We all know Berkshire Hathaway as the vehicle that made Warren Buffet the richest man in the world. But what most people don’t realise is that due to Berkshire’s fantastic annual compounded returns, it minted a number of millionaires and billionaires along the way. Today we focus on Stewart Horejsi, a billionaire born through Berkshire Hathaway.
Stewart Horejsi ran his family’s welding business. The business was struggling to fight off competition and Stewart was having doubts that his business would survive. He thus looked to the stock market in order to grow his wealth.
In 1980 Stewart bought 40 shares in Berkshire for $265 each – an initial investment of $10,600. Two weeks later he bought 60 more shares at $295 each and, a month later, spent $66,000 buying 200 shares at $330.
Today Stewart Horesji has roughly 4,300 Class A shares in Berkshire Hathaway equating to roughly $1.3 billion!
Horejsi’s path to his billion-dollar empire began with a modest investment. This one investment has put Stewart firmly on the Forbes list of Billionaires.
What is incredible about Stewart Horejsi’s story is that he discovered Berkshire Hathaway and Warren Buffet late. When Stewart started buying his stock, Berkshire had already grown 30 fold from $7 a share to his initial purchase price of $265.
In fact, shortly after his purchase, it went from $265 to $330 in just a few weeks, and Horejsi was buying a few shares all along the way.
He didn’t anchor to the lower stock price he initially paid – instead as the price rose, Stewart continued to feel that the stock price was undervalued. Horejsi kept buying despite the stock rising many multiples from his original purchase price.
What Stewart did is hard because when a stock doubles, triples, or goes up 10x, there is a tendency to think that it has become too richly valued. Imagine how high Berkshire stock must have looked after going from $7 to $300. Or to $1000. Or to $5000. Or to $10,000, $20,000, $50,000, $100,000, $150,000, etc…
Stewart Horesji’s story demonstrates the power of finding what I call a true compounder. A basic definition of a compounding machine is a company that can produce high returns on capital and can redeploy that capital continuously at similar high rates of return.
A company that is a net consumer of cash is usually value dilutive over time. A company that is a net producer of cash is value accretive over time. The cash allows them to return capital via dividends or buy back shares. But a company that can both produce cash and reinvest it in the business at ever persistent high rates of return is a long term investor’s dream, because it allows compounding to work its magic.
Buffett figured this out very early in his career.
The benefit of owning compounders is that they essentially eliminate reinvestment risk, i.e. the ever challenging issue of buying undervalued stocks, selling them as they reach fair value, and finding new undervalued assets to reinvest the profits. This is what Buffett has been doing for 50 years. It’s what we all have to do as investors. We allocate capital… ideally at high rates of return.
Buying a good company itself is not an easy job. Keep on buying and holding on to the same for 30 years demands extreme conviction, patience and discipline.
Buy and hold may or may not work for a single stock. But for portfolios, mutual funds and index, selling rarely and holding on for most of the time would work wonders. The argument mainly against buy and hold is disruption. Disruption has always been there for businesses. It is not a new phenomenon. Good companies adapt and thrive. Weak companies fail and die. Buying & holding does not prevent us from tracking developments. Also it does not mean giving up our judgement and discrimination. Selling can be done but it has to be the last option. If we buy right, selling will be infrequent.
Whenever we see illustrations of someone having held a fund or stock for 20 years and how rich he would have become, we just yawn. We believe those are just illustrations and not a reflection of real life. No doubt it is not easy to hold a stock or fund for 20 years. But in this series I keep giving examples of everyday people to show that this can be done. We may or may not make hundreds of millions of pounds but a few million is possible for investors with right investment strategy, patience and discipline.
Stay the course, build a fortune.