How Warren Buffett Made His First Millions? Little-Known Stocks and Strategies Revealed

A new investigation into the decades when Warren Buffett earned his best returns. Warren Buffett’s Early Investments: Proven Value Investing Lessons from His Best Decades

Discover the untold stories behind Warren Buffett’s earliest and most profitable investments. Learn how the Oracle of Omaha applied value investing principles to companies like American Express, Disney, and Greif Bros., and what modern investors can learn from his biggest wins and rare missteps. Uncover actionable lessons to boost your own investment strategy.

Ready to unlock the investment secrets that shaped Warren Buffett’s legendary career? Dive into the full article to explore detailed case studies, timeless value investing strategies, and expert insights you can apply to your portfolio today!

Recommendation

Legendary investor Warren Buffett has inspired a veritable library of studies and books about his career. In this slim volume, value investor Brett Gardner hones in on some of the Oracle of Omaha’s earliest moves. He recounts Buffett’s well-known wins, including stakes in American Express, Studebaker, and Disney. But there’s also a long-forgotten failure, in which neglecting demographic changes and sectoral shifts led to a losing bet. This book is a useful complement to the Buffett library for its focus on a seminal part of Buffett’s esteemed record.

Take-Aways

• One of Warren Buffett’s earliest moves was taking a stake in wholesaler Marshall-Wells.
• In 1951, Buffett invested in Greif Bros. Cooperage Corp.
• In 1952, he bought shares of Cleveland Worsted Mills.
• Union Street Railway was a rare buy for Buffett, because it was losing money.
• In 1964, Buffett made an investment in American Express.
• To invest in Studebaker, Buffett needed to do some sleuthing.
• In 1966, Buffett made an ill-fated investment in a department store.
• Also in 1966, Buffett took a major stake in Walt Disney Productions.

Summary

One of Warren Buffett’s earliest moves was taking a stake in wholesaler Marshall-Wells.

In 1950, Buffett was 20 years old and already a graduate student at Columbia University, where renowned investor Ben Graham taught. Buffett and his father bought 25 shares of Marshall-Wells, a hardware wholesaler, for $200 a share. Graham himself owned a small stake in the company, but Buffett likely was attracted to Marshall-Wells because it was deeply undervalued. The Fortune 500 company was an obvious value play: It traded at a deep discount to asset values, and its price-to-earnings (PE) ratio was less than 4.

“The stock traded at a 40% discount to net current asset value….It was an unbelievable bargain.”

Buffett held the investment for less than a year, reporting a small loss. Marshall-Wells paid a robust dividend, so it’s possible he made a profit on holding the shares. Marshall-Wells didn’t perform especially well after Buffett sold: Sales declined in 1952 and were flat in 1953, as the company suffered from inefficiency and rising competition. Even though the investment was far from a home run, it did fit Graham’s model of value investing. Buffett was protected from downside risk by the company’s dramatic undervaluation.

In 1951, Buffett invested in Greif Bros. Cooperage Corp.

The company made barrels used for shipping products such as whiskey, beer, sugar, flour, and produce. By the time Buffett grew interested in Greif Bros., cooperage was a fading industry, but he was attracted by the value play. Even if all of Greif Bros.’s plants and equipment were valued at nothing, the shares still sold at a 40% markdown from book value.

“There was downside protection through the assets — the company would fetch more in a liquidation than it sold for in the stock market — and was trading at ridiculously cheap multiples on earnings.”

Greif turned out to be a smart bet. As of 2023, Greif Bros. continued to trade on the New York Stock Exchange. The company was a leader in industrial packaging and had a market capitalization of more than $3 billion. It’s unclear when Buffett sold his shares of Greif Bros., but it’s evident that the investment was a modest win for him, if not a huge success. It’s possible that Buffett reaped 20% annual returns on the investment.

In 1952, he bought shares of Cleveland Worsted Mills.

Cleveland Worsted Mills had the hallmarks of a stock favored by Buffett and Graham. It was deeply undervalued, and it paid a strong dividend of 7%. The company made yard and cloth, selling its products to makers of clothing. The company, which had launched in the 19th century, experienced ups and downs but emerged from World War II poised for growth.

