The opus "Dancing the Tap Dance 'After Work'" is monumental in scope, published in seven installments. The first two sections analyze the Berkshire Hathaway board of directors to illustrate how the cultural cornerstone of Berkshire Hathaway—what Charlie Munger referred to as the 'seamless web of trust'—was established.
This article, as the third installment, provides a comprehensive review of Warren Buffett's career evolution from his early entrepreneurial years prior to encountering Benjamin Graham's value investing philosophy, through his five-year 'employment journey' (1951-1956).
The first section vividly showcases how 'Young Buffett,' before receiving formal financial training, intuitively grasped key business concepts such as 'franchise rights,' 'cash flow,' and 'passive income' through an examination of representative commercial ventures during his elementary, middle, and high school years—such as selling Coca-Cola, delivering newspapers, and investing in farms.
The second section focuses on Buffett's five golden years of employment (1951–1956) before establishing his partnership firm, detailing his tenure at Buffett-Falk & Co. and Graham-Newman Corporation. This was a period ofReturn on Investmentremarkable growth (with an annualized compound growth rate of approximately 60%). By reviewing eight pivotal cases including GEICO, Rockwood, and Philadelphia and Reading Coal and Iron Corporation, it reveals how Buffett took the methodologies of 'net-net working capital investment' and 'arbitrage' to their utmost level. This phase not only helped Buffett accumulate his 'first pot of gold' but also marked his transformation from a quantitative securities analyst into a mature capital allocator.
(I) 'Young Buffett' Before Encountering Graham's Value Investing Philosophy
—Starting with the variables most closely related to business success
At the 2007 shareholders' meeting, a 10-year-old shareholder asked Charlie and Warren: 'In your opinion, what is the best way for a 10-year-old child to make money?'
Warren: Take me as an example. Before I graduated from high school, I had probably tried about 20 different businesses.
I once read a study about business success and its correlation with certain variables. The research attempted to identify the variable most closely linked to business success, such as one’s educational background, parents, or whether they attended business school, among others.
Ultimately, the study found that the variable most closely associated with business success is the age at which a person first engages in business. Generally speaking, the younger the age at which one starts a business, the higher the probability of achieving commercial success later on. To some extent, this finding is a natural outcome, as similar patterns exist in many fields such as track and field competitions and music.
Reviewing Warren's numerous business ventures before his high school graduation, we find that he attempted no fewer than 20 ways to make money, including six methods during elementary school, eight during middle school, and ten during high school. If we include the money-making methods he explored during college, then prior to studying value investing under Graham, Warren had experimented with over 30 different approaches to generating income.
Following this line of thought, let us examine three representative business practices of 'young Buffett' during his elementary, middle, and high school years before he was exposed to Graham’s value investing philosophy.
Warren Buffett in his youth
One of the six money-making methods during elementary school: selling Coca-Cola
Warren often humorously remarked on his birth, saying that to a certain extent, his existence was thanks to the Great Depression that began in 1929.
In 2013, at Georgetown University, he mentioned, 'I was born in 1930. My father was a stockbroker who, after the stock market crash of 1929, had nothing to do and thus spent all day at home with my mother. So, thanks to the Great Depression of 1929, I was conceived. Whenever I look back at the Great Depression of 1929, I always feel a peculiar sense of fondness.'
Generally speaking, during his time at Rosewood Elementary School in Omaha from 1936 to 1942, Warren engaged in no fewer than six small business ventures, including selling chewing gum, Coca-Cola, copies of the Saturday Evening Post, Liberty magazine, used golf balls, peanuts, and popcorn. After accumulating experience between the ages of six and eleven over five or six years, Warren finally saved up $120 by the spring of 1942. He then purchased three shares of preferred stock in Cities Service Company at $38.25 per share, for a total investment of $114.75.
Take the example of selling chewing gum: Warren purchased from his grandfather’s grocery store at a cost of 3 cents per pack and sold them for 5 cents each, earning a 2-cent profit per pack. The 'gross margin' was approximately 67%, earning him his first coin in life.
Among the six early business ventures during his elementary school years, the experience of selling Coca-Cola was particularly interesting. At the 2013 Coca-Cola shareholders meeting, Warren was invited to have an engaging conversation with then Coca-Cola Chairman Muhtar Kent.
Warren: It was around 1937, before air conditioning existed, and summers were unbearably hot. In the evenings, people would lie on their lawns to cool off. I thought to myself, perhaps I could try selling soda to make money. So, I visited all the nearby gas stations to conduct 'due diligence.' Back then, gas stations kept sodas in refrigerated coolers with a bottle opener hanging on the side and a container below to collect bottle caps. For several weeks, I collected about 8,000 bottle caps from various gas stations. After sorting them, I found that Coca-Cola bottle caps were the most numerous, far surpassing other soda brands. Therefore, I decided to start selling Coca-Cola sodas.
At the time, my grandfather ran a grocery store, so I went to him to negotiate a discounted price. I bought from him at 25 cents for 6 bottles and sold each bottle for 5 cents, achieving a profit margin of 20%. Every time, I sold out quickly, with no inventory or accounts receivable—it was simply the best business I had ever done.
However, I made a big mistake: I did not use the money earned from selling soda to buy Coca-Cola stock. More than 50 years later, I finally corrected this error.
