W<\/span>ith the best will in the world, we must be nearing the final leg of Warren Buffett\u2019s remarkable career as an investor.<\/p>\n We lost Buffett\u2019s irreplaceable righthand man Charlie Munger<\/a> in 2023, on the cusp of his centenary.<\/p>\n And at 94, Buffett cannot continue to tap dance<\/a> to work forever.<\/p>\n Investors of all stripes will someday miss an advocate, an educator, and an inspiration.<\/p>\n Not to mention a titanic financial role model.<\/p>\n Buffett might still be the world\u2019s richest person if he hadn\u2019t started giving<\/a> away his wealth a couple of decades ago.<\/p>\n Even so, he\u2019s still worth a cool $154bn.<\/p>\n Most Monevator<\/em> readers will find Buffett\u2019s generosity admirable \u2013 while being equally interested in getting the chance to be that generous ourselves.<\/p>\n And what really fascinates us about Buffett is that he got rich not by founding a continent-spanning supermarket chain or a globe-conquering social network, but by investing.<\/p>\n Can\u2019t we do \u2013 at least a bit \u2013 of what Buffett did?<\/p>\n Alas it\u2019s not so \u2018simple\u2019 as stockpicking your way onto the Forbes<\/em> billionaire list<\/a>.<\/p>\n If the devil\u2019s greatest trick was to make the world believe he didn\u2019t exist, then Buffett\u2019s greatest ruse<\/strong> has been to make the world forget he was once a hedge fund manager.<\/p>\n I much admire Warren Buffett, both as a man and an investor. So don\u2019t take my Biblical allusion too seriously.<\/p>\n Nevertheless, it\u2019s remarkable how little you hear about the way Buffett\u2019s early investing partnerships turbo-charged his wealth.<\/p>\n It was investing Other People\u2019s Money via these partnerships that enabled Buffett to amass an initial warchest that he then multiplied many times over to become the world\u2019s intermittently richest man.<\/p>\n Most pundits focus on how Warren Buffett got rich investing in Coca-Cola (\u201cand you can too!\u201d<\/em>) or on how Buffett is really a businessman disguised as a stock trader, so you shouldn\u2019t bother trying.<\/p>\n Academics have even sought to explain away<\/a> Buffett\u2019s market-beating achievements as a combination of factor investing and benefiting from cheap leverage. As if Buffett wasn\u2019t a genius for figuring it all out decades before their backwards-looking analysis!<\/p>\n But regardless, the truth of how Buffett got rich lies somewhere between all these factors.<\/p>\n Stock picking would have made Buffett a millionaire<\/a>. But his early business success in running money for other people is what enabled Buffett to become a billionaire<\/a>.<\/p>\n Let\u2019s take a closer look.<\/p>\n Whether in best-selling biographies<\/a> or the regular eulogies<\/a> about his life, the fact that Buffett took a huge swathe of his partners\u2019 gains to enrich himself is rarely mentioned.<\/p>\n That\u2019s a bit like dropping the Wright Brothers from the history of flight. Or omitting Bilbo Baggins from The<\/em> Lord of the Rings<\/em>.<\/p>\n Because managing money for others is how Buffett\u2019s wealth accumulation got its entry ticket into the major leagues.<\/p>\n After a precocious childhood selling newspapers and investing in his first shares when he was 11 \u2013 so far, so fitting the legend \u2013 Buffett began his professional investing career as an analyst on Wall Street.<\/p>\n Yes, fans of folksy Omaha \u2013 Wall Street. The infamous hive<\/a> of scum and villainy!<\/p>\n Buffett first worked for Renaissance man and genius Ben Graham Buffett\u2019s initial salary was $12,000. That sounds very modest now but it is the equivalent of more than $142,000 in today\u2019s money. Not bad for a 24-year old, even by the standards of modern trading desks.<\/p>\n Buffett\u2019s high starting salary is the first aspect of his wealth accumulation that\u2019s rarely dwelt on by stock pickers dreaming of becoming billionaires by putting \u00a3500 a month into an ISA.<\/p>\n On the other hand, the legend reasserts itself with the truth that Buffett did scrimp and save<\/a> \u2013 and reinvested most of what he earned.<\/p>\n According to my thrice-read copy of The Snowball<\/a> Arguably this is the closest his life story gets to what we\u2019re told to do to emulate his success.<\/p>\n Buffett grew his wealth by 61% a year after going to college. And that $174,000 is equivalent to over \u00a32m in 2025 dollars.<\/p>\n Buffett was a millionaire in today\u2019s terms while still in his mid-twenties. We shouldn\u2019t downplay that achievement.<\/p>\n But what laid the foundations for him to enter the ranks of the mega-rich were the private investment partnerships he next set up and ran \u2013 mostly for family and friends \u2013 between 1956 and 1969.<\/p>\n The terms of these partnerships varied. For the first partnership, the seven other founding partners put in $105,000. Buffett put in just $100.<\/p>\n Here\u2019s his recollection of the deal, from The Snowball<\/em>:<\/p>\n \u201cI got half the upside above a four percent threshold and I took a quarter of the downside myself. So if I broke even, I lost money.<\/em><\/p>\n And my obligation to pay back losses was not limited to my capital. It was unlimited\u201d<\/em>.<\/p>\n<\/blockquote>\n Buffett felt an obligation to pay back losses partly because his early investors were the closest people in his life.<\/p>\n His wife\u2019s father was one of them, for instance. His sister was another.<\/p>\n Buffett\u2019s stipulation that would see him out of pocket if his returns fell below 4% is far removed from the typical hedge fund of today.<\/p>\n Some still charge a 2% management fee every year, regardless of performance.<\/p>\n And even the greediest hedge funds don\u2019t claim \u2018half the upside\u2019.