Did Warren Buffet Get Rich by Investing in Stocks?

When I talk about investing in the stock market versus investing in real estate, I often hear that the stock market is a better investment because of what Warren Buffet has done. Warren Buffet has made billions of dollars in his career, but was it because he invested in stocks? I think Warren Buffet has made his billions from the stock market but not in the traditional way most people invest. Warren Buffet is a very smart man and utilized not only his money but other people’s money as well. He was also a very active investor: he did not sink his money in an index fund and wait for it to slowly go up. In fact, his company often bought entire companies, not just stocks. So while the stock market has been a great investment for Buffet, I don’t think saying he got rich from investing in stocks is an entirely accurate statement.

How did Warren Buffet get started investing in the stock market?

Warren Buffet grew up in a successful family and was an entrepreneur from a very young age. He sold Coca Cola and chewing gum door to door when he was 11. He saved all the money he made and bought a farm when he was 14. He first invested in the stock market when he was 11 as well buying $35 worth of stock. Through high school, he delivered papers, started a pinball machine company, and made money any way he could. By the time he finished college, he had saved $9,800, which is about $101,000 today.

Warren Buffet did not invest in stocks from the time he was 11. He went to college and worked as a stockbroker, making over $100,000 per year in today’s dollars. While he was a stockbroker, he formed partnerships, the first one in 1956 when he was 26 years old. In that partnership, he contributed $100 dollars while the other partners contributed $105,000.

Are the returns better with stocks than real estate?

Was Warren Buffet able to get rich with stocks using only his own money?

As you can see, Warren Buffet did not get rich with stocks by investing all of his money in them and watching them grow over time. He used leverage to make more money in the stock market than he could make on his own. When he started the partnership, he invested $100 which is about $919 in today’s money. The other investors invested $105,000, which is about $965,000 in today’s money. The way the fund was set up, Warren guaranteed a return to the other investors, and any profit over that guaranteed investment he was able to split with the investors as the fund manager.

This is how apartment syndication works. The manager finds the deal, manages the deal, and invests little of their own money. The investors get a guaranteed return and a share of the profits, and the manager gets to split the profits as well. People who get very rich rarely do it by investing only their own money into safe investments.

This is one reason why I love real estate as an investment. It is easy (compared to other investments) to get financing and use other people’s money to leverage your investment. You can buy a rental property with a 20% down payment or an owner-occupied house (which can later be turned into an investment property) with less than 5% down.

Did Warren Buffet get rich by diversifying his investments in the stock market?

I also hear how people should diversify their investments to protect their money. Warren Buffet did not diversify his investments. He was a very aggressive investor and would invest as much money as he could in one company that he liked. He even borrowed money from his father to buy more shares in a company that he really liked. Buffet invested in Geico insurance at a very young age. He did not invest 5% of his money into the company to stay diversified and safe; he sold stocks and invested 75% of his net worth! He eventually bought enough stock in Geico that he and Berkshire Hathway are the majority shareholders.

Diversification is touted as the best way to invest your money, but diversification will not make you rich. The richest people in the world get rich by putting all their eggs in one basket and focusing on that basket. There is more risk with this strategy, but to be very successful in life, it often means being willing to take risks that others will not take.

I personally do not invest anything in the stock market. All my net worth is in the companies I own (house flipping, rental properties, real estate brokerage, blog) and real estate. I know real estate better. I know how to make money in real estate, and I have more control over my investments in real estate and my companies. This is how Warren Buffet invests as well. He invests in things he knows about and invests all his money into those businesses.

How I was able to buy 11 house flips in 2 months.

Does Warren Buffet invest in stocks or companies?

Many people think of Warren Buffet as a stock investor, but this is not completely true. In fact, Buffet’s goal was often not to invest in stocks but to take control of companies by purchasing more than a 50% share in them. Below is a list of some of the companies Berkshire Hathaway and Warren Buffet have purchased:

  • Purchased 90% of the stock of Nebraska Furniture Mart in 1982
  • Bought See’s candy for $25 million in 1972
  • Took over Fruit of the Loom for $835 million in 2002
  • Bought Dairy Queen for $585 million in 1998
  • Purchased 77% of Burlington Northern Railroad that they did not already own for $44 Billion in 2010

Buffet did not simply invest in stocks. He bought companies and took over control of them. There is a huge difference in buying stocks to hope they go up in value and buying companies that you can change and add value to with your own business sense.