Coca-Cola was born in a small pharmacy in 1886. Over years of development, it now sells the equivalent of 1.8 billion 8-ounce servings of beverages daily. I joined the Coca-Cola board of directors in 1988. Later, the company gradually reduced its shares through buybacks, and per capita consumption of soda also increased gradually. Its global market share continued to rise, which is exactly the kind of business we like. Berkshire Hathaway holds 400 million shares of Coca-Cola stock, and we have never sold a single share.
Seventy-six years later, Warren recounted this seemingly insignificant 'business' experience, hinting at how a 7-year-old boy learned about the competitive positions of different companies through on-site due diligence. Why sell Coca-Cola instead of Dr Pepper? Perhaps 'Young Buffett' began to slowly understand the power of brands and franchise rights, and the prototype of a good business without inventory or accounts receivable might have started to take root in his mind.
Eight Ways to Make Money in Junior High School: Selling Newspapers
At the end of 1942, Warren's father, Howard, was elected to Congress for the first time. Consequently, in early 1943, the family left their hometown of Omaha and moved to Washington, D.C. Thus, Warren began his junior high school years in the capital in 1943, continuing until his high school graduation in June 1947.
During his junior high school years, Warren attended Alice Deal Junior High School. During this period, he tried no fewer than eight ways to make money, including working at a bakery, selling corn flakes and dog food, caddying at a golf course, delivering newspapers, and selling desk calendars and magazines. In between, Warren also briefly returned to his hometown of Omaha, where he collected scrap materials, worked at his grandfather's grocery store, and worked at his father’s South Omaha Feed Company. By the age of 14, Warren had accumulated savings of approximately $1,000.
Through continuous trial and error, Warren finally found one of his favorite ways to make money in 1944: delivering newspapers. Previous work experiences were almost purely mechanical repetitions of physical labor. From the beginning, Warren had an aversion to such manual tasks but his desire to earn money and achieve independence outweighed his dislike for monotonous physical work. Unlike working for others, newspaper delivery offered relatively more freedom, flexibility, and independence. It allowed him to ride his bicycle around in a relaxed environment, independently plan his routes, and think while delivering papers.
The initial newspaper delivery routes included one for The Washington Post and two for The Times-Herald. This newspaper delivery service lasted from early junior high in 1944 until his high school graduation in 1947. Generally speaking, Warren earned about 1 cent per paper delivered, delivering about 500 papers daily, which amounted to roughly $5 per day. Over three years, he delivered approximately 500,000 papers, earning about $5,000 through newspaper delivery alone. Based on the purchasing power at that time, this amount could have bought an apartment in Omaha.
The experience of delivering newspapers during his teenage years greatly shaped Warren’s life. Newspaper delivery further honed Warren’s execution capabilities, and its financial returns far exceeded those of his previous attempts. Through newspaper delivery and additional businesses like selling desk calendars and magazines, Warren’s peak monthly income reached $175, more than what his teachers earned. Additionally, thanks to his newspaper delivery experience, at the age of 14, Warren filed his first personal income tax return by the end of 1944. As shown in the figure below: Warren’s total income from July to December 1944 was $409. After deducting expenses such as watch repairs and bicycle depreciation totaling $45, Warren netted $364 and paid his first personal income tax of $7.
This experience of being closely involved with newspapers may have sparked Warren’s interest in media businesses like newspapers. At the 2000 shareholders' meeting, Warren stated: “Looking back 25 years ago, Charlie and I firmly believed that in most typical 'one-city-one-newspaper' cities, the newspaper business was almost the best solid business you could find.” Perhaps due to Charlie and Warren’s natural affinity for media businesses like newspapers, these ventures inevitably and significantly contributed to Berkshire Hathaway’s compounding growth:
In 1969, Berkshire Hathaway acquired The Omaha Sun for approximately $1 million. Thanks to its investigative reporting on the 'Boys Town Financial Scandal,' The Omaha Sun won the Pulitzer Prize for Local Investigative Reporting in 1973, marking the first time a weekly publication received this honor in the history of American journalism.
In 1973, Berkshire Hathaway purchased The Washington Post during a significant market downturn, making it the largest holding at that time (purchase cost approximately $10.6 million). In 2014, Berkshire completed a 'stock-for-business' transaction, exchanging its shares valued at $1.13 billion for WPLG, a media business under the listed company. Without considering dividends, this 41-year investment yielded over 100 times its original value.
In 1977, Charlie and Warren made their largest investment to date, acquiring The Buffalo Evening News for approximately $32.5 million. After overcoming the initial five challenging years, The Buffalo Evening News turned profitable in 1983, recouping all previous cumulative losses within a year. Its performance continued to grow, and by 1986, its annual pre-tax profits exceeded the original purchase price. Despite some impact from the internet starting in the early 1990s, The Buffalo Evening News maintained profitability surpassing the purchase price well into the 21st century (from 2000 onwards, its operating results were no longer disclosed separately in annual reports), providing Berkshire with substantial cash flow.
During the high inflation period of 1982, six out of Berkshire Hathaway's top eleven stock holdings were media companies such as newspapers.
In 1985, Berkshire Hathaway became the largest shareholder of Capital Cities with an unprecedented position worth approximately $520 million at the time. By 1995, ten years later when Capital Cities merged into Disney, this investment had yielded about $2.5 billion in profits.
