Right now, Warren Buffett’s holding company Berkshire Hathaway pumps out about $12 billion per year in annual profit. Because it owns extensive insurance operations that experience fluctuating profits, it is not as easy to determine Berkshire’s normal earnings power as it would be, for say, Kraft’s food packaging divisions which have pretty predictable demand for macaroni and cheese, Oscar Meyer hot dogs, and Maxwell House coffee, but still–$12 billion is a good estimate of what “normal” profits look like each year for Berkshire shareholders.
And although Warren Buffett is starting to sell off some of his Berkshire stock to donate to charity, he still owns about 1/3 of the total company. That means $4 billion of Berkshire’s profits belong to him.
So when Warren Buffett wakes up in the morning, this is what he knows:
(1) He is going to make $4 billion in annual profits from Berkshire’s holdings in Heinz ketchup, chemical-maker Lubrizol, Dairy Queen, Helzberg’s diamonds, GEICO insurance, Nebraska Furniture Mart, and over 70 other businesses that generate at least $100 in profits each year. That doesn’t even touch on the dividends received from Buffett’s stock holdings, the major ones being Coca-Cola, American Express, IBM, and Wells Fargo (by the way, Buffett has been buying up Wells Fargo stock since 2008 like it’s going out of style. It has now surpassed Coca-Cola as Berkshire’s largest common stock holding. If you want to use Buffett’s brain to get your own investment ideas, Wells Fargo and IBM are probably your best bets because they represent stocks that Buffett has recently bought or continues to buy).
(2) That means when Buffett wakes up in the morning, he knows he’ll be making about $333 million in profit that month.
(3) Taking it one step further, he makes $10.95 million every day just for waking up in the morning.
(3) Whether he is awake or asleep, Buffett is making $456,000 per hour.
How did he put together this kind of life for himself?
(1) He played good defense his whole life. Even when he was a billionaire in the late 1980s/early 1990s, he insisted on buying his Coca-Cola in bulk when it was on sale. He was in the richest 0.000001% of the entire world back then, and he still looked out for a bargain (note: somewhere along the line, he started getting his Coke for free. Hey, when you own 400,000,000 shares of a company, you get a side perk or two). The point is this: making good money doesn’t build wealth. Just read those Sports Illustrated articles that occasionally pop up about athletes ten years after they retire. Rather, it’s about doing something intelligent with the spread between the money you take in and the money you spend. The bigger the spread, and the higher growth rate you achieve with it, the more wealth you can create.
Warren Buffett is worth $59 billion, yet he lives like he is only worth $50 million. Buffett has avoided the extravagance that turns many high-earning individuals into Gatsby-like caricatures that make you wonder if they are doing their best to lay the foundations for Sodom and Gomorrah 2.0. While other high-powered executives are buying statues that have Mountain Dew coming out of the orifices, Buffett is buying more shares of Wells Fargo. A lot of rich people turn themselves into cartoon characters once their wealth reaches a certain point. Buffett may have picked up a jet here and a vacation home in Laguna Beach there, but he has largely avoided the Larry Ellison “You can only access this golf course by way of helicopter” lifestyle that other rich folks take up.
(2) He used other people’s money. The beauty of owning an insurance company is that you receive money from clients that you get to invest, and then make payouts as the needs arise. The longer the amount of time you can “keep” that money, and the higher the return you can achieve on it, the greater your wealth creation becomes. Buffett’s decision to own insurance companies, and use them as vehicles for stock investments, is probably a useful reason explaining why Buffett is worth $59 billion right now instead of $2-$3 billion. Over the course of a lifetime, that “free money” is quite powerful, especially in the hands of someone like Buffett who can invest spreads into companies that have high returns on equity.
(3) His best investments have been in excellent businesses that churn out cash year after year. I mean, think about it: How do you not get rich if you own something for forty years that keeps giving you more and more money? Buffett’s biggest investing blunder in the past twenty-five years was probably Dexter Shoe, a shoe company with no tangible moat that quickly lost money. Companies like See’s Candies have been giving Buffett cash to deploy for 35+ years. If Buffett has another decade or so left of life in him, he might reach a point where he receives annual Coca-Cola dividends in excess of the amount of his purchase. Think about that one for a minute.
Buffett didn’t get to the point where he makes $456,000 just for waking up in the morning by accident. There’s no investment tooth fairy that dumps millions of dollars in assets into your account (err, technically, there is a trust fund tooth fairy, but according to Dr. Thomas Stanley’s research in The Millionaire Next Door, slightly less than 10% of millionaires in this country received that wealth by way of inheritance). Buffett got to where he is today by spending less than he earns, using other people’s money to earn an asset override, and finding excellent companies that keep on giving him cash to deploy into new investments. His business partner Charlie Munger was right. “Drowning in cash” is fun.