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 Buffett has done. Warren Buffett has made billions of dollars in his career, but was it because he invested in stocks? I think Warren Buffett has made his billions from the stock market but not in the traditional way most people invest. Warren Buffett 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 Buffett, I don’t think saying he got rich from investing in stocks is an entirely accurate statement.
How did Warren Buffett get started?
Warren Buffett 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 Buffett 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.
Did Warren Buffett invest his own money?
As you can see, Warren Buffett 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 Buffett get rich by diversifying?
I also hear how people should diversify their investments to protect their money. Warren Buffett 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. Buffett 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 Buffett invests as well. He invests in things he knows about and invests all his money into those businesses.
Does Warren Buffett invest in stocks or companies?
Many people think of Warren Buffett as a stock investor, but this is not completely true. In fact, Buffett’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 Buffett has 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
Buffett 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 Buffett’s company that he started to invest in stocks. This is not true either. Berkshire Hathaway was a textile company that Buffett bought in 1964 after beginning to buy stock in the company in 1962. the company in 1964 actually offered to buy out Buffett, but the offer they made in writing was lower than the verbal offer Buffett and the company had agreed on. This angered Buffett, and he decided to buy the company instead of sell out. Eventually, the company became Buffett’s investing vehicle as the textile business was not profitable.
Is Warren Buffett a good example of how average people can get rich with stocks?
Warren Buffett 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 people’s 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 Buffett 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.
Does Warren Buffett 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 years 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:
- Most people get a loan when they buy a house, which means the percentage gain on their investment is much higher than the percentage gain of the asset.
- People are saving money on rent if they live in a house they own, and people who own investment properties are making money on rent above and beyond the housing market gains.
- There are incredible tax advantages to owning real estate.
- You can buy real estate below market value or add value to the real estate after you buy it.
- Rents will naturally increase with inflation increasing your returns over time.
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 Buffett 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 Buffett 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.
Warren Buffett 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 created $15,000 a month in cash flow from my rentals. 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 Buffett.