Yesterday was Warren Buffett’s 96th birthday. In honor of Buffett, we will break our regular schedule of notes for HX Weekly and share several essays on our (reasonably unique) perspective on Buffett.

Warren Buffett the #GOAT

...of GROWTH Investing!

This first note will make a point that many of my regular readers have heard me make in the past…Buffett has made his money as a GROWTH investor rather than a VALUE investor.

What does this mean?

Look up the definition of "value investor," and you get the following…

That next sentence in that article says…

“Warren Buffet is probably the best-known value investor today…”

What does it mean to be a value investor?

Read the writings of Benjamin Graham and many of the "founding fathers" of value investing, and you will read about them buying companies at less than "book value, " which is the accounting value of their assets.

There will also be many examples of buying a company below the replacement value of its assets or liquidation value.

These “buy $1 of assets for $0.50” opportunities used to exist in the stock market fifty years ago. That was before these strategies became more well known, the explosion in the asset management business and – most importantly – the Internet.

Outside the complex distressed security market, there are very few of these opportunities in the stock market anymore—certainly not large ones.

Buffett began his professional investing career in the 1950s and 1960s when these opportunities still existed.

Looking at how he ACTUALLY made his money, though, you see that it was NOT on these types of opportunities.

Instead, it was buying large companies that would GROW their earnings tremendously.

Let’s look at his most famous investment – The Coca-Cola Company (NYSE: KO).

He initiated this position in 1988, and his $1.3 billion investment has turned into a $24.5 billion stake or a profit of $23 billion.

Here is a Financial Analysis table of the key financial metrics for KO since 1988 and through the end of 2023…

Let’s discuss both tables.

We don’t have precise data, but Buffett began buying KO in 1988. For the purposes of our analysis, we ran our numbers as if he had taken four years to enter the position.

Across those four years, the stock's media price-to-earnings (P/E) ratio was 15.8x. Over the next three decades, the median P/E ratio was slightly less than 27x.

This means that the appreciation from a multiple perspective was +70%.

Also note that at 16x forward EPS back in 1988, KO was a +10% premium to the multiple of the S&P 500. Even the next year (1989) was only a -15% discount, and 1990 was a premium again.

Now, let's look at earnings per share (EPS) over the period. It has grown +2370% from $0.18 per share to almost $2.50 per share in 2023.

Looking at the almost +2200% increase in the stock price across this thirty-five-year period, the expansion in earnings multiple (+70%) certainly helped, but the REAL driver was earnings growth.

This was also a stock that was NOT trading at a discount to asset value or the overall stock market at the time.

The VALUATION of KO stock did not drive the appreciation in Buffett's stake; rather, it was the GROWTH in earnings that did.

Now, let's go back to the definition of "Value Investing" at the top. It does take into account this situation.

It says value investors seek "…stocks that they think the stock market is underestimating."

This captures what happened with KO stock.

It wasn’t that it was trading at a discount to the asset value at the time or the stock market, but it certainly was excellent value given the future growth that would happen. In THAT sense, it certainly was a good "value" purchase.

This means the critical stock analysis was NOT about understanding the VALUE but rather about handicapping the GROWTH.

It is interesting to note that the return we quoted above was the return of his stock holdings, not his total returns.

If we consider the dividends that were paid, that is another +952% return. This brings his return to over +3000% on his KO holding.

The annual dividend has grown from $0.08 per share to $1.84 per share or +2200%. That number is almost the same as the earnings growth.

Again, the key to this investment is the GROWTH of the company.

While Buffett is lauded as the most extraordinary living (or ever) VALUE investor of all time, we think the KEY to his success has been identifying GROWTH.

This brings us to our favorite Buffett quote…

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This is something that every young investor should take to heart…

Think You Know Warren Buffett?

We Have Some Little-Known Facts

Over the decades, MILLIONS of pages have been written about Buffett, so we wanted to offer some new thoughts.

Above we argued that the key to Buffett's success has been growth investing rather than value investing. We don’t think many folks have made that case before…

Here, we were originally going to share some great Warren Buffett quotes.

