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How Warren Buffett Turned A $13 Million Investment Into $2.1 Billion

 March 21, 2012 11:56 AM
 


Warren Buffett is the world's most successful investor. He's worth $44 billion and is the third-richest person on earth.

The investments made by his firm, Berkshire Hathaway (NYSE: BRK-B), gained 513,055% from 1964 to the end of 2011. The S&P 500, including dividends, gained 6,397% over the same time period.
 
Now, you may have seen these stats before. But let me ask you a question.

If you could jump in a time machine and meet Buffett in 1964, back when he was still rustling up money from a handful of private investors, would you take your checkbook with you?

Before you answer, ask yourself if you would have had the guts to make this type of investment:

In 1963, a small-time businessman named Tino De Angelis owned a company, Allied Crude Vegetable Oil. De Angelis would borrow money from a bank via a line of credit, buy shiploads of vegetable oil, store the oil in tanks on shore, sell the oil and then pay back the line of credit. The oil in the tanks was inspected regularly and was pledged as collateral for the line of credit.

Eventually, De Angelis figured out a way to outsmart the bankers who came by to check on the collateral. Instead of filling his ships with vegetable oil, he filled them with water and then pumped in a thin layer of oil on top. When the bankers sampled the load, they never reached below the oil floating on the top of the water. They thought the whole tank was filled with oil, as promised.

De Angelis used this "phantom oil" as collateral for more and more loans, borrowing more than $150 million (over $1 billion in today's dollars) against tanks of water. By the time the bankers finally caught on, the $150 million was gone.

The loss hit the banks hard. One bank in particular, American Express (NYSE: AXP), lost half its value due to the "salad oil scandal."

But a cagey investor from Omaha took notice of a great company selling at the fire-sale price of $35 per share -- and he loaded up on $13 million worth of AXP.

Consider: If you had followed Buffett's lead in 1964 when he made his first investment in American Express, you would have made a tidy 162,543% return today based on share price alone.


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