“Cleveland Worsted Mills was selling a commodity product whose demand was falling due to alternative products.”

After the war, Cleveland Worsted Mills modernized its plants. With a PE ratio of just above 5, it was cheaply valued. However, Cleveland Worsted Mills was less solid than Buffett believed. Profits waned in 1952 and 1953, forcing the firm to pay dividends from its balance sheet. In 1954, the business cratered. Cleveland Worsted Mills slashed its dividends, and the share price plummeted. It’s unclear whether Buffett dumped his shares. While his analysis of the company’s dividends proved inaccurate, his overall take was correct — Cleveland Worsted Mills was indeed undervalued, and its shares rewarded investors with the patience to hold on beyond the dividend crisis.

Union Street Railway was a rare buy for Buffett because it was losing money.

In 1954, Buffett bought shares of the Massachusetts-based bus company. Its shares were trading at less than the value of the cash on the company’s balance sheet. Buffett’s analysis was straightforward: The little company had liquid assets of $1 million, equating to a value of $60 a share. But the stock was selling for just $30 to $35, allowing Buffett to buy a dollar for 50 cents.

“Union Street Railway was an early lesson in how positive changes in capital allocation can lead to windfall profits.”

The company began buying back shares, and Buffett soon had a 4% stake. Meanwhile, Union Street Railway became profitable in 1955. Shares responded, topping $60 in 1955 — but still at a discount to book value. Buffett was something of an activist investor, and it’s possible that his position in the company spurred Union Street Railway to pay a $50 dividend. If he held onto the shares until 1957, he would have realized an internal rate of return of about 30%.

The Philadelphia and Reading railroad was a classic balance sheet play.

Next up was the P&R, which had been a holding of Graham’s since 1952. The income statement was ugly, with slim profits and declining revenues. Yet the balance sheet excited Buffett. The company’s share price of $13 was close to its underlying asset value of $9. In a twist, the railroad in 1955 bought Union Underwear, better known as Fruit of the Loom.

“It was impossible for an investor to get too excited about P&R’s income statement.”

It was during this time that Buffett morphed from a passive investor into the activist role that defined his later career. In one example, Buffett bought up 300,000 shares of Lone Star Steel and then presented the investment to P&R’s CEO, who responded by buying 73% of the steel producer. In that way, Buffett became a player in building one of his holdings into a conglomerate. Such maneuvers later became staples of Buffett’s playbook.

In 1964, Buffett made an investment in American Express.

American Express was a leader in traveler’s checks, issuing more than $1 billion annually in the early 1950s. And in 1958, inspired by the success of the Diners’ Club cards, American Express launched its first credit card. In a technicality, it was really a charge card — borrowers had to pay off the entire amount each month. Buffett was attracted to American Express after financial irregularities were reported by Fortune magazine.

“Buying American Express allowed Buffett to obliterate the market.”

Buffett viewed American Express as an undervalued company with a strong brand — its traveler’s check business was a clear market leader. By 1964, Buffett owned 5% of the company, and his hunch proved prescient. Diners’ Club had a head start on American Express, but by 1970, American Express had blown past Diners’ Club in the number of cardholders. Shares responded strongly: American Express was up 30% in 1964, 39% in 1965, 32% in 1966, and 89% in 1967. The company far outperformed the Dow-Jones Industrial Average. American Express was so successful that, by the late 1960s, Bank of America and Chase Manhattan had introduced competing credit cards, and American Express’s run of growth slowed. But Buffett timed his investment well, and American Express was a major win for his investment partnership.

To invest in Studebaker, Buffett needed to do some sleuthing.

While Studebaker was a once-great name, by 1965 it had lost market share, and its public disclosures were murky at best. For instance, in 1965, Studebaker sold some assets and distribution rights to Mercedes-Benz, but Studebaker didn’t divulge for how much or where the proceeds appeared in its financial statements. Buffett did his own research, calling managers and people who did business with Studebaker to fill in the gaps left by the company’s deficient disclosure. One obvious source of value came from STP, Studebaker’s oil division, which was enjoying soaring growth in the 1960s. Another bonus was that Studebaker had amassed significant tax loss carry-forwards.