Over the years, though, we have learned something surprising. Buffett doesn't give a good quote!

Buffett's partner, Charlie Munger, is a quote machine. They are smart, short, funny, and often incredibly clever. He has awesome quotes!

Buffett is also smart, funny, and incredibly clever. His quotes just aren’t that great.

We published our favorite above. We like that one so much that we are going to publish it here again…

That one is a “10 out of 10”! There are some other decent ones, but they aren't spectacular as a group.

As we were looking for quotes, we started looking up facts about Buffett. THAT is where we found some fascinating stuff!

Many are well-known, but a few might surprise even the most ardent fan of Buffett.

Here they are…

1. He Made $53,000 By the Age of 16

He started making money at the age of six! He walked around his neighborhood selling packs of gum for a nickel each.

When his father became a congressman and the family moved to D.C., he delivered The Washington Post newspaper and made $175 a month—more than $3000 a month in today's dollars. He was thirteen years old at the time.

The article I read said he had made $53,000 by 16. That is an amazing $848,000 in today’s dollars. Wow!

The man was BORN to make money!

2. He Made 94% of His Wealth AFTER He Turned 60 Years Old

This is fascinating for a guy who had made almost $1 million by age 16.

At 52, he was worth $376 million, so it's not like he was sitting around doing nothing.

Since then, though, his net worth has gone through the roof! It currently stands at over $140 billion! That is the power of compounding…

Also, I just turned 52, five days before Buffett's birthday this year. I am definitively NOT worth $376 million, but that gives me some hope for the next forty years!

3. He Thought Graham and Dodd Were Dead

Buffett first attended my alma mater – the Wharton School of the University of Pennsylvania. He studied there for two years but then moved to the University of Nebraska, where he graduated at 19.

Buffett then applied to Harvard Business School and was rejected. After the rejection, he discovered that his investing idols, Benjamin Graham and David Dodd, were professors at Columbia Business School.

“I wrote them a letter in mid-August,” Buffet said. "I said, 'Dear Professor Dodd. I thought you were dead, but now that I found that you're alive and teaching at Columbia, I would really like to come.' And he admitted me."

That is ONE way to fill out an application!

4. His Face Was on Cherry Coke Cans in China

I don't know that I have much to say about this one…going to let it sit right here…

5. He Loves the TV Show Breaking Bad

Everyone I know says this is one of the best TV shows of all time. Personally, I have never watched it because I don't like to watch shows that are too depressing.

My father's family is from New Mexico and lived the show, so I figure—why do I need that in my life now?

The show is too depressing for me, but Warren Buffett, "The Oracle of Omaha," and the world's most famous investor, loves it!

He has some surprises in him…

We hope you enjoyed some of these facts about Buffett that may have surprised you!

We read over a dozen articles on the subject and want to give full credit to this one.

It was by FAR the most informative and fun.

HAPPY BIRTHDAY!

Whitney Tilson's Tribute to Warren Buffett

On His 94th Birthday

A couple of years ago, in honor of Warren Buffett’s 94^th birthday, we went to the person who knows Warren best—my friend and colleague Whitney Tilson!

Below we are sharing (with his permission) a note Whitney sent to his subscribers. You can subscribe to his awesome free daily here…

My Tribute to Warren Buffett on His 94^th Birthday

When I first became interested in investing, I discovered Warren Buffett and Charlie Munger in the mid-1990s. I studied them obsessively, reading everything by and about them and traveling to Omaha, Nebraska, to attend the Berkshire Hathaway (BRK-B) annual meeting every May (I've been to 26 in a row).

Value investing is like a religion: It has a revered founder (Ben Graham), pope (Buffett), senior cardinal (Munger), Old Testament (Security Analysis), New Testament (The Intelligent Investor), a set of norms and values like kindness and integrity, and thousands of passionate disciples (like me) who study all of the historical texts and carefully analyze all of the new teachings by the pope and senior cardinal.

