> Warren Buffett Blog: How Warren Buffett used cashflow to get rich

Wednesday, August 3, 2016

How Warren Buffett used cashflow to get rich

Warren Buffett’s company Berkshire Hathaway (really just a legal entity that owns other companies) is a very unique business. And no, it’s not because “Warren Buffett buys cheap stocks, value stocks, Buffett’s a great guy blah blah blah”. It’s because of Warren Buffett’s investment model. Buffett’s true buy and hold strategy works something like this.

Start off with $200,000 in 1950 (Buffett’s dad was a Congressman in the 1940’s/50’s). Buy a company (let’s call it Company A). Use the cashflow from that Company A to buy shares in another attractive company (let’s call this Company B). Eventually have enough cash from Company A to buy all of Company B. Use the newly combined cashflow to buy shares in Company C. Eventually have enough cash from Company A and Company B to buy all of Company C. Repeat this process with Companies D, E, F, G, and so on.

Thus, Berkshire Hathaway is a Buy and Hold Machine. That’s why Buffett’s biography is called The Snowball. Your investments will snowball as you own more and more companies. The mechanisms of this investment strategy are real slick. The cash generated from businesses goes into investing in other businesses, which increases the cash flow, which allows for more businesses to be bought, which generates even larger cash flows. And the cycle repeats itself.

via modestmoney