In the 1986 Berkshire Hathaway shareholder letter, Warren Buffett explicitly listed for the first time the 'three eternal holdings,' two of which were media businesses.
Overall, newspaper delivery contributed more than half of Warren Buffett’s initial capital for stock investments. His early and fruitful engagement with the newspaper business gave him a deep understanding of media enterprises. The significant investments in media businesses mentioned above provided wings for Berkshire Hathaway's sustained compound growth.
Oh, by the way, to demonstrate his newspaper-throwing skills honed in the 1940s, Warren even initiated an 'International Newspaper Throwing Challenge' during the 2012 Berkshire Hathaway Annual Shareholders Meeting, seventy years later.
Eleven Ways to Make Money in High School: Investing in a Farm
Warren Buffett's emphasis on issues like corporate boards and governance has a long history. As early as the 1993 shareholder letter, he wrote specifically on 'corporate governance,' analyzing related topics such as the board of directors and director qualifications. At the age of fourteen, Warren graduated from Alice Deal Junior High School and entered Woodrow Wilson High School.
During high school, in addition to continuing his favorite newspaper delivery business, Warren tried no fewer than ten other ways to make money. These included selling newspapers, investing in his father's hardware store in Omaha, purchasing a 40-acre farm for $1,200, retailing used golf balls (purchased at around $3.5 per dozen and sold for about $6 per dozen), selling stamps, operating a car wash service at a used car lot, running coin-operated pinball machines, reselling pinball machines, collecting discarded betting tickets at racetracks, editing the horse racing magazine 'The Prudent Speculator,' and selling it at the racetrack.
Among these various money-making methods, operating coin-operated pinball machines reflected Warren's profound understanding of compounding during this period. Investing in a farm bore striking similarities to how Warren would later operate Berkshire Hathaway. A brief summary follows:
At the age of fifteen, Warren, both a high school student and a capitalist, had accumulated over $2,000 through newspaper delivery and other businesses. That year, Warren invested $1,200—about 60% of his net worth—to purchase a 40-acre farm in Nebraska for approximately $30 per acre. Farmer Warren leased the farm to a tenant who handled the physical labor of farming while Warren provided the capital and acted as an encourager and supporter. Profits were shared between them. In 1950, Warren sold the farm for about twice the purchase price he paid five years earlier, achieving a doubling of assets in five years with an annualized compound return rate of approximately 15%.
This arrangement of 'using assets to generate passive income and produce cash flow' bears similarities to Berkshire Hathaway’s later operating principles. For instance, in the 1960s, National Indemnity Company; in the 1970s, See's Candies; in the 1980s, Scott Fetzer Group; in the 1990s, GEICO auto insurance; and in the 21st century, IMC, among others. Charlie and Warren were responsible for acquiring businesses that consistently generated cash flow (in special cases, they also acquired capital-intensive businesses like FlightSafety International and BHE, which required continuous investment but offered acceptable returns). They refrained from interfering in daily operations, carefully selecting managers to oversee specific operations—most often, the original management teams continued their roles. Rational and effective incentive mechanisms were established, creating an idyllic environment for subsidiaries, which then channeled cash flows back to the parent company.
Under this corporate structure, Charlie and Warren focused on two things: the overall capital allocation of Berkshire Hathaway and creating the best possible environment for subsidiary managers. Beyond that, year after year, Charlie and Warren applauded and celebrated the excellent subsidiary managers.
1987 Shareholder Letter: If we consider these seven core subsidiaries of Berkshire Hathaway as a whole, this company achieved a net profit of approximately $100 million in 1987, with an astonishing capital return rate of 57%. It is almost impossible to find such a high level of shareholder returns elsewhere, not to mention that our subsidiaries are large-scale, diversified in business, and have extremely low leverage. For reference: according to Fortune magazine, among the 500 largest industrial enterprises and the 500 largest service companies in the U.S., only six companies had shareholder returns exceeding 30% over the past decade, accounting for just 0.6%. Among these 1,000 large companies, the best performer was CCH with 40%.
With this group of outstanding Berkshire Hathaway subsidiary managers, Charlie and I really don’t need to do anything at the operational level. In fact, the more Charlie and I do, the less we might earn. At Berkshire, we don’t have large corporate meetings, company-wide budgets, or performance evaluations. Of course, some of our subsidiaries may adopt similar measures within their scope of operations to improve business. After all, with the family members of Mrs. B and the Heldman family overseeing furniture and uniform businesses respectively, how could we possibly offer random advice?
When it comes to the outstanding performance of our subsidiaries, Charlie and my main contribution is to applaud our managers. We have seen too much mediocrity in other companies, which is why we sincerely appreciate the masterful performance of our subsidiary managers. Regarding the performance of each subsidiary manager in 1987, the only appropriate response is sustained and enthusiastic applause.
2002 Shareholder Letter: What inspiration does this hold for corporate management? It’s simple: to succeed, you must be around successful people.
As a caddie, it’s clear that Eddie didn’t care about the posture used to carry clubs—it was about which player he carried them for. I learned this from Eddie, so at Berkshire, I always hand the baton to the best managers in America.