People also think of Berkshire Hathaway as Warren Buffet’s company that he started to invest in stocks. This is not true either. Berkshire Hathaway was a textile company that Buffet bought in 1964 after beginning to buy stock in the company in 1962. the company in 1964 actually offered to buy out Buffet, but the offer they made in writing was lower than the verbal offer Buffet and the company had agreed on. This angered Buffet, and he decided to buy the company instead of sell out. Eventually, the company became Buffet’s investing vehicle as the textile business was not profitable.

Why rentals will help you retire faster than the stock market.

Is Warren Buffett a good example of how average people can get rich with stocks?

Warren Buffet is a very smart businessman and is one of the richest men in the world. Contrary to many beliefs, he did not get rich by investing in stocks. He got rich by working harder than other people, saving his money, using other peoples money to buy companies, and improve those companies. I do not know of any billionaires who got rich by investing in stocks with only their own money.

You can see this when using retirement calculators. Here are some stats for how much money someone would have after saving and investing for a certain amount of years:

  • If you started with $50,000, invested $1,000 per month for 50 years, and made 10%, you would have 24 million dollars at the end of 50 years.
  • If you did the same thing above but for only 40 years, you would have $9 million.
  • If you did the same thing above but for 30 years, you would have 3 million dollars.
  • If you did the same thing above but for 20 years, you would have 1 million dollars.
  • If you did the same thing above but for 10 years, you would have $340,000.

These results change based on the savings and percent you are making on the money. A 10% return is an aggressive return, and most people will make less in the stock market. If you only made 7%, you would have $1.6 million after 30 years instead of $3 million. You can also see how the time drastically changes the amount of money you have. Warren Buffet is 88 years old and has had a lot of time to build his wealth.

The amount of money you invest has a huge impact on the money you will have later in life as well. If you are able to invest $5,000 per month at 10% interest for 30 years, you would have over $12 million. You are also investing $60,000 per year instead of $12,000. We can see the huge change in returns with different percentages gained here too. If you made 7% per year with the above scenario, you would only have $6 million.

You can check out your own scenario with the calculator here.

Does Warren Buffet show that stocks outperform real estate?

I have discussions with many people about investing in the stock market versus investing in real estate. You know by now that I love to invest in real estate. These are the following arguments I hear for stocks:

  • The average returns from the stock market beat the average increase in housing prices.
  • If you invested in Apple 10 year ago, you would have made 700% on your money!
  • Stocks are easier to buy and sell than real estate.
  • Warren Buffett has shown you can get rich investing in stocks.

The first point is not valid because the housing market gain is not indicative of what you would make investing in or owning a house because:

I wrote an article that goes into more detail on why real estate has better returns than the stock market here.

If you would have invested in Apple ten years ago, you would have made 700% on your money. I cannot argue with that. However, how many people actually invested all of their portfolio into one stock ten years ago when Apple was at the bottom of its price point? Hindsight makes investing very easy. It is the same when people say the housing market crashed and wiped out 30% of the equity in houses. Yes, it would have wiped out 30% of the equity if you bought at the very peak of the market and sold at the very bottom. If you would have held on to the property, you would be just fine today. You cannot pick the very best stock performers from the past and use that as an indication of future returns.

Stocks are easier to buy and sell than real estate. I have no argument for that, but if you want to get ahead in life, it takes hard work. Warren Buffet did not take the easy way out by buying and selling stocks. He worked every job he could find, bought companies, found investors, and formed partnerships.

Finally, Warren Buffet has shown you can get rich by working hard and taking risks. His investing style was more similar to mine with real estate than it is to a person who buys stock in the market.

