Warren Buffett (Trades, Portfolio) started managing money for outside investors in 1957. After he graduated from college, he went to work with his teacher and mentor, Benjamin Graham, at the Graham-Newman Corporation.
Unfortunately, after a relatively short time working under the stewardship of Graham, the value investor decided to shutter his hedge fund because he was struggling to find bargains in the market.
The young Buffett, who was working in New York at the time, went back home to Omaha, where a group of friends and neighbors asked him to manage their money for them.
He didn't particularly want to take on this role, which is why he set up a contract that gave him (the manager) almost complete control over the assets, with no requirement to produce any reports to investors apart from an annual letter. These initial investors were taking a considerable risk.
Luckily, the risk paid off. Over the next few years, the original Buffett Partnership (and its successor funds) produced a total compound return of 31.6% between 1957 and 1969.
Buffett takes on Berkshire
In 1968, Buffett decided it was time to quit the investment management business. He had stumbled into the same problem as Graham: there was a lack of bargains in the market at the time. He also wanted to spend more time concentrating on Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), a position he had originally acquired as a deep value investment but ended up taking over after falling out with its management.
Before the late 1960s, Buffett was just another investor trying to make his mark on the world. However, in the 1970s, his reputation started to grow as he hoovered up businesses and moulded them into Berkshire.
In November 1974, Buffett gave an interview with Forbes Magazine, which is one of the first interviews he gave as the CEO of Berkshire. The advice he gave in the interview is just as informative today as it was five decades ago.
Buffett's first interview
During the interview, Buffett was asked how to contemplate the current market in the early 1970s. The Dow Jones Industrial Average had reached a high of around 7800 in October 1965 and plunged for the next decade and a half. It hit a low of 2,150 in July 1982. At the time of the November 1974 interview, the index was sitting at around 3,000.
The up-and-coming investor described the market at that time as being, "Like an oversexed guy in a whorehouse." He then added, "This is the time to start investing."
Buffett said that he didn't know what the stock market was going to do next, but there "are still plenty of bargains around." Even at this early stage of his career, he was not wasting his time trying to predict market movements. Buffett was only interested in finding value, just as he is today:
"I call investing the greatest business in the world, because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike o-n you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."
Buffett's advice at the time for investors is the same as it is today. Investors should stay dispassionate and be patient, no matter what the rest of the market is doing:
"You're dealing with a lot of silly people in the marketplace; it's like a great big casino, and everyone else is boozing. If you can stick with Pepsi, you should be O.K."
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett: Cash Is King, Especially in Times of Crisis
- Learning From Warren Buffett's Early Mistakes
- A Look at David Einhorn's Most Undervalued Stock Holdings
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