In general, by briefly reviewing Warren’s three representative ‘business’ experiences during elementary, middle, and high school, we can see that before formally entering securities investment, 'young Buffett' tried no fewer than 30 ways to make money, including selling soda, delivering newspapers, investing in farms, and operating pinball machines. Beyond earning his first pot of gold, these early business practices helped Warren deepen his understanding of the key economic attributes of various businesses from different perspectives.
In the spring of 1951, after learning from his mentor Graham the techniques of 'cigar butt' investing, arbitrage, and other methods for uncovering securities value, Warren graduated from Columbia Business School.
(2) Five years as an employee: From the spring of 1951 to August 1954, Warren participated in five investments at BF Corporation.
The best period for investment performance, from 10,000 to 150,000, with an annualized compound interest rate of approximately 60%.
First, consider a question: during which phase did Warren achieve the highest return on investment after graduation?
At the 2000 shareholders' meeting, he provided a clear answer: 'Shareholders may not be aware, but interestingly, my best period for personal investment performance was actually when I was'
an employee. Because at that time, I had not yet established a partnership project, and the capital scale was small.
This answer is both surprising and full of common sense: the time when one has little money is precisely when the efficiency of making money is at its highest. Broadly speaking, if we measure by investment returns, Warren’s fastest continuous wealth accumulation occurred during his employment experience from around 1950, when he first encountered Graham's value investing philosophy, to May 1956, when he launched his first partnership, Buffett Partnership Ltd.
At the 2019 and 2024 shareholders' meetings, Warren analyzed the approach of achieving high returns exceeding 50% annually using small-scale capital:
Shareholder question: Charlie and Warren, you have mentioned that if managing a small fund of 1 million USD, you could earn 50% annually. Could you explain what investment approach you would adopt in the case of such small-scale capital? Would you invest in low-priced companies with mediocre business quality, so-called 'cigar butt' companies, or engage in arbitrage activities?
Warren: If managing small-scale capital, we might engage in certain arbitrage activities slightly different from traditional arbitrage.
There are often marginal inefficiencies in the market that most people fail to notice, and occasionally, you can seize some opportunities. However, for a company as large as Berkshire Hathaway, these opportunities are practically useless.
In answering the same question, Charlie even cited the example of well-known investor Li Lu: 'Li Lu used his student loans as investment float and earned 1 million USD shortly after graduation by identifying and seizing a few opportunities.'
2024 Annual Shareholders Meeting: I will try to figure out all the details involved in those small opportunities, and I should be able to find some mispriced opportunities among them, investing one million with a 50% return within a year. If I only had a small amount of capital, I would attempt as described above, aiming for a 50% annual return. Most importantly, I genuinely enjoy doing this. Whether it is playing bridge, chess, or searching for undervalued stocks, if you don't truly love what you are doing, you won't do it well.
Based on conservative estimates (due to imprecise and inconsistent data from various sources during the relevant period), Warren's net worth was approximately $10,000 to $15,000 when he graduated with a master’s degree in 1951, and around $150,000 to $170,000 by 1956 when he launched his first partnership project (at that time's purchasing power, Warren had essentially achieved initial financial independence). His wealth grew approximately tenfold over five years, with an annualized compound growth rate of about 60%.
During this approximately five-year period, Warren held two salaried positions. The first was from 1951 to August 1954, working as a stockbroker for Buffett-Falk Securities (referred to as BF Company), founded by his father. The second position began in August 1954, when he joined Graham-Newman Corporation (GNC Company) run by his mentor Benjamin Graham, until GNC dissolved in the spring of 1956.
During this period, Warren adhered strictly to Benjamin Graham’s investment methodology in securities investment, mainly focusing on net current assets; typically, he bought at no more than two-thirds of the book value of net current assets. During these two employment periods, Warren made eight major investments. Below are brief descriptions of the five investments conducted between the spring of 1951 and August 1954 while at BF Company:
GEICO
1995 Annual Shareholder Letter: GEICO was my 'first love' in investing.
GEICO represented Warren's first concentrated stock investment after being introduced to value investing. While still a student, Warren invested the majority of his personal assets in GEICO, earning his first substantial profit in his investment career. More importantly, through GEICO, Warren gained an understanding of the economic characteristics of the insurance business.
GEICO ignited Warren’s passion for the insurance industry and indirectly inspired the Berkshire Hathaway operational structure, where low-cost insurance float serves as a source of capital for acquiring businesses and investing in securities. In this sense, GEICO's significance to Warren and Berkshire Hathaway cannot be overstated.
Let us rewind to Warren’s student days: On a Saturday morning in January 1951, while studying at Columbia University, Warren traveled to GEICO headquarters to meet with Lorimer Davidson, the assistant to the company president. They discussed GEICO's auto insurance for four hours. Through this conversation, Warren grasped the key economic attributes of the auto insurance industry, the sustainable competitive advantages of GEICO's direct sales model, and the high costs incurred by competitors due to their heavy reliance on intermediaries.
After graduating and returning to Omaha as a stockbroker, the first stock Warren successfully sold to clients was GEICO. Confident in his analysis, Warren published a report titled 'My Top Stock Recommendation' on GEICO's auto insurance in the Commercial Financial Chronicle in December 1951. The report was brief, occupying only one page with 16 short paragraphs. The original text follows:
Meanwhile, Warren made four purchases of GEICO stock totaling approximately $10,300 for 350 shares that year, with each investment accounting for over 50% of his personal net worth at the time. By the end of the same year, this investment had grown by about 30% to $13,000, representing approximately 65% of his total net worth.