What I learned from these two wise men about investing was invaluable. In the early days of my career, I had little experience—and they were such brilliant, inspiring, and patient teachers! Had I not absorbed all of the investing lessons they imparted, I would never have achieved anything close to what I did.

In my first dozen years of investing, I beat the market year after year and grew assets under management from $1 million to more than $200 million across three hedge funds and two mutual funds. I also launched successful investment conference and newsletter businesses, appeared regularly on CNBC for many years, was on 60 Minutes twice, wrote hundreds of articles, and coauthored three books. 

However, I've come to realize that the most important things I learned from Buffett and Munger go well beyond investing—to what Munger called "worldly wisdom."

The worldly wisdom they instilled in me has made me a much happier, more successful person and a better husband, father, son, and friend than I otherwise would have been. For this, I am profoundly grateful to them – so appreciative, in fact, that in 2021, I published a book full of lessons that are rooted in what they taught me: The Art of Playing Defense: How to Get Ahead by Not Falling Behind. Here's the cover:

After writing and contributing to three books about investing, this one was for my daughters (now ages 28, 25, and 22) with my best ideas on how to lead a happy and successful life.

When I started writing it, I structured it around the simple things Buffett and Munger preached (as Munger liked to joke, "If it's trite, it's right!"): Work hard, become a learning machine, have high integrity, develop good habits, be nice to everyone, marry the right person and maintain a strong relationship, and so forth.

But I quickly became bored with my book... So, I instead channeled Munger, who said the best way to solve problems was to "invert, always invert," and I rewrote it, this time structured around the five calamities to avoid that can ruin your life. They are:

• Loss of Reputation and/or Wealth

• Loneliness and/or Suffering a Permanently Impaired Relationship With a Loved One

• A Bad Marriage, Often Ending in Divorce

• Addiction and Abuse

• The Death, Serious Injury, or Illness of Yourself or a Loved One

I quoted Buffett three dozen times throughout the book. I've shared the highlights below to honor him on his 94th birthday.

Best regards,

Whitney

Develop Good Habits 

Think about that. All the little things you do dozens of times every day – your habits – define who you are, and once these patterns are set, they're really tough to change. Thus, it's critically important to develop good habits early in life.

Buffett tells students to look at the people they work or go to school with and ponder this question:

As you think about this, what characteristics are you focusing on? Are they smart? Do they work hard and not give up easily? Do they have integrity? Is their word their bond? Are they 100 percent reliable? Are they well organized? Do they take care of themselves and not take foolish risks? Are they kind and a pleasure to spend time with? Do they make the world a better place?

Now ask yourself: what are they doing that I can't do as well? I think you'll find at least 90% of these traits are things over which you have total control.

So you see, you don't need me to tell you what habits you should try to adopt—you already know. There's no secret—they're obvious! The real question is: What are you going to do about it?

Integrity, Intelligence, and Energy

Turning to Buffett again:

Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without [integrity], you really want them to be dumb and lazy.

... By "energy," Buffett's not just talking about putting in many hours – though that's part of it – but also maximizing the value of those hours by being smart, focused, and disciplined.

Loss of Reputation and/or Wealth

If you're in the professional world – if you are, for example, a doctor, lawyer, or businessperson – your greatest asset other than your brain is your reputation, for how hard you work, your sense of decency, and most importantly, your integrity.

Cherish and protect it because, as Buffett once said:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.

I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.

Develop the "Soft Stuff"

Your smarts, work ethic, and credentials are all important, but you need to marry them with what I call the "soft stuff" to be a well-rounded, successful, happy person.

This is what Buffett once said to a group of students:

"How I got here is pretty simple in my case. It is not IQ; I'm sure you will be glad to hear.

The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output – the efficiency with which the motor works – depends on rationality. A lot of people start out with 400-horsepower motors but only get 100 horsepower of output. It's way better to have a 200-horsepower motor and get it all into output.

So why do smart people do things that interfere with getting the output they're entitled to? It gets into the habits and character and temperament, and behaving in a rational manner. Not getting in your own way.

As I have said, everybody here has the ability absolutely to do anything I do and much beyond. Some of you will, and some of you won't. For those who won't, it will be because you get in your own way, not because the world doesn't allow you."