“While Buffett would not have known precise figures then, he would have figured out that STP’s business was exploding.”

Buffett paid $18 a share in 1965, reasoning that Studebaker’s disparate businesses were worth more than investors realized. By 1966, the company was trading at around $27 a share, and a Hawaiian investor made a tender offer of $30 a share. The offer created a frenzy of activity around the stock, which quickly shot past $30. “Anybody who pays $40 a share for Studebaker doesn’t know what he’s doing,” the investor remarked. In truth, company shares soon surged past $60, giving Buffett a big win — and underscoring the wisdom of his attention to the underlying book value of an enterprise. It hardly mattered that Studebaker stopped manufacturing cars altogether during the episode.

In 1966, Buffett made an ill-fated investment in a department store.

A stock market boom meant undervalued companies were growing scarce. Buffett turned his attention to Hochschild, Kohn & Co., operator of one of the leading department stores in downtown Baltimore. When he did the deal, Buffett sang the praises of the Kohn family, which ran the retailer. While the store had been in business for 70 years, retail was changing by the time Buffett arrived on the scene. Hochschild Kohn had opened branch locations, and a new breed of discounters was building suburban stores and siphoning off sales. Perhaps most mystifyingly with regard to Buffett’s usual investing framework, three other downtown department stores directly competed with Hochschild Kohn.

“Buffett’s primary mistake with Hochschild Kohn was buying into a business with no sustainable competitive advantage at a ‘kind of cheap’ price.”

Despite these issues, Hochschild Kohn reported a record year in 1965. Margins were low, but the retailer appeared to be both profitable and successful at fending off rivals. Another challenge was the emptying out of urban populations during the 1960s. At first, the exodus from downtown Baltimore was easy to overlook. The overall metro area was growing, and the outflow from the city center might have been a blip. The racially charged migration trends accelerated after the assassination of the Reverend Martin Luther King in April 1968. In December 1969, Buffett exited his foray into Baltimore retailing, selling Hochschild Kohn at a loss.

Also in 1966, Buffett took a major stake in Walt Disney Productions.

In the 1950s, Buffett had engaged in detailed accounting of company assets. If an enterprise’s buildings, equipment, and cash were worth more than its shares were trading for, then it was a buy. The Disney deal marked a sharp departure from this ethos. For one thing, Disney operated in the notoriously volatile world of filmmaking. Mary Poppins had been a major hit in 1966, but there was no guarantee Disney could replicate that success.

“Warren Buffett’s purchase of 5% of Disney’s common stock is one of the most famous investments of his early career.”

What’s more, Disney leaned heavily on the brains and creative genius of Walt Disney. He posed the sort of key-man risk that was foreign to Buffett’s portfolio of staid industrial companies. In another twist, Disney was expanding beyond its Disneyland theme park in California and planning to invest heavily in Walt Disney World in Florida. Those sorts of complicated assets didn’t lend themselves to simple calculations of tangible book value. Buffett and his associate Charlie Munger were fans of Disney’s family-friendly films and of its theme park at Disneyland. During family trips to the park, Buffett and Munger would try to ascertain how profitable each ride was. In 1965, some 6.5 million visitors paid to go to Disneyland, underscoring the popularity of the Disney brand.

“His critical insight was not that Disney was worth a specific number but that it was certainly worth more than the market cap he bought the stock at.”

Buffett applied his usual common sense to valuing Disney. In 1966, he paid $4 million for a 5% stake in Disney, meaning the entire enterprise was valued at $80 million. He reasoned that Mary Poppins had made $30 million in one year, and that Disney would put the film in theaters again in seven years. “It’s like having an oil well where the oil seeps back in,” Buffett wrote. A similar calculation applied to Disney classics such as Snow White and Cinderella. Buffett also assigned a value to the land under the theme park in Anaheim, along with values to the rides themselves. Indeed, a year after buying a stake in Disney, he sold it for a 55% gain.

About the Author

Brett Gardner is a value investor who has worked at multiple investment firms, including Discerene Group. He also has waged successful activist campaigns against public traded companies.