The more remarkable story about GEICO auto insurance lies ahead: In 1976, Berkshire Hathaway purchased the nearly bankrupt GEICO; by 1980, its stake had increased to about one-third, costing a total of approximately $47 million. As the company continued its share buybacks, Berkshire’s stake passively grew to about half. In 1996, Berkshire acquired the remaining half of GEICO for $2.3 billion, making GEICO a wholly-owned subsidiary of Berkshire.
2018 Shareholder Letter: In summary, Berkshire initially bought half of GEICO for only $47 million, an amount that today would barely suffice to purchase a luxury apartment in New York.
Given GEICO’s significance, it is no surprise that Warren revisited this classic investment during this year's shareholder meeting:
Warren: In the 1970s, we spent less than $50 million to acquire half of GEICO Insurance. Today, GEICO has become a wholly-owned subsidiary of Berkshire. In the first quarter of this year, GEICO generated $2 billion in profits, meaning half of that equals $1 billion. Initially, we invested just $50 million, and now we earn $1 billion every quarter—20 times the original investment. This is the result of years of accumulation. 120 years ago, auto insurance did not exist; today, it has become the largest category within property insurance.
Ajit: I will add one point: besides earning substantial underwriting profits, GEICO also provides approximately $29 billion in float.
Warren: Consider this: we initially invested just $50 million, and now we have access to $29 billion at no cost, while earning 20 times that amount—$1 billion—every quarter.
If we roughly reference the current market value of Progressive Corporation, a comparable company, which stands at approximately $150 billion, then conservatively speaking, the fair value of GEICO should not be less than $100 billion.
Western Insurance Securities
In 1952, Warren liquidated his GEICO holdings for $15,300, earning a profit of about $5,000 after holding the investment for one year, representing a return of approximately 50%.
The primary reason for selling GEICO was to purchase the more attractively priced Western Insurance Securities (referred to as WIS Insurance). At that time, WIS Insurance had earnings per share of approximately $27, book value per share of about $86, and its stock price was around $40, representing a price-to-earnings (P/E) ratio of less than 2x and a price-to-book (P/B) ratio of less than 0.5x. In March 1953, Warren again published an analysis report on WIS Insurance in the Commercial Financial Chronicle under the title "My Favorite Stock."
We do not currently have detailed information regarding Warren’s specific purchases, position sizes, or related selling activities concerning WIS Insurance.
By the way: If Warren had not sold his GEICO shares worth approximately $15,000 in 1952, this investment would have grown to roughly $1.3 million by the early 1970s, increasing 85-fold over 20 years with an annualized compound return of approximately 25%.
Marshall-Wells Company
Although this investment occurred before Warren became a full-time employee and, technically, should not be included in this section, it is briefly mentioned here due to the company being a case study in Graham's *Security Analysis* and because Warren purchased a significant stake influenced by the book.
In 1950, Warren partnered with his father, Howard, each contributing $2,500 for a total investment of $5,000 to purchase 25 shares of Marshall-Wells Company at $200 per share. The $2,500 represented approximately one-quarter of Warren’s net worth at the time.
At that time, Marshall-Wells Company was the largest hardware wholesaler in North America, with earnings per share of approximately $62. The stock traded at less than 4 times P/E and less than 0.5 times tangible net assets. After receiving dividends of approximately $12 per share, Warren liquidated his holdings in the same year, selling the shares at a price roughly 1% lower than the purchase price.
During the process of investing in Marshall-Wells Company, Warren, who was then studying at Columbia University, attended the shareholders' meeting with his classmate Fred Stanback. It was at this meeting that Warren met Walter Schloss, who was working at GNC at the time. The two became lifelong close friends.
Schloss was born in 1916, 14 years older than Warren. In 1955, Schloss left GNC and founded the investment partnership WJS, starting with $100,000 cobbled together from various sources to begin independent investing. The partnership was dissolved in 2002 after achieving an annualized compound return of approximately 20% over 47 years.
Greif Brothers Cooperage Corporation
As mentioned earlier, GEICO was Warren's largest individual stock holding in 1951, accounting for approximately 50% of his portfolio, while the second-largest holding was Greif Brothers Cooperage Company (hereinafter referred to as Greif Brothers), with a share of about 15%.
Greif Brothers was founded in Cleveland in 1877 and grew into the world’s largest barrel manufacturing company by the early 20th century. At that time, the company had net current assets of approximately $20 per share, tangible net assets of around $40 per share, and its stock price was approximately $18, trading at less than 0.5 times price-to-book (PB) and roughly 4 times price-to-earnings (PE).
In 1951, Warren purchased Greif Brothers while working as a stock salesman for BF Corporation and recommended the company’s investment value to Graham. Until the dissolution of GNC in 1956, Warren continued to monitor Greif Brothers closely and personally visited its manager, John Dempsey.
Warren did not disclose the timing or price at which he sold the company. Notably, Greif Brothers is an exceptionally resilient company that has thrived for 138 years and remains a niche leader in the industrial packaging sector. Its shares continue to be traded on the New York Stock Exchange (stock code: GEF) with a current market capitalization of approximately $3 billion.
