Warren Buffett's Net Worth by Age | Hacker News Reader

Warren Buffett's Net Worth by Age

microcapclub.com

72 pointstiffani63 comments

Just a warning: The X-axis in the graph is not regularly spaced: some labels on the bars are separated by 3 years, some by up to 13.

It looks like a logarithmic axis.

A nice way to think of it is that a linear line on a logarithmic axis would look exponential on a linear axis.

But it's not a logarithmic axis, so...

Wow, that's an average 26% per year increase (for the non-inflation-adjusted data) over a 70 year timespan. That's definitely not a random walk down wall street [1]. For reference, Dow Jones seems to have about 7% per year for the same time period.

[1] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Thanks for the link. Actually, I've been watching a finance class given by the infamous Martin Shkreli (I came across it in an other HN comment recently). https://www.youtube.com/watch?v=ARrNYyJEnFI and I've been pondering this efficiency hypothesis.

Basically, he explains how to pick stocks by fundamental analysis. Very entertaining to watch how this type of investors works. However, I can't help thinking that despite the rather sophisticated analysis, it just amounts to throwing random guesses. He always has to guesstimate some percentages (business future income over a decade and various other parameters) that can't be known precisely and little variation in them totally change the decision.

What he says it that 20% of stocks are badly priced by the market, it's just a matter of working hard enough to find them. Could it be that the market is only mostly efficient? or those successful investors are just the lucky ones and they are biased to interpret their success on great skills when it really is luck? (Nicholas Taleb's "fooled by randomness" is all about this idea).

I also watched a finance class on coursera (from Prof. Shiller) where this was discussed. A guest speaker (Andrew Redleaf) explained that the efficiency hypothesis was a thing of the past, essentially popular in academia, and he gave several reasons why it couldn't be true (you can find the video if you're interested) and it was convincing.

The market is irrational but it can stay irrational longer than you can stay solvent.

It's inevitable that the market will have some inefficiencies, the question is: how can you tell whether you found one? Mark Cuban claims he got rich because he found stock price anomalies in a business he was knowledgeable about, namely network equipment [1]. But he also warns that every stock trade has a sucker involved, and how do you know that you're not the sucker (i.e. the other party knows the stock is going to go down and that's why they're selling)?

1. http://blogmaverick.com/2013/01/10/the-stock-market-2/

He might have made some money picking stocks, but he got rich by selling an overvalued company at the peak of the dotcom bubble. I suppose this is an example of a market inefficiency as well.

> or those successful investors are just the lucky ones

Buffett directly answers this question

http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....

I started watching his videos as well. Interesting stuff. But one thing that stood out for me was what he said once along the lines: "I recommend many stocks, I rarely buy stocks myself".

He says at the very beginning that he doesn't recommend investing one's own money. It's better to do it professionally with other people's money because if you mess up one year, you keep your bonuses from previous years. It makes sense!

Taleb's "fooled by randomness" is often misquoted as attributing performance to luck rather than skill, but it actually explores the idea that returns are affected more by variability rather than the return itself in the short run. That is, one will not do oneself better by watching the market, but rather investing for the long run.

I've worked in the investments industry a long time now, and I've come to realize that the market is great at coming to a consensus, not necessarily the right one. It's the job of an investor (much like an entrepreneur) to have a different thesis from the rest of the market, have conviction that they are right, and then be right.

That being said, the market, especially the US equity markets, are predominantly efficient. Alpha can be found outside the mainstream, however.

Well, how many trades did he do? Is that number high enough to statistically determine if he is really more skilled than the average investor?

Even running a statistical test won't cut it. How could a statistical test account for the fact that an internet celebrity trader might be less likely to discuss his losing trades?

Actually, if I remember right, he said he bought ONLY when stock was under priced as per his analysis. A few big transactions a year vs. "trader" type frequent transactions.

If UPRO (s&p 500 leveraged 3x) had existed since the early 50s, it would've averaged about 20%-25% gains per year up until now. Warren Buffett also used leverage to invest.

Also note his net worth increased even during recession times ,of which there were twelve during his lifetime so far, except for the 1974-1975 recession.

"We find that [Buffett's] alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management."

http://www.econ.yale.edu/~af227/pdf/Buffett's%20Alpha%20-%20...

Oh so all you've gotta do is pick cheap, safe, quality stocks.

Got it.

Low beta just means low historic correlation with market returns. It can be computed mechanically with no subjective judgement needed

https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model

If you had invested in low beta stocks, leveraged at the same level as Buffett you would not have performed much worse.

It can be easy with hindsight to say oh you should have just done Betting-Against-Beta and Quality-Minus-Junk. It doesn't mean those strategies are going to win over the next decades.

To me the biggest anomaly here is the four year period from 1956 to 1960, 26 to 30, when Buffet octupled his net worth from $1M to $8M. Plenty of silicon valley engineers will have a net worth of $1M, but I think few make it to $8M. What was Buffet doing during those magical 4 years?

On the chart, the preceding few years have a very similar slope. One possible explanation is that he entered his 20s after all, and you might imagine that he started being taken more seriously in his business ventures when compared to the preceding period (i.e. it is possible the growth looks really huge when starting from a small base)

Leverage is one big thing. Buffet is a money manager, so he takes outside money, and make money off of that. Most of Silicon Valley engineers won't do that. 1956 is when he started taking serious outside money.

Then there is early luck and talent.

http://www.valuewalk.com/2015/05/warren-buffett-partnership/

I remember going through some of my refrence books. I was deciding which one's to toss. I opened Encyclopedia of Psychiatry (vol. 1 and 2).