<\/p>\n For years the standard deal was 2% annual and a 20% performance fee \u2013 lower in recent times \u2013 as well as some sort of high water mark to theoretically protect investors from volatility that enriches the manager but not the customers.<\/p>\n But Buffett took 50% of the upside \u2013 not 20%!<\/p>\n True, Buffett\u2019s upside came only after the first 4%. Whereas most hedge funds today will take, say, 20% of anything they make (even interest on cash).<\/p>\n This is Warren Buffett we\u2019re talking about here, though. He doesn\u2019t do miserly returns for long.<\/p>\n In 1957, the three partnerships Buffett was operating gained 10%, against a market that was 8% lower.<\/p>\n 1958 was better still. Again quoting The Snowball<\/em><\/a>:<\/p>\n The next year the partnerships\u2019 had risen more than 40% in value. Buffett\u2019s fees so far from managing the partnerships, reinvested, came to $83,085.<\/p>\n These fees had mushroomed his initial contribution of only $700 \u2013 $100 contributed to each of the seven partnerships \u2013 into a stake worth 9.5% of the combined value of all the partnerships.<\/p>\n<\/blockquote>\n You don\u2019t need to bust out a compound interest calculator<\/a> to see how well the partnership fee structure was serving Buffett.<\/p>\n Sure, he needed to succeed with his stock picking to make decent returns for his partners.<\/p>\n But it was by leveraging other people\u2019s money into those stock picks that Buffett made himself rich.<\/p>\n If Buffett had merely invested for himself the $700 that he\u2019d put into the partnerships over those first two years, then he\u2019d have grown it to\u2026<\/p>\n \u2026$1,078.<\/p>\n That\u2019s 76-times less than what he made by investing for other people.<\/p>\n My point is not that Warren Buffett isn\u2019t a great investor.<\/p>\n He most certainly is one of the best \u2013 and arguably the GOAT.<\/p>\n Nor am I saying that Buffett was ripping off his early investors. He made most of them into multi-millionaires, and they probably never realised how much the arrangement protected their downside.<\/p>\n Most people care more about losing money than making it, so I believe the terms weren\u2019t sheer avarice on Buffett\u2019s part.<\/p>\n Nevertheless, it was the fees generated by his investing talent through the partnerships that made Buffett rich, not those pure stock picks themselves.<\/p>\n By January 1962, barely five years after he began, Buffett was a millionaire on paper, with his share of the partnerships\u2019 assets valued at $1,025,000.<\/p>\n The moral? If you want to get as rich as Warren Buffett, you don\u2019t merely need to start early and grow old<\/a>. Just investing like Buffett<\/a> won\u2019t do it, either.<\/p>\n Instead, to get very rich as an investor, you need to invest like Warren Buffett on other people\u2019s behalf<\/strong>, and claim a good portion of the gains for yourself.<\/p>\n Ironically perhaps, Buffett won a ten-year bet against hedge funds<\/a> partly on account of their high fees.<\/p>\n And in recent years he has championed index funds<\/a> as the best solution for everyday investors like you and me.<\/p>\n Once you know how well he did from high fees himself in his pre-Berkshire Hathaway years, you can\u2019t help thinking there\u2019s an element of \u2018poacher turned gamekeeper\u2019 to this.<\/p>\n (Which is certainly no reason to ignore his advice to invest passively<\/a>. Quite the opposite!)<\/p>\n Some people have saluted<\/a> how well Berkshire Hathaway has served its shareholders, compared to how most hedge fund managers milk their customers with the 2\/20 structure.<\/p>\n The truth is more complicated. Just as Warren Buffett uses folksy analogies to make economic issues more understandable, his most ardent fans \u2013 if not the man himself \u2013 have also played us like a fiddle when it comes to seeing how he first got rich.<\/p>\n If Buffett was a private investor in his spare time, as per the myth \u2013 if he was a successful everyday businessman investing his excess cash, or maybe even a doctor or a teacher \u2013 then he\u2019d very likely have become a multi-millionaire.<\/p>\n I doubt we would have heard of him, though.<\/p>\n I don\u2019t know if Warren Buffett reads Monevator<\/em> (I wish\u2026)<\/p>\n But since I published the first version of this article, Buffett has been less coy about his hedge fund days then he was when The Snowball<\/em> was published.<\/p>\n For example, in publicity for a second authorised biography, Tap Dancing to Work<\/em><\/a> Until 1969, Mr. Buffett operated a private partnership that was akin in some ways to a modern hedge fund, except the fee structure was decidedly different.<\/p>\n Instead of charging \u201c2 and 20\u201d \u2014 a 2 percent management fee and 20 percent of profits \u2014 Mr. Buffett\u2019s investors \u201ckeep all of the annual gains up to 6 percent; above that level Buffett takes a one-quarter cut,\u201d Ms. Loomis wrote. [\u2026]<\/p>\n \u201cIf you want to make a lot of money and you own a hedge fund or a private equity fund, there\u2019s nothing like 2 and 20 and a lot of leverage,\u201d he said over a lunch of Cobb salad.<\/p>\n \u201cIf I kept my partnership and owned Berkshire through that, I would have made even more money.\u201d<\/p>\n<\/blockquote>\n Of course, getting to a ripe old age does a lot of the heavy lifting too when it comes to compounding<\/a> a fortune.<\/p>\nWho wants to be a billionaire?<\/h4>\n
Secret 1: Buffett the City Slicker<\/h3>\n
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Secret 2: Buffett the fund manager<\/h3>\n
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Halfway to Heaven<\/h4>\n
Nice work if you can get it<\/h4>\n
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Gearing up his great stockpicking<\/h3>\n
Rich folk history<\/h3>\n
The truth is out there<\/h3>\n
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Age before beautiful stock picks<\/h4>\n