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How Did Warren Buffett Make His Money (5 Rules for Success)

by | Nov 1, 2021 | Business Lessons, Investment Lessons

How did Warren Buffett make his money? Simple. He follows 5 rules for success viciously and we're about to review each one in detail.

Warren Buffett is a man who needs no introduction. At 91 years old, Nebraska’s true son is considered one of the best investors the world has ever seen. 

As CEO of Berkshire Hathaway, he is truly successful on so many fronts. He has a net worth of 104.3 billion dollars, thanks to his conglomerate that owns and operates over 60 companies in the U.S. and abroad. 

Buffett has loved business from a young age. At 7 he read One Thousand Ways to Make $1000, was selling gum to make a buck and in High School started a business placing pinball machines in barber shops. He sold that business quickly for a value today of almost $100,000.

He held many different jobs. Most notable was working for value investor Benjamin Graham. Graham closed his business in 1956 and Buffett went on to start many different partnerships co-investing. At the time he was worth just over $100,000 which today is over $1,000,000. Many of the partnerships he invested little of his own money but it paid off.

So how did Warren Buffett make his money?

Well, in 1962 he was officially a millionaire and 28 years later became a billionaire when Berkshire Hathaway began selling class A shares. Today, just one share of Berkshire Hathaway is over $400,000 and he owns let’s just say a lot!

Berkshire is a holding company for several investments like GEICO, Fruit of the Loom and many other well known brands. Warren finds undervalued companies and either acquires the entire company or a large portion. Highly recommend reading Berkshire Hathaway’s annual shareholder letter each year. They’re filled with so much value and business lessons.

There are a lot of investors, maybe even you, who buy businesses undervalued like Warren Buffett. So what does he do different?

Watch this video or continue reading to learn Warren Buffett’s 5 Rules for Success!

Rule #1: Reinvest Your Profits

In the biography about Warren Buffett titled ‘The Snowball’ the author Alice Schroeder talks all about Warren Buffett’s business life.

The book is actually titled, The Snowball, to illustrate the effect of compounding. Compounding, is tiny additions over the long-term that result in huge gains. 

Buffett is an advocate of taking all profits and reinvesting them back again. Over the long term, this can lead to huge gains without doing much work. 

Reinvesting your profits is a form of delayed gratification that is really tough to see in the short term. This is hare for most investors who spend their profits, but if you read The Millionaire Next Door, you’d see many millionaires believe in delayed gratification. 

It literally pays to be mindful of the opportunity costs you might incur by spending the profits today. 

Investing and reinvesting will compound over time, which tough to see clearly in the moment, pays dividends in the future. This goes for reinvesting in yourself also, which Buffett who reads 4+ hours a day is also a fan of.

Warren Buffett quotes

Rule #2: Be Willing to be Different 

In the late 1990s people were all jumping into the stock market and chasing the dot com stocks. Buffett was one of the few investors who chose to stay away. 

Being different saved both him and Berkshire Hathaway from the dot com bust. 

Remember: 

The Bulls and Bears Make Money. Pigs Get Slaughtered 

Greed bankrupts many investors as does following the herd. Following the herd never ends well.

In Alice Schroeder’s biography on Buffett she covers many contrarian positions Buffett had. 

One was buying up companies or parts of companies for really cheap during The Great Recession. 

This was when a lot of the other companies were on the verge of either bankruptcy or decided to be too conservative. 

Not Buffett. He has an inner scorecard that helps him make his decisions and leaves the emotions of the market out.

Being different pays off, while following the herd just ends up hurting your portfolio. Buffett is super famous for scooping up opportunities while many are panic and selling off. Next time you see the market selling off, maybe it’s time to scoop in and uncover a second income opportunity which Buffett suggests for all!

Never depend on a single income. Make an investment to create a second income.

Rule #3: Spell Out the Deal Before You Start

Always set mutually agreeable terms before going too deep in an investment, partnership or job!

This is always beneficial for both sides. 

When one side feels left out or exploited long-term nothing ends up good. 

Warren Buffett takes this approach for all deals that Berkshire Hathaway makes. 

Whether you are a freelancer, employee, or business owner, having a clear idea of what you expect and communicating effectively is super beneficial.

Rule #4: Watch Small Expenses

Tracking your expenses and net worth is so important. 

Use a budgeting app, spreadsheet, or even pen and paper to always have a 30,000 foot overview of your finances. 

Warren Buffett and many other successful entrepreneurs are known to be frugal in their businesses. 

Even Sam Walton, the founder of Walmart, was frugal in his personal and business expenses. 

Small expenses tend to slip out of sight because they seem small. But unnecessary small expenses can kill you financially.

This “death by a thousand cuts” outcome resulting from small, unnoticed expenses in your personal life or business is devastating. 

Many don’t notice this until it’s too late. Maybe you get a raise or bonus and decide to get a nicer car. It only cost a bit more each month, but what happens if that job or business disappears? 

You see this with even small things like subscription services today. We have subscription services for virtually everything and most people don’t cancel. Maybe like that gym membership you’ve had for the last year or in my case my lifetime supply of razors from Dollar Shave Club!

Warren Buffett Advice Watch Small Expenses

Warren Buffett watches his expenses very closely, even being the top 10 richest person in the world.

When he buys a new car, it’s at the end of the year to save money. His house today is the same house he bought in 1957 for $31,500. When he’s in Omaha, for breakfast you’ll find him at a local spot where it cost less than $5 to eat like a king.

We can all learn a thing or two about watching those small expenses.

Rule #5: Be Persistent

When reading Warren’s biography you can see the persistence that Warren Buffett has exhibited throughout life. 

Even when looking back at his early childhood, you’ll see how persistent he was. He sold chewing gum, Coca-Cola bottles and weekly magazines door to door. He even continued to go door-to-door knocking when he first approached GEICO.  

There are many other examples during his adult life where he continued the behavior of being persistent. 

He’s started many partnerships, some rough but he persisted through each over decades. During  multiple recessions he was extremely persistent and stuck them out when others didn’t.  Still today, he’s continued to be persistently patient in the companies he acquires. He’s known for sitting on large sums of cash, while others are overpaying, waiting to scoop in for a value. 

Personally I find it amusing when today’s Silicon Valley one-hit-wonder keyboard warriors tweet that he doesn’t understand today’s economy. He simply waits for the right time persistently patient and it’s paid off over time.

He’s also widely known to be an optimist. Actually, he’s more of a realistic optimist. 

A realistic optimist believes they will succeed but with planning, effort, and persistence even when times are tough.

Summary: How Did Warren Buffett Make His Money

Let’s recap Warren Buffett’s top 5 Rules for Success:

  1. Reinvest Your Profits
  2. Be Willing to be Different
  3. Spell Out the Deal Before You Start Anything
  4. Watch Small Expenses
  5. Be Persistent

You’ll notice that many of these 5 rules for success are similar to other billionaires thoughts. For instance, in our post on 5 Billionaires Advice For Investing and Success, Alice Walton had similar advice. She also reinvested and was a big believer of making investments that generate income.

One lesson I found as a great reminder was number 4 and watching small expenses. Today subscription services as noted above are tied to anything. Maybe this particular lesson might remind you to go see a few you can cancel today.

Above all though, my favorite Warren Buffett rule for success, not noted above is:

warren buffett books

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