Cleveland Worsted Mills
Early in his career, Warren made a serious mistake with Cleveland Worsted Mills (hereinafter referred to as Worsted Mills): misjudging the industry fundamentals and making an incorrect linear extrapolation of the company’s profitability.
Worsted Mills was established in 1878 and primarily produced worsted wool yarns and woolen fabrics. At its peak, it was the second-largest worsted fabric manufacturer in the United States.
During his time promoting stocks in Omaha in 1952, Warren highly praised Worsted Mills and even confidently wrote a detailed analysis report, concluding: considering the then-current stock price of approximately $115, the dividend of $8 per share would provide a stable yield of about 7%. From the simple data available at the time, Worsted Mills’ stock appeared somewhat attractive: net current assets were approximately $150 per share, tangible net assets were about $185 per share, earnings per share were approximately $20, and the stock price of around $100 represented a PE ratio of about 5 and a PB ratio of 0.55.
Despite appearing sufficiently inexpensive, subsequent developments did not unfold as Warren had envisioned. Due to factors such as product homogenization, the emergence of substitute products, and intensified industry competition, Worsted Mills’ profits plummeted by 72% in 1952 shortly after Warren’s purchase, prompting management to reduce dividends. Warren opposed the dividend cut and even attended the shareholders' meeting to protest but returned empty-handed.
In 1954, Worsted Mills’ stock price fell sharply to about $60, far below the approximate $100 level in 1952. While we do not know Warren’s specific selling actions, it can reasonably be inferred that he likely exited the position at a loss. This was a classic error made by the young Warren: overlooking the key economic attributes of the industry, mistakenly assuming that Worsted Mills’ current profitability would persist, and making an erroneous linear extrapolation.
By the way: although the author of this article claims to have basically mastered Charlie and Warren's value investing philosophy, he has unfortunately made similarly foolish mistakes of linear extrapolation.
The above are five well-known investments that Warren participated in during his time working at his father's BF Securities. In August 1954, Warren finally realized his dream when he received an unsolicited offer from Graham’s GNC Company, moving to the East Coast to work in New York as an 'East Coast drifter' until the dissolution of GNC Company in the spring of 1956. During this period, Warren participated in three influential investments:
(3) From August 1954 to the Spring of 1956: Three Investments Participated in at GNC Company
Rockwood & Co.
First, the investment in Rockwood & Co. in 1954 was one of the most pivotal moments in Warren's career. In the 1988 shareholder letter, Warren used this case to explain to shareholders what arbitrage is:
1988 Shareholder Letter: Rockwood & Co., located in Brooklyn, was a chocolate manufacturer with ordinary profitability. The company used the Last-In, First-Out (LIFO) accounting method. In 1954, due to a temporary supply shortage, the price of cocoa beans skyrocketed from 5 cents to 60 cents. The company wanted to quickly sell off its expensive inventory before the price of cocoa beans fell, but if sold directly, it would face a high tax rate of nearly 50%.
A turning point emerged. There was an obscure provision in the tax law at the time: if the inventory were distributed to shareholders through a business reduction under LIFO, it would be tax-free. Consequently, Rockwood announced that it would terminate its cocoa butter business and classified 13 million pounds of cocoa beans in inventory under this operation. The company then proposed repurchasing shares valued at approximately $34 per share by offering cocoa beans worth about $36, or exchanging 80 pounds of cocoa for one share of stock.
During this process, I, on behalf of GNC Company, bought shares, exchanged them for cocoa, and sold the cocoa to secure a guaranteed arbitrage profit of $2 per share.
Compared to the company's arbitrage approach, Warren’s personal strategy went further. Through independent analysis, Warren determined that holding the stock was more advantageous. He independently purchased 222 shares of Rockwood stock and made a substantial profit of $13,000 in a short time as the stock price surged from $15 to $100, earning about $60 per share, whereas GNC Company only earned a $2 arbitrage spread per share.
The architect behind this tax-free stock buyback deal involving cocoa beans was Jay Pritzker, who later built the Marmon Group based on businesses such as the aforementioned Rockwood & Co. The Marmon Group became a Berkshire-like conglomerate empire, encompassing over 120 businesses. In 2007, Berkshire acquired a 60% stake in Marmon Group for $4.5 billion in cash, marking Berkshire's largest cash acquisition at the time. Following six years of continued incremental purchases through four separate transactions, by 2013, Berkshire fully acquired the company at a valuation of approximately $15 billion.
Through his investment in Lockwood, Warren made a profit of $13,000 in a short period of time. This amount was sufficient to purchase a house in Omaha at that time. More importantly, Warren further deepened his understanding of the art of arbitrage.
At the recently concluded 2025 shareholder meeting, Warren once again recalled this arbitrage transaction from over 70 years ago:
Lockwood Company organized a meeting, and only two people attended: Jay and me. At that time, I was 24 years old, and Jay was 29. That day, Jay gave me a professional lesson on taxation, clearly explaining the relevant tax arrangements. I dare say that even if I had taken a few more years of tax courses in graduate school, I might not have learned as much about taxation as Jay taught me.
United Street Trolley Company
United Street Trolley Company (referred to as 'Street Company') was founded in New Bedford, Massachusetts, in 1872. Street Company's initial main business was carriages, which later evolved into tram and bus services as history progressed.
