Warren Buffett’s Investing Style In 1956

I found a great passage in Alice Schroeder’s “The Snowball” biography about Warren Buffett that covered his investing style in his 20s when he was running a partnership for family friends and affluent physics professor Homer Dodge:

“Every stock certificate was delivered directly to him, made out in the partnerships’ names, rather than left on deposit with a broker as was the usual practice. When they arrived, he carried them—smooth cream-colored diplomas in investing, engraved with finely etched drawings of railroads and bald eagles, sea beasts and toga-clad women—down to the Omaha National Bank in his own hands and placed them in a safe-deposited box. Whenever he sold a stock, he went to the bank, riffled through the collection of certificates, and mailed off the correct ones from the post office on 38th street. The bank would call to let him know when a dividend check came in to be deposited, and he would go there, examine the check, and endorse it personally.” See bottom of page 186.

One of the reasons why it can be hard to get people interested in investing is because the process is intangible. The process of wealth creation seems really abstract when the means of interaction are punching two and three letter symbols into a keyboard and watching them squiggle upward and downward each day. When that is how your wealth is built, it is hard to believe that buildings, rent payments, employees and payroll, taxes and suppliers, and warehouses are involved in what you own. The act of being a common shareholder is great in that it can build wealth passively without ongoing effort, but it is also incredibly remote because it doesn’t have the tangibility of something like owning a piece of real estate you can physically visit and see tenants paying cash monthly to you as the landlord.

Even for someone that operates at an incredibly high theoretical level like Warren Buffett, he still benefitted from doing things that made investing come alive. He had physical stock certificates. He went to the bank to collect cash from an individual holding four times per year.

My view is that these actions are much more likely to make someone a true buy-and-hold investor. Someone that buys a stock at $500 per share and sees it fall to $370 might sell it impulsively. What if you hold the stock certificate in a bank vault somewhere? Would you visit the bank today, grab it, and go to a brokerage office to sell it? It is a possibility, but you’ve created a friction point that encourages behavioral modification so that the probability is lower compared to what it would be if you held the funds in the commonplace electronic form that gives the brokerage house custody.

If your goal is to get someone you care about interested in investing, or spur on your own motivation, it makes sense to look at high-cash generating dividend stocks where you set the purpose to receive every dividend it produces as cash to spend. If you pick up 500 shares of Royal Dutch Shell, you get $470 every 90 days that you can spend on whatever you want. This makes investing seem real—you get real cash coming your way without surrendering any of your ownership—and this acts as an offset to the delayed gratification nature of the investing process that expects you to shovel money away for four decades and not really get a payoff until you’re old.

Even though Warren Buffett pays very close attention to the growth in retained earnings of his investments and doesn’t have Berkshire Hathaway pay a dividend, it would be a foolish next step to conclude that he doesn’t appreciate the passive cash coming in. He also tied the compensation of See’s Candy management to the amount of excess cash that got mailed to Omaha, and acknowledged that he invested in Wells Fargo partially because he expects it to have superior dividend growth compared to the banking sector in general. To the people who regard stock certificate-bearing investors as having a certain old-fashioned naivete, I’d say don’t knock it until you try it. If you have stock certificates of Colgate-Palmolive, Nike, Exxon-Mobil, PepsiCo, and Johnson & Johnson sending you cash twenty times per year, I can’t imagine you’d ever find the prospect of collecting more and more cash each year from a prior effort to be bothersome.