The first page I flipped to said, "A man of 50 will not make anymore money than he is currently making in his life." It was just so specific, or I I got the quote wrong? I recall looking at it a few times. It was personally depressing because I was broke, and hitting 50.

To this day, I think about that sentance, supposedly extrapolated from years of statistics.

Well, even though most of the wealthy people I have pesonally interacted with had the likability factor of a boat anchor; Warren Buffet seems like one of the wealthy the others should try to emulate. He is one of the guys I secretly root for.

The man of 50 thing sounds like nonsense. Buffett himself is a counter example.

Buffett's net worth at 14 was $5k. I just checked my old childhood savings account, and after my 14th birthday it had around £50 in it.

At 34, his net worth was $7M, so relatively speaking, I only need £70k to be doing about as well as he was.

I think I'm actually doing better. :-)

You need to adjust for inflation, though.

We both experienced inflation, but sure, let's work it out:

£50 when I was 14 was worth £90 in today's money. Buffett's $5k was $68k.

Buffett's age-35 7M was worth 53M in today's money. So I'd need £70k in today's money to match his net worth growth.

That's exactly the same. I'm actually surprised by this, as it suggests both Buffett and I experienced the same level of compound inflation over the 20 years of our lives from age 14, despite being at different times and on different continents.

(This is all tongue-in-cheek, of course).

Wow! Tell me your secrets! :-)

How do you accumulate $67k by age 14? I'm doing something wrong.

It's $67k after being adjusted for inflation.

If you click through to the original article[1] linked by the blog post, they explain that

> Warren Buffett became a player in the investment game at the wee age of 11, eventually using cash he earned from his paper route to buy some farmland in his home state. As a high school sophomore, he also reaped the rewards of a booming pinball machine business.

1. http://www.marketwatch.com/story/from-6000-to-67-billion-war...

Yeah, I know it's adjusted for inflation. I guess they explain it? I can't imagine a paperboy earning nearly $60k (adjusted) in a couple years, so his investment returns must have been phenomenal right off the bat.

A high school sophomore would be 15-16, so he would have already made the $67k (adjusted) before he got into the pinball business.

That figure seems slightly exaggerated, Wikipedia states he had $9800 saved when he was 20. And that he made $175 a month from his postal route. If he started his paper route at 15 he would have made over $10,000 from just the paper route during those 5 years. And the article lists several more business ventures he was active in.

Few people start working as early as 13-14, but if we extrapolate the $175 a month (which would be almost $2500 in today's dollars), and you had no expenses you could save $150,000 by the time you were 20, today.

Must surprising here is how well paid that paper route was. Average salary was $200 a month in 1944. Today the average salary is $2500 a month, but you can't earn as much from such a simple job today.

He did quite a lot of stuff: fish for (and resell) golf balls, did paper route, have pinball business and he also shoplift at Sears.

Buffet's approach of combining high leverage with low growth 'value' equities is a large part of his great performance. This is not to say there isn't a skill in noticing the benefits of this approach and convincing creditors and investors to let you take on all the debt, but a surprisingly small proportion of these gains are due to stock picking.

http://xqdoc.imedao.com/150c22613c69373fe2602a80.pdf

Can anyone really know what the root of his great performance is? If anyone did, wouldn't they be as successful?

Yes, the disaggregation used in the linked paper is robust. You're welcome to critique it if you find a specific error.

There are often leverage restrictions for financial products sold to individuals and even beyond this people are often wary of them. He is incredibly skillful in gaining the trust of investors and running an efficient mortgage operation as well as having a moderately good stock picking record.

Buffett actually has very little debt. Most of the leverage comes from insurance float - when you buy insurance with GEICO Buffett invests the money until you crash.

True, should have written leverage rather than debt but the risk profile is the same for investors.

> Comparing yourself to others and especially to the best performer ever in your skill/expertise is unhealthy. Don’t compare yourself to others.

And yet here I am anyway, nearing almost 30, still in graduate school, wondering if I'll ever know what it's like to have a reasonable amount in savings, let alone a "net worth" :)

I've only started caring about money a couple of years ago, so no point comparing 14-year old me with anyone in terms of money.

What gets me is how much more creative successful people were when they were young. Fishing and re-selling golf balls? Pinball business?? When I was 14 I was too busy with computer games.

Anyone that doesn't believe luck played a huge role in Buffet's success is a fool, even Buffet says so.

It's interesting to read about his career to see what he did to build his wealth. https://en.wikipedia.org/wiki/Warren_Buffett#Business_career

My favorite part of his history in business is how the company whose name he eventually adopted for his whole operation (Berkshire Hathaway) was actually one of his self-admitted stupidest acquisitions, one based on vengeance rather than strategy. Seems like an unspoken bit of advice from him: name your company after your biggest fuck up, so you'll never forget you're only human.

The most interesting thing is that y-axis is exponential. iIts humbling that Buffet didn't even crossed 100M mark when he was 40! While wealth accumulation seems to be exponential, it's sure a long winding road.

These days doesn't he transfer quite a bit (5%ish ?) into Gates' trust every year? Does that still count as 'his' for the purposes of this graph or is it deducted?

How does a 14-year-old get $67k?

Hustling:

http://www.businessinsider.com/how-a-young-warren-buffett-ma...

Did this take place in Omaha, or where exactly?

Per the link above, DC.

Everything thoroughly documented here: https://www.amazon.com/Snowball-Warren-Buffett-Business-Life... It is a great book which really explains how extreme an investor Buffett is. Few would be able to stay fully invested for a lifetime like he has.

Insider trading is not illegal http://cnbc.com/id/43471561

What's the relevance of that to Warren Buffett?

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