Nice Guys Finish First

There's a myth that to get ahead, you have to be ruthless and nasty and that nice guys are chumps who get taken advantage of. Nothing could be further from the truth. Over the years, I've been fortunate enough to meet some of the world's richest and most successful people: Warren Buffett, Charlie Munger, Bill Gates, Michael Bloomberg, Eli Broad, Jorge Paulo Lemann, Don and Doris Fisher, Reed Hastings, and over a dozen billionaires in the investment world. I never cease to be amazed at what genuinely nice and philanthropic people almost all of them are.

Arrogance versus Humility

Having a lot of self-confidence, bordering on arrogance, can be a good thing. You're more likely to try bold things and be able to overcome setbacks. The key, however, is to marry this confidence with a healthy dose of humility, which will help you figure out the difference between trying something bold versus something that's just dumb and whether to soldier on in the face of setbacks versus wisely pulling the plug on something that's never going to work.

Warren Buffett is a great example of someone who's struck the right balance. He has plenty of self-confidence—one of my favorite sayings of his is, "My idea of a group decision is looking in a mirror," for example—but he's also very humble. He's the world's most famous investor, but he's always saying he doesn't understand certain companies or industries, and he goes out of his way to talk about the terrible investments he's made over the years.

A Bad Marriage, Often Ending in Divorce

Buffett once said that the two most important decisions you make in your life are who you marry and what career you choose.

I agree.

Based on my 27 years of experience, a lifetime of observation, and quite a bit of research (which, for example, reveals that one-third of marriages are severely strained), I can't think of anything more important to long-term happiness than a strong marriage. It's the most important relationship in your life.

Until about ten years ago, this wasn't something I thought much about because divorces among my friends and family were rare. But since then, it's been an epidemic. More than a dozen people I'm close to have gone through a divorce, and in every case, it's been a nightmare.

Impaired Relationships with Loved Ones

A separate but related calamity to loneliness is a permanently impaired relationship with a loved one – in particular, a parent, sibling, or child. It can be as devastating as a divorce.

As Buffett once said, "I know of so many people with all the money in the world, but they're divorced, don't talk to their kids, and are totally miserable. My definition of success is whether the people who should love you do love you.” 

... There are two keys to avoiding this calamity: maintain healthy relationships in your family and, if a relationship breaks, fix it!

Choosing Friends

It's wonderful to have lots of casual friends, but choose your close ones carefully. Good ones will enrich your life immensely, while bad ones will drag you down directly and because others will judge you based on them.

Buffett once said:

You will move in the direction of the people you associate with, so it's important to associate with people better than yourself. You want to associate yourself with people who are the kind of person that you'd like to be. You'll move in that direction. The friends you have will form you as you go through life. Make some good friends and keep them for the rest of your life. Have them be people you admire as well as like.

Develop Good Financial Habits

If you want to build wealth and live comfortably someday, you must develop good financial habits...

Despite being one of the wealthiest men in the world, Buffett is still very frugal. He could afford to live in a massive estate but has lived in the same house for 61 years! When he first started flying in a private jet, he felt so embarrassed that he nicknamed it "The Indefensible."

Having Your Body Break Down

While, of course, not as serious as dying, having your body break down prematurely is a genuine calamity. Most people don't take care of their bodies – more than two-thirds of Americans are overweight, and 40% are obese. As a result, as they age, they often suffer years of pain and disability and die years before they should.

Buffett gives a wonderful analogy: "If you were only given one car and you had to make it last for your entire life, imagine how you'd treat it: you'd drive it slowly and carefully, change the oil regularly, etc." 

Yet most people do the opposite with their bodies: they stuff them full of sugar and fat, poison them with drugs, cigarettes, and excess amounts of alcohol, and do little to no exercise. 

If you take nothing else from this book, vow to treat your body better. You don't have to be perfect – everyone has their vices (mine are Diet Coke, candy, and a little ice cream sundae every night) – but you can go far by taking a lot of small steps over time.