With the best will in the world, we must be nearing the final leg of Warren Buffett’s remarkable career as an investor.
We lost Buffett’s irreplaceable righthand man Charlie Munger in 2023, on the cusp of his centenary.
And at 94, Buffett cannot continue to tap dance to work forever.
Investors of all stripes will someday miss an advocate, an educator, and an inspiration.
Not to mention a titanic financial role model.
Buffett might still be the world’s richest person if he hadn’t started giving away his wealth a couple of decades ago.
Even so, he’s still worth a cool $154bn.
Who wants to be a billionaire?
Most Monevator readers will find Buffett’s generosity admirable – while being equally interested in getting the chance to be that generous ourselves.
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.
Can’t we do – at least a bit – of what Buffett did?
Alas it’s not so ‘simple’ as stockpicking your way onto the Forbes billionaire list.
If the devil’s greatest trick was to make the world believe he didn’t exist, then Buffett’s greatest ruse has been to make the world forget he was once a hedge fund manager.
I much admire Warren Buffett, both as a man and an investor. So don’t take my Biblical allusion too seriously.
Nevertheless, it’s remarkable how little you hear about the way Buffett’s early investing partnerships turbo-charged his wealth.
It was investing Other People’s Money via these partnerships that enabled Buffett to amass an initial warchest that he then multiplied many times over to become the world’s intermittently richest man.
Most pundits focus on how Warren Buffett got rich investing in Coca-Cola (“and you can too!”) or on how Buffett is really a businessman disguised as a stock trader, so you shouldn’t bother trying.
Academics have even sought to explain away Buffett’s market-beating achievements as a combination of factor investing and benefiting from cheap leverage. As if Buffett wasn’t a genius for figuring it all out decades before their backwards-looking analysis!
But regardless, the truth of how Buffett got rich lies somewhere between all these factors.
Stock picking would have made Buffett a millionaire. But his early business success in running money for other people is what enabled Buffett to become a billionaire.
Let’s take a closer look.
Secret 1: Buffett the City Slicker
Whether in best-selling biographies or the regular eulogies about his life, the fact that Buffett took a huge swathe of his partners’ gains to enrich himself is rarely mentioned.
That’s a bit like dropping the Wright Brothers from the history of flight. Or omitting Bilbo Baggins from The Lord of the Rings.
Because managing money for others is how Buffett’s wealth accumulation got its entry ticket into the major leagues.
After a precocious childhood selling newspapers and investing in his first shares when he was 11 – so far, so fitting the legend – Buffett began his professional investing career as an analyst on Wall Street.
Yes, fans of folksy Omaha – Wall Street. The infamous hive of scum and villainy!
Buffett first worked for Renaissance man and genius Ben Graham. His hero, Graham was also the biggest influence on Buffett’s investing style until Charlie Munger came along many years later.
Buffett’s initial salary was $12,000. That sounds very modest now but it is the equivalent of more than $142,000 in today’s money. Not bad for a 24-year old, even by the standards of modern trading desks.
Buffett’s high starting salary is the first aspect of his wealth accumulation that’s rarely dwelt on by stock pickers dreaming of becoming billionaires by putting £500 a month into an ISA.
On the other hand, the legend reasserts itself with the truth that Buffett did scrimp and save – and reinvested most of what he earned.
According to my thrice-read copy of The Snowball, by 1956 Buffett had amassed $174,000. He did this by compounding his teenage nest egg and his later savings with a concentrated share portfolio.
Arguably this is the closest his life story gets to what we’re told to do to emulate his success.
Buffett grew his wealth by 61% a year after going to college. And that $174,000 is equivalent to over £2m in 2025 dollars.
Secret 2: Buffett the fund manager
Buffett was a millionaire in today’s terms while still in his mid-twenties. We shouldn’t downplay that achievement.
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 – mostly for family and friends – between 1956 and 1969.
The terms of these partnerships varied. For the first partnership, the seven other founding partners put in $105,000. Buffett put in just $100.
Here’s his recollection of the deal, from The Snowball:
“I 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.
And my obligation to pay back losses was not limited to my capital. It was unlimited”.
Buffett felt an obligation to pay back losses partly because his early investors were the closest people in his life.
His wife’s father was one of them, for instance. His sister was another.
Halfway to Heaven
Buffett’s stipulation that would see him out of pocket if his returns fell below 4% is far removed from the typical hedge fund of today.
Some still charge a 2% management fee every year, regardless of performance.
And even the greediest hedge funds don’t claim ‘half the upside’.