At that time, Street Company's core business faced significant pressure, resulting in an extremely low valuation. Around 1954, Warren's primary reason for purchasing the company was its cheap price: Street Company had net cash of approximately $48 per share, and Warren's initial purchase price was around $30, equivalent to buying the company at 60% of its net cash value.
As early as when he worked as a stock salesman at BF Company, Warren had attempted to buy shares of Street Company through GNC Company, but due to an operational error, GNC refused to execute the order. However, based on independent analysis, Warren believed that Street Company was undervalued and worth investing in, so he initially purchased shares in his personal name in 1952.
To increase his holdings in Street Company, Warren even published a buy advertisement specifically in 1954 to gather more shares of the company. After a period of continuous purchases, Warren accumulated 576 shares, accounting for approximately 3.1% of Street Company’s outstanding shares. Meanwhile, Street Company itself was actively repurchasing shares, reducing its total shares by approximately 23% from 1953 to the end of 1955, which passively increased Warren's stake to about 4.1%.
A turning point occurred during this period. In 1955, Street Company turned profitable, and its stock price surged to around $55. At that time, the company's tangible net assets were approximately $170 per share, yet the stock price remained extremely low, trading at about 0.3 times its price-to-book (PB) ratio. At this juncture, Warren visited Duff, the company's manager. Street Company was considering shareholder return arrangements. According to Massachusetts regulations at the time, utility companies issuing special dividends were required to pay amounts in multiples of the stock's par value. The par value of Street Company's stock was $25, and the company subsequently announced a special dividend of $50 per share.
Warren’s selling information was not disclosed publicly. Conservatively estimated, his position of 576 shares was retained at least until the end of 1956, with a market price of approximately $20 per share, resulting in a market value of about $12,000.
Overall, Warren made a profit of over $20,000 from this investment, approximately five times the average annual income of an ordinary worker at the time, which was enough to purchase a suburban villa in Omaha.
The Culmination: The Philadelphia and Reading Coal and Iron Company
In my view, investing in the Philadelphia and Reading Coal and Iron Company (referred to as P&R Company) marked the culmination of Warren's career during his early working years. Not only did Warren invest an unprecedented $35,000 in P&R Company, but the process also served as a comprehensive rehearsal for his future management of Berkshire Hathaway.
Anthracite coal played a crucial role in the U.S. energy structure from the 19th century through the early 20th century, with its core production area located in northeastern Pennsylvania. P&R Company had been engaged in anthracite-related businesses since 1833. By the 1950s, advancements in oil and gas extraction technologies caused anthracite production to plummet by nearly 70% from its peak, placing the industry in irreversible decline.
In 1952, Warren first purchased shares of P&R Company at $19 per share. The company’s tangible net assets were about $31 per share, trading at approximately 0.6 times price-to-book (PB). As the industry declined, profitability dropped sharply, with annual profits falling from a high of $6.2 million in 1948 to just $100,000 in 1963, causing the stock price to plunge to $9. During this period, considering that the financial statements failed to reflect the value of the company’s slag heaps, Warren continuously increased his position. By the end of 1954, Warren had personally invested $35,000, making P&R Company the largest individual holding of his working career.
At the same time, Warren’s mentor, Graham, began purchasing P&R Company shares at around $18 per share and continued to increase his holdings. By 1954, GNC held more than 5% of P&R Company’s equity, accounting for approximately 11% of GNC’s portfolio, making P&R Company GNC’s largest holding. Graham subsequently joined the board of directors of P&R Company.
In early 1955, P&R Company released its 1954 annual report, showing a staggering loss of $7.3 million for the year. At this point, Graham and his partner Newman took decisive action, leading P&R Company on a transformative path: First, they scaled back the original core business of anthracite coal by liquidating excess inventory and other non-performing assets to generate cash. Second, they used the accumulated cash to acquire profitable businesses. Given P&R Company’s substantial losses, it could carry forward tax losses, allowing acquired profitable entities to reasonably avoid corporate income taxes.
P&R Company’s transformation was nothing short of remarkable. Its first acquisition in the fall of 1955 was a perfect home run. Deeply inspired, Warren Buffett reviewed this practical lesson in capital allocation with great respect in his 2001 Berkshire Hathaway shareholder letter, 46 years later.
In 1955, I invested a significant portion of my personal net worth in P&R Company stock, driven by trust in the business acumen of my three bosses: Graham, Newman, and his son.
This investment ultimately yielded tremendous returns: P&R Company subsequently acquired United Underwear Company (referred to as Union Company) from Jack Goldfarb for $15 million. At the time, Union Company’s primary business involved producing Fruit of the Loom (FOL) branded underwear under a licensing agreement. Union Company held $5 million in cash on its balance sheet, $2.5 million of which could be used to pay for the acquisition. The company generated approximately $3 million in pre-tax profits annually, which could be sheltered from taxation due to P&R Company’s ability to offset taxable income with carried-forward losses.
The more intriguing part of the transaction arrangement was yet to come: out of the remaining $12.5 million payment, $9 million was structured as a zero-interest promissory note. Specifically, once Union Company’s annual profit exceeded $1 million, 50% of the amount surpassing $1 million would be allocated to gradually repay the acquisition cost. Those were truly the golden days of acquisitions; just recalling this deal sends shivers down my spine with excitement.
