The Real Way Warren Buffett Got Rich (And Why You Should Care)

Let me tell you something about Warren Buffett that might shock you.

You know all those Buffett quotes you see floating around about buying wonderful companies at fair prices and holding them forever? The ones that get shared endlessly on social media by folks who think they’re investment gurus because they bought some Apple stock?

Well, here’s the truth: That’s not how Warren got rich in the first place.

Now, don’t get me wrong. Buying great businesses at reasonable prices is a fantastic strategy – if you’re sitting on billions of dollars like Berkshire Hathaway is today. But for those of us mere mortals trying to build wealth in the stock market, we’d be better served following the Warren Buffett of the 1950s and 1960s.

You see, the young Warren Buffett learned his craft from the grandfather of value investing himself, Ben Graham, at Columbia University. Then he went to work for Graham at Graham-Newman, where he really got his hands dirty with deep value investing. And let me tell you, he wasn’t looking for wonderful businesses back then – he was hunting for cheap stocks in solid companies that Wall Street had tossed in the bargain bin.

I’ve spent countless hours poring over Buffett’s partnership letters from 1957 to 1970, and they’re an absolute goldmine of investment wisdom. They show us exactly how he built his initial fortune, and more importantly, how we can apply those same principles today.

The Four Ways Buffett Really Made His Money

Buffett divided his investments into four distinct categories, and understanding these is crucial if you want to follow in his footsteps:

1. The Private Owner Approach

This was Buffett’s bread and butter. He’d find companies that were dirt cheap compared to their actual worth and buy them like he was going to own them forever. He wasn’t looking for quarterly earnings beats or momentum plays – he was looking for real businesses selling for less than they were worth.

2. The Relatively Undervalued Play

These weren’t the screaming bargains of category one, but they were still companies trading below their intrinsic value. Think of it as buying dollar bills for 70 cents instead of 50 cents. Not as sexy, but still profitable if you’re patient.

3. The Work-Out Situation

This is where Buffett really showed his creativity. He’d find special situations – mergers, spinoffs, reorganizations – where he could make money regardless of what the broader market was doing. It’s like finding a $20 bill in the street – it doesn’t matter if the stock market is up or down that day.

4. The Control Play

This is where things get really interesting. Sometimes Buffett would buy enough stock to influence company decisions. Take the Dempster Mill story – he bought a controlling stake in a company selling for $18 that had a book value of $72. That’s like buying a dollar for a quarter!

The Dempster Mill Case Study: A Master Class in Value Investing

Let me tell you about Dempster Mill, because it perfectly illustrates how Buffett operated back then. This wasn’t some wonderful business with great brands and high returns on capital. It was a boring old company making windmills and farm equipment in Nebraska.

But here’s the beautiful part – it was trading for $18 per share when it had a book value of $72. That’s the kind of discount that makes value investors salivate. Buffett slowly accumulated shares until he owned over 70% of the company. Then he brought in new management, cleaned house, and nearly tripled his money.

Was it pretty? No. Was it easy? Absolutely not. But it was profitable, and that’s what counts in this business.

The American Express Opportunity

Sometimes the market hands you a gift wrapped in newspaper headlines of doom and gloom. That’s exactly what happened with American Express during the Salad Oil Scandal of 1963. Everyone thought AmEx was going down in flames because of a massive fraud involving soybean oil warehouse receipts (yes, really).

The stock crashed 50%, which got Buffett’s attention. He did his homework, realized the core business was solid as a rock, and invested $13 million. This wasn’t just a cigar butt play – it was buying a great business when everyone else was running for the hills.

The Bottom Line

Here’s what really matters: Buffett has said multiple times that if he were managing smaller sums today, he’d go right back to investing the way he did in the partnership days. That should tell you something important.

For individual investors like us, there’s a fortune to be made following Buffett’s original playbook. Look for solid companies trading at deep discounts to their intrinsic value. Find special situations where you can make money regardless of market conditions. And when the market occasionally serves up a great business at a fire-sale price due to temporary problems, back up the truck.

The truth is, you don’t need to find the next Amazon to make money in the stock market. You just need to find things that are worth a dollar and buy them for 50 cents. That’s how Warren really got rich, and that’s exactly the kind of opportunities I’ll be bringing to you in my newest service on Benzinga Research.

Remember, the stock market is simply a mechanism for transferring money from the impatient to the patient. And I plan to be very, very patient.

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