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1 Crucial Investing Lesson Warren Buffett Learned ... at 11 Years Old

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In June 1942, an 11-year-old Warren Buffett bought his very first stock.

The target of the future Berkshire Hathaway  (NYSE: BRK-B  ) (NYSE: BRK-A  )  CEO's inaugural buy? Three shares of Cities Service Preferred at $38 apiece, good for a total investment of $114.

That was a hefty sum back then for any kid. Adjusted for inflation, Buffett's $114 would have had the same buying power as roughly $1,633 today.

Then again, Buffett did have a bit of a head start, considering his father was himself a stockbroker, so young Warren was already somewhat familiar with the idea of buying and selling small pieces of businesses through the stock market.

But that didn't make him feel any better when the price of Cities Service Preferred quickly plunged 29% to $27 per share later that month.

Even still, that drop was largely thanks to a broader market decline that year, and nothing in particular had happened to negatively change Buffett's investing thesis for the company. As a result, when the stock recovered shortly thereafter, Buffett sold at $40 per share to net a tidy 5.3% gain on his investment.

Not too shabby, right?

Here's the kicker
Shortly after he sold, however, the stock proceeded to rise to more than $200 per share.

In the end, had Buffett simply stuck to his guns and trusted his original decision, he would have more than quintupled his $114 investment to more than $600.

Or, if you prefer the illustration in today's dollars, Buffett would have quickly turned his $1,633 into a whopping $8,595.

Now most folks would probably cut the young investor some slack for this rookie mistake. After all, he was just a kid, right?

There's a name for that ...
The thing is, I'm sure I wouldn't be going out on a limb to say thousands upon thousands of adult investors make this same mistake every day.

In fact, in the world of behavioral finance, they call it the "disposition effect" -- a term to describe the tendency of investors not only to hold on to stocks that have dropped in value, but also to sell their winners too soon.

And while Buffett was right not to panic and held on to a stock for which the underlying fundamentals hadn't changed, his itchy trigger finger to sell obviously got the better of him when that stock edged into positive territory.

In the end, though, it's safe to say this lesson paid huge dividends down the road, as Buffett was able to use it as a starting point to hone his incredible ability to focus not just on the price of his equities at any given moment, but also on the actual value of the businesses behind the stocks he buys.

In fact, after the S&P 500 dropped more than 50% from the beginning of 2008 through early 2009, Buffett was the one reassuring investors everything would be OK when he released that's year's letter to Berkshire Hathaway shareholders on Feb. 28, 2009:

The market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that "Price is what you pay; value is what you get." Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.

Foolish takeaway
Those of you keeping track know the S&P 500 has more than doubled since then and currently sits near all-time highs.

Better yet, truly Foolish investors know all too well there were a significant number of beaten-down stocks around that time that have absolutely trounced the broader market's perfectly respectable return over the same period.

But in the end, those gains were reserved only for those who had managed to learn the lesson Warren Buffett first encountered as a child.

If you'd like to read even more about the best of Warren Buffett's greatest wisdom, you're in luck! We've put together new special report from The Motley Fool, so click here now for your free copy.

Read/Post Comments (7) | Recommend This Article (60)

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  • Report this Comment On September 07, 2013, at 11:07 AM, BeckyYW wrote:

    Dear Mr. Buffett: How lucky you were to have $115.00 at 11 years old! At 11 years old I was putting cardboard into my shoes to cover the holes in the soles! I didn't even know the stock market existed!!!!!

  • Report this Comment On September 07, 2013, at 11:23 AM, PEGformula wrote:

    This is senseless. Back when Buffett "invested" few people were in the game and it was prior to the engineered products, IRA and 401-K that caused the big bubble to occur starting at 1980 that changed valuations to make those having a hundred thousand, millionaires and millionaires tens to hundred millionaires.

    The equilibrium has already started with elderly needing to cash out for retirement that would take the air out of this extra bubble beyond the bubble pricing currently that Bernanke is so aimed at keeping up which he will never be able to do successfully. Bernanke is the biggest fool there ever was in thinking he is helping the economy by causing the huge wealth divide that is an ANTI-STIMULUS.

    Anyway, the market should be 70% lower now based on PE ratios in bad time - something pundits will never mention but I do over and over again as this is what historical PE ratios tell us. Now, when the equilibrium is allowed to occur with retirement accounts vested in the inflated stock market, we will once again return to norms of PE ratios that averaged around 12 to 13, not the 15 so many pundits speak of today that is unduly influenced by the bubble valuations since 1990.

    Thus per our bad economy, the market should be about 70% lower and if we ever have a recovery that the Fed is thwarting, the market would be about 20-30% overpriced. Now is definitely not the time to be going long. If you want to invest money being Bernanke hijacked our bank interest, you should be heavily short-selling this pig market.

    Go read "2X overpriced stock market".

  • Report this Comment On September 07, 2013, at 11:27 AM, PEGformula wrote:

    Go look at the DOW graph and extrapolate from 1920 to 1980 and extend to today to see the DOW should be under 3K. What changed was the engineered products, IRA accounts and 401-K accounts that would inflate the stock market and for so many years there has been vastly more money going into these than going out. But, the money has already starting flowing out to seek equilibrium and Bernanke is stealing from the responsible poor and middle class to try to correct for it but he is foolish in trying to keep these unnaturally high valuations.

  • Report this Comment On September 07, 2013, at 11:43 AM, winnerli wrote:

    Best way to learn from Buffett is to follow his portfolio. See his holdings and history:

  • Report this Comment On September 09, 2013, at 5:35 PM, LotinElite wrote:

    PEGformula doesn't understand the difference between a linear and logarithmic chart.

  • Report this Comment On September 09, 2013, at 7:36 PM, Seanickson wrote:

    dow 3000 is laughable. Maybe you dont think stocks should be 2.45x book value, but saying fair value is less than half of book value is quite a stretch

  • Report this Comment On September 10, 2013, at 8:08 AM, JeffParrel wrote:

    This spring Warren Buffett was optimistic on 2013:

    May be we should still listen to him?

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