  • He bought companies, so he had complete control of them, which I do by purchasing houses.
  • He used other people’s money to increase his returns and take control of more assets, which I do by getting loans on my real estate.
  • He did not diversify into 100s of stocks or companies. He focused on a few really good ones that he knew a lot about, which I do with my investments.

I talk much more about my rentals and investments in my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. It is available on Amazon as a paperback, eBook, and audiobook.

Conclusion

Warren Buffet has proven that you can become a billionaire by investing in companies with other people’s money. He did not get rich by going the slow-and-steady route with plenty of diversification. I am not saying the slow-and-steady route is a bad way to invest, but for those who want to be rich and not wait 30 years, simply investing in stocks most likely will not do it. I have been able to create $12,000 per month in passive income with my rentals in less than 8 years from less than a $100,000 investment. Along with that cash flow, I have created millions in equity, and there is no way I could have done that with the stock market. I think it is much easier for regular people to get rich from real estate than from investing like Warren Buffet and getting rich in the stock market.

 

15 thoughts on “Did Warren Buffet Get Rich by Investing in Stocks?”

  1. Actually, that’s not exactly true Mark.
    You CAN buy the option contract or sell one. You have a set price that you want to buy the stock at, and if the stock price goes down to that price, you can buy it. But if it doesn’t go to the price you want it to, within the set time you want it to, it expires.
    BUT, if your the seller of the option, you still collect the premium, which can rang from $25 – $1,000 depending on what option you get. And if you do that trade each month, you can average $500 – $ 750 a month! And that’s the least!! I’ve seen profits at 78% on my money!!

    So no, you can get money without paying money in the stock market, I’ve done it, the Mr.Buffet does it as well.
    It’s one of the secrets of the WISE stock trader.
    And most don’t know about this trick, so it’s rare that you hear about some one doing it.

    And you can make shore that when you invest in an option contract, or a stock, that you get at least 48.00% on your money, yearly! You just have to know how.
    In my opinion, stocks and real estate are equal. But I LOVE real estate the most.

    What do you think?

  2. @Mark, this is an impressive article. It takes us back to the Intelligent Investor. Where, in this case, it’s more than just buying stocks when they appear low and sell when they `appear’ higher. Its about being smart. Intelligent. No matter what you do, you have to have a better understanding of it works.
    Behind every Ticket Symbol, there’s a Business, find what it does.!
    Good luck ?

  3. Hi Mark,
    First, Warren Buffet did wait to invest in stocks, buying them 50% of then selling them. The only reason he buys businesses is if he thinks it’s going to be a SAFE investment. With stocks, you can make money instantly, without paying anything. It’s called option trading. And Warren Buffet is the STOCK GUY, that’s how he makes his money and got to were he is today. Stocks have a way bigger return then 7%. I get 45-50% a year on my investment and all I have to do is compound it over years, like buffet. Although Mr.Buffet has bought businesses, he does mostly stocks. Although Buffet does LOVES real estate and invests a lot in it, like the farm. He does mostly stocks. And so does a lot of the very rich people in the world. Take it from a stock investor that loves both real estate and stocks, both are great investments, and both are equal.
    I think Mr.Buffet is a great example of the ultimate investor, whether it’s stocks or real estate.

    Here is the reason Warren Buffet is one of the richest men in the world: He buys businesses at an attractive price, and if need be, buys the whole company, or sales the stock at a higher price. And the same for real estate. And he repeats. That’s why.

    • Actually, Buffet was notorious for holding stocks or companies and not selling them.

      With options trading, you have to buy the option. You don’t make money paying nothing.