For years the standard deal was 2% annual and a 20% performance fee – lower in recent times – as well as some sort of high water mark to theoretically protect investors from volatility that enriches the manager but not the customers.
But Buffett took 50% of the upside – not 20%!
True, Buffett’s upside came only after the first 4%. Whereas most hedge funds today will take, say, 20% of anything they make (even interest on cash).
This is Warren Buffett we’re talking about here, though. He doesn’t do miserly returns for long.
Nice work if you can get it
In 1957, the three partnerships Buffett was operating gained 10%, against a market that was 8% lower.
1958 was better still. Again quoting The Snowball:
The next year the partnerships’ had risen more than 40% in value. Buffett’s fees so far from managing the partnerships, reinvested, came to $83,085.
These fees had mushroomed his initial contribution of only $700 – $100 contributed to each of the seven partnerships – into a stake worth 9.5% of the combined value of all the partnerships.
You don’t need to bust out a compound interest calculator to see how well the partnership fee structure was serving Buffett.
Sure, he needed to succeed with his stock picking to make decent returns for his partners.
But it was by leveraging other people’s money into those stock picks that Buffett made himself rich.
If Buffett had merely invested for himself the $700 that he’d put into the partnerships over those first two years, then he’d have grown it to…
…$1,078.
That’s 76-times less than what he made by investing for other people.
Gearing up his great stockpicking
My point is not that Warren Buffett isn’t a great investor.
He most certainly is one of the best – and arguably the GOAT.
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.
Most people care more about losing money than making it, so I believe the terms weren’t sheer avarice on Buffett’s part.
Nevertheless, it was the fees generated by his investing talent through the partnerships that made Buffett rich, not those pure stock picks themselves.
By January 1962, barely five years after he began, Buffett was a millionaire on paper, with his share of the partnerships’ assets valued at $1,025,000.
The moral? If you want to get as rich as Warren Buffett, you don’t merely need to start early and grow old. Just investing like Buffett won’t do it, either.
Instead, to get very rich as an investor, you need to invest like Warren Buffett on other people’s behalf, and claim a good portion of the gains for yourself.
Rich folk history
Ironically perhaps, Buffett recently won a ten-year bet against hedge funds partly on account of their high fees.
And in recent years he has championed index funds as the best solution for everyday investors like you and me.
Once you know how well he did from high fees himself in his pre-Berkshire Hathaway years, you can’t help thinking there’s an element of ‘poacher turned gamekeeper’ to this.
(Which is certainly no reason to ignore his advice to invest passively. Quite the opposite!)
Some people have saluted how well Berkshire Hathaway has served its shareholders, compared to how most hedge fund managers milk their customers with the 2/20 structure.
The truth is more complicated. Just as Warren Buffett uses folksy analogies to make economic issues more understandable, his most ardent fans – if not the man himself – have also played us like a fiddle when it comes to seeing how he first got rich.
If Buffett was a private investor in his spare time, as per the myth – if he was a successful everyday businessman investing his excess cash, or maybe even a doctor or a teacher – then he’d very likely have become a multi-millionaire.
I doubt we would have heard of him, though.
The truth is out there
I don’t know if Warren Buffett reads Monevator (I wish…)
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 was published.
For example, in publicity for a second authorised biography, Tap Dancing to Work, Buffett discussed his old partnerships with The New York Times:
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.
Instead of charging “2 and 20” — a 2 percent management fee and 20 percent of profits — Mr. Buffett’s investors “keep all of the annual gains up to 6 percent; above that level Buffett takes a one-quarter cut,” Ms. Loomis wrote. […]
“If you want to make a lot of money and you own a hedge fund or a private equity fund, there’s nothing like 2 and 20 and a lot of leverage,” he said over a lunch of Cobb salad.
“If I kept my partnership and owned Berkshire through that, I would have made even more money.”
Age before beautiful stock picks
Of course, getting to a ripe old age does a lot of the heavy lifting too when it comes to compounding a fortune.
As does starting early, as Morgan Housel noted back in 2017:
More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful.
But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.
$80.7 billion of Warren Buffett’s $81 billion net worth was accumulated after his 50th birthday.
Seventy-eight billion of the $81 billion came after he qualified for Social Security, in his mid-60s.
The bottom line is that it was by managing money for other people that Warren Buffett got very rich, very young.
And that early fortune gave him the capital he needed to subsequently become a billionaire, many many times over.
This article on how Warren Buffett got rich was updated in April 2025 to bring all the numbers up-to-date and to flag new developments in Buffett’s life. Comments below may refer to the previous text, so please check the dates.