is most often compared to a snowball that goes down a hill. It starts small and gets bigger over time. Once the snowball reaches the bottom of the hill it will be a bigger size. The same thing goes for accounting and compounding interest. Once you start with a small sum of money, you can then keep adding even one percent of interest over time and you will be able to create a large sum of money.
Value investing is choosing the stocks that are going to sell less than the value that they initially say they are going to sell at. These are stocks that are on the market but they are undervalued. These are the stocks that will sell for a smaller value than they seem to sell. This is what Warren Buffett likes to use when he is investing in the stock market. This way he will be able to buy stocks at a low price and then when the stocks go up in value, he will be able to sell the stock for a higher value creating profit for himself. Warren Buffett uses an idea called Long Term Value Investing. As said before Warren Buffett does most of his accounting through long term methods. Buffett likes the idea of waiting for the long term to do his investing. This way he will gain more in the long term than in the short term. Warren Buffett can buy a stock or shares of a stock for a small amount of money and then wait for interest to take it term and add more money to the shares that he has bought. This way he is gaining more of a profit from his shares. He basically spends less to gain more. Buy low, sell high.
Overall in his life Buffett is more likely to earn around one hundred billion dollars in net worth. He will continue to earn money through his shares and through his companies that he owns through Berkshire Hathaway. Buffett will continue to work throughout his lifetime even though he could retire comfortably right now in his life. He has changed accounting and how people will invest their money, especially the stocks that they buy and sell. He is an influential person in the accounting world. His company will continue to grow and expand through the years to come. Berkshire Hathaway will continue to expand to give him money and add monetary value to his name and to his company. Warren Buffett has earned billions of dollars with more to come.