  4. Mark I’m not sure you are doing a fair comparison when you explain that stocks have had a 7% return. That 7% is unlevered. The returns you’re touring in real estate are only possible with leverage. The amount of wealth you’re comparing when you bring up warren buffet isn’t something a regular person is going to achieve. A regular person has a job and probably doesn’t have the inclination or ability to run a multimillion or multi billion dollar business. They probably don’t have the inclination to run a real estate syndicate or small real estate private equity fund either. However a regular person who commits to building assets over time in the stock market will have much better odds of having something at the end than someone who doesn’t. Will they be “rich”, probably not. But they will be better off than 99% of people with no assets to speak of. If they invest unlevered they don’t have a risk of their assets being called when there is a downturn. If they put their money into leveraged real estate a period with too many vacancies, localized economic downturns, or 100 year flood can turn their situation upside down quickly. I think it would be fair to say that investing in a diversified equity portfolio isn’t the best way to get “rich”. Perhaps I would say a hyper concentrated portfolio gets you rich and a diversified one keeps you rich. I think your content is great and opens up what is possible. I just am not sure I agree with all of the points here when comparing stocks to real estate.

    • Those are actually the points I am making. Trying to get rich is riskier than playing it safe. That is what the title is about. It is not for everyone for sure. My point with leverage is that real estate is easy to leverage while stocks are not. With leverage, you can actually buy more properties and diversify more than with cash. In some ways, it is safer. Most real estate loans cannot be called due unless they are balloon loans. They still have a 10 year term before the ballon can come into effect.

  5. Mark,

    Great way to put this all in perspective. You’re absolutely right about people’s misconception on how Warren Buffet became one of the wealthiest man in the world. Thanks for sharing.

    Marcelo Correia

  6. Ya, but you also benefitted from being in a real estate market that’s been exploding the last few years, much like buffet benefitted from arguably the most profitable time in human history to be long stocks (the end of Bretton woods in 1971 and the commencement of the Fed’s money printing spree has done more to inflate stock and real estate prices than people realize). If you want a stock comparison to your local real estate market, look at what Canadian weed stocks are doing. You could’ve picked a random company in July and doubled your money already. Much like stocks, with real estate it matters what you buy, when you buy, how much you pay, and where you buy it. I live in central Illinois where we’ve only experienced real estate appreciation because the Fed has spent the last decade flooding the market with funny money at crazy low rates. Apart from a few flourishing pockets on the coasts, most real estate will begin losing value as the Fed continues to raise rates. I’m a fan of yours and appreciate how hard you work to put out quality content, but one of the greatest fallacies of man is to think that just because you’re rich, you’re also smart. I would be curious to see what your portfolio returns would look like if you lived in a place like Gary Indiana instead of Colorado. Stocks allow you to make money on the way down, as well as on the way up. Sorry to be a dick, I just read my comment and it makes me sound like a bastard…

    • I have been an agent and investor since 2001. So I have seen the good, the bad, and the good again. There are ways to make money in every market. The cool think about real estate is you can double your money as soon as you buy without hoping for market appreciation. I bought many of my rentals for 30 percent below market value. As soon as I signed the paperwork, and sometimes making some repairs I had doubled my money without having to hope for values to increase. that is partially what Buffet did with some of his companies as well. He saw if they were managed differently there were ways to increase the value and profits without hoping that others pushed the stock price up.

      I don’t see appreciation here because of cheap money, but because of a lack of housing. Cheap money helps, but the fed has helped people get low down payments on houses for decades. People are not as concerned with interest rates as they are with how much down they need. Houses are much less affordable in other countries. I don’t know if you have seen these articles or not. https://investfourmore.com/2018/06/11/will-unaffordable-housing-in-the-usa-cause-a-housing-crash/

      https://investfourmore.com/2017/06/05/will-another-housing-market-crash/

      I never said anything about being smart because I was rich. Not sure where that comment is coming from. I actually think that being a hard worker with the right attitude has much more to do with success than smarts. My whole point with this article is that Warren Buffet does not invest like many people think he does. Do you disagree with that?

      There is not much correlation with interest rates and property values if you look at historical trends.

      My cash flow came from buying rentals at the right price with the right numbers. Rents have not increased in value that much. My net worth has gone up because of values, but that is only a paper number. I would be scared to ever invest in Gary because of the decreasing population. I like to find areas that have the potential for appreciation and cash flow. If I had invested in Gary I would probably have 150 houses due to the lower prices and more cash flow than I do now, but not the equity increase.

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