Most people have fallen for the myth surrounding Warren Buffett.
Buffett is believed to be the most successful investor in history. He regularly ranks as one of the top three richest men in the world. He controls one of the greatest fortunes ever made…
And, entire books have been written about Buffett’s stock market skills. New investors routinely say – “I’m going to buy stocks like Warren Buffett does”…
And surely – Buffett is a great stock market investor. But when you consider his fortune – the real secret to his success isn’t picking winning shares over and over again…
The real story is Buffett actually got rich owning what financial insiders consider the world’s greatest business.
It’s a business that, when managed properly, is mathematically guaranteed to make money! But very, very few investors EVER recognise this fact. If they did they’d know it’s not “Buy and Hold” investing, nor the purchase of Coca-Cola that made Buffett rich – but a business with mathematically guaranteed profits.
The real secret behind Warren Buffett’s $58 billion fortune
Warren Buffett’s big investment started in 1952. Buffett took a train ride to Washington, D.C. in hopes of meeting with executives at GEICO’s headquarters. GEICO was a small insurance company at the time. And Buffett was trying to find out why his mentor – Benjamin Graham – was on the board of directors.
Buffett sat down with Lorimer Davidson, GEICO’s vice president. The two discussed the insurance business for hours. This turned out to be one of the most important meetings in Buffett’s career.
Buffett quickly understood that insurance was one of the best businesses in the world. That’s because people pay insurance premiums upfront. Yet, this money gets paid out at a later date – when an accident or natural disaster occurs.
For example, when a licensed driver pays his car insurance... these payments are made despite the fact that he has not been in an accident yet.
And all of this money sits in a pool (called a “float”) until an accident occurs – which could be never.
The brilliant part... Buffett knew he could make exceptional returns on these floats. It was like a license to borrow money for free. And based on his annual returns, he could simply invest this float in his favourite stocks, like Coke and Proctor & Gamble.
You can see why Buffett’s fortune is much more than buying brand-name stocks and holding on forever. By purchasing insurance companies, he was essentially buying massive pools of cash (increasing his leverage). This cash is then invested – earning returns far greater than the market.