Later, Union Company outright purchased the brand ownership of FOL Company. In 1968, together with P&R Company, it was merged into Northwest Industries Group. Under the leadership of manager John Holland, FOL Company’s annual pre-tax profit once reached $200 million.
P&R Company’s acquisition of Union Company was an exemplary case of capital allocation. Through this investment, Warren personally experienced the fascinating process of corporate evolution, understood the irreversible decline of the company’s original core business, closely learned how to manage a controlling stake, how to recapture capital by gradually reducing inefficient assets like inventory and accounts receivable, and how to reallocate capital from low-return declining businesses to high-return profitable ventures. In this process, Warren gained a deeper understanding of handling various business relationships and relying on trustworthy subsidiary managers to gradually complete business transformation.
Out of the $15 million required for P&R Company’s acquisition of Union Company, $2.5 million came from idle funds within Union Company itself. Of the remaining $12.5 million, $9 million was sourced from Union Company’s future profitability, leaving P&R Company to extract only $3.5 million from its declining anthracite coal business to acquire a pre-tax profit-generating business worth $3 million annually without incurring taxes.
What was unimaginable at the time was that under the management of the outstanding manager John Holland, Union Company’s pre-tax profit later soared to $200 million, representing a 66-fold increase from the initial approximate $3 million at the time of acquisition. The annual pre-tax profit alone was equivalent to 57 times the cash originally paid during the acquisition.
Such a high rate of return is almost beyond imagination. Imagine extracting $3.5 million from a doomed declining business to acquire a company that generated $3 million in pre-tax profits at the time and grew to generate $200 million in pre-tax profits several years later. This transaction bears striking resemblance to Buffett’s later transformation journey of extracting cash from Berkshire Hathaway’s textile business to acquire NICO Insurance, INB Bank, and Charlie and Buffett’s use of cash squeezed out from BCS’s stamp business to buy See’s Candies.
Prior to the acquisition of Union Company in 1954, P&R Company’s stock price had fallen to about $10 per share. In 1968, Northwest Industries Group acquired P&R Company at $200 per share, representing a 20-fold increase over 15 years. We do not know when Warren sold his shares in P&R Company or how much he ultimately earned from his initial personal investment of $35,000. Later, while managing the partnership BPL in the 1960s, Warren repurchased shares of P&R Company.
More important than making money, this vivid lesson in asset allocation profoundly influenced Warren. In Berkshire Hathaway’s numerous acquisitions over the following six decades, we can see traces of P&R Company’s acquisition of Union Company: As mentioned earlier, 12 years later, in 1967, Warren was also forced to initiate a transformation of Berkshire Hathaway’s then-struggling textile business. His first acquisition was the purchase of NICO Insurance for $8.7 million, which, despite initial challenges, marked the beginning of Berkshire Hathaway’s investment model leveraging P/C insurance float as a low-cost financing mechanism. Five years later, in 1972, as BCS’s core business continued to decline, the company made its first external acquisition by purchasing See’s Candies for $25 million.
The art of capital allocation Warren learned through investing in P&R Company became a pivotal force driving Charlie and Warren’s subsequent transformation of Berkshire Hathaway:
In the 1975 shareholder letter, Warren summarized his first decade of controlling Berkshire Hathaway: When we took control of Berkshire Hathaway in 1965, the two textile mills were the company’s sole source of profit, and before Chase was appointed to oversee daily operations, the textile business’s profits were highly unstable. Over the 10 years since our takeover, net assets have grown significantly to $92.9 million. During this period, we acquired six new businesses in cash through negotiated purchases, established four new businesses, and acquired a 31.5% stake in another company. At the same time, we reduced the company’s equity capital to 980,000 shares through share repurchases. Overall, in the first 10 years of our control, the compound annual growth rate of book value per share exceeded 15%.
1983 Shareholder Letter: After Berkshire acquired BCS through a stock-for-stock transaction, an interesting outcome emerged: compared to the company’s equity capital of 1.1378 million in 1965, the current capital is approximately 1.1469 million, meaning that 1% in 1965 is equivalent to about 0.99% today. In other words, relative to 1965, we have added several highly profitable businesses—such as The Buffalo Evening News, See's Candies, Nebraska Furniture Mart, and the insurance operations—to Berkshire's original textile assets with only negligible equity dilution.
The above represents eight major investment deals that Warren participated in during his roughly five-year career. Through practical experiences with GEICO, Rockefeller Wood Company, Street Company, P&R Company, and others, Warren successfully inherited Benjamin Graham’s value investing philosophy while also earning his first substantial fortune: during his time at GNC, Warren received an annual salary of $12,000, nearly four times the average salary at the time. By comparison, Walter Schloss, a senior disciple 14 years Warren’s elder, earned about $50 per week, less than a quarter of Warren’s salary. Including multiple investment gains during this period, Warren’s net worth now exceeded $150,000, equivalent to 30 times the average annual income of a typical American middle-class household, achieving basic financial independence. From this point forward, Warren could break free from various constraints and truly take control of his professional destiny.
Five selected columns! Helping you not only 'do your homework correctly,'but also understand the problem-solving approach.
Editor/Rocky
