Warren Buffett Tells You How to Turn $40 Into $10 Million

Warren Buffett is perhaps the greatest investor of all time, and he has a simple solution that could help an individual turn $40 into $10 million.

A few years ago, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) CEO and Chairman Warren Buffett spoke about one of his favorite companies, Coca-Cola (NYSE: KO  ) , and how after dividends, stock splits, and patient reinvestment, someone who bought just $40 worth of the company's stock when it went public in 1919 would now have more than $5 million.  


Source: Coca-Cola.

Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer, that figure was updated and the company noted that original $40 would now be worth $9.8 million. A little back-of-the-envelope math of the total return of Coke since May 2012 would mean that $9.8 million is now worth about $10.8 million.

Source: Microsoft.

The power of patience
I know that $40 in 1919 is very different from $40 today. However, even after factoring for inflation, it turns out to be $540 in today's money. Put differently, would you rather have an Xbox One, or almost $11 million?

But the thing is, it isn't even as though an investment in Coca-Cola was a no-brainer at that point, or in the near century since then. Sugar prices were rising. World War I had just ended a year prior. The Great Depression happened a few years later. World War II resulted in sugar rationing. And there have been countless other things over the past 100 years that would cause someone to question whether their money should be in stocks, much less one of a consumer-goods company like Coca-Cola.

The dangers of timing
Yet as Buffett has noted continually, it's terribly dangerous to attempt to time the market:

With a wonderful business, you can figure out what will happen; you can't figure out when it will happen. You don't want to focus on when, you want to focus on what. If you're right about what, you don't have to worry about when" 

So often investors are told they must attempt to time the market, and begin investing when the market is on the rise, and sell when the market is falling.

This type of technical analysis of watching stock movements and buying based on how the prices fluctuate over 200-day moving averages or other seemingly arbitrary fluctuations often receives a lot of media attention, but it has been proved to simply be no better than random chance. 

Photo: Flickr/J Greer.

Investing for the long term
Individuals need to see that investing is not like placing a wager on the 49ers to cover the spread against the Panthers, but instead it's buying a tangible piece of a business.

It is absolutely important to understand the relative price you are paying for that business, but what isn't important is attempting to understand whether you're buying in at the "right time," as that is so often just an arbitrary imagination.

In Buffett's own words, "if you're right about the business, you'll make a lot of money," so don't bother about attempting to buy stocks based on how their stock charts have looked over the past 200 days. Instead always remember that "it's far better to buy a wonderful company at a fair price."

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2014, at 10:29 AM, TheShoeshineBoy wrote:

    Hindsight is a great motivator but it wont make anyone money. That is probably great advice for most people, Warren is full of great advice and wisdom, but...he doesn't buy companies that are priced high and has had most of his success by buying at a hefty discount to his calculation of intrinsic value. This is timing the market. If Warren believes don't worry about valuations and just worry about if a company is solid, then why does he not put cash to use now on companies he likes but feels are pricey? I have never bought BRK and have been contemplating it for several months as it trades sideways, for some reason I'm having a hard time buying it. I suppose it's because I know there is no one else like him and when he leaves IMO BRK would not be the same. I have never seen any fund etc who had a great manager who once they step aside ever do as good as that great manager, Peter Lynch and Magellan come to mind as a top reference. I don't think Warren has convinced anyone his eventual departure will not be a turning point for BRK and I suspect that is why it's trading sideways.

  • Report this Comment On January 07, 2014, at 10:38 AM, pampam23 wrote:

    does this mean that every time I have the money I should immediately in stocks? and is it alright to say reserve a portion in cash and deploy the fund if the market crashes?

  • Report this Comment On January 07, 2014, at 10:53 AM, tchams wrote:

    pampam23:

    If putting that money into the stocks were free, then the answer would be yes. If you have a $7 transaction free for every 100 you are putting into the market, and you happen to invest the $100 in different stocks. Your costs will be much greater than 2% (not including a fool subscription) which is higher costs than recommended.

    The underlying idea you proposed, however, appears to be correct logic. (not that you should take my word for it)

    Have a good one!

  • Report this Comment On January 07, 2014, at 11:30 AM, investor4450 wrote:

    I am 59 years old excellent health, married, sons 23 and 20, one in the army the other in university. My wife is 58 years old and also in excellent health.

    We both have very good jobs with a household gross income of $200, 000 per year and a great retirement plan, with no worries. We could both easily work another 10 years if we choose or retire now, move to a cheaper location and be debt free.

    We have a house worth $600,000 and a $330,000 mortgage.

    I figure it is time in our life cycle to create some serious wealth for our off-spring. Up till now with child rearing we have not taken any risks.

    I am thinking of selling, the house, freeing up the equity ($250,000)and investing it through the Motley Fools recommendations. My calculations are that my 5 year return from the equity market would be far more than keeping it in the house, even after considering taxes. I have been with the Fool since 2004 (Stock Advisor)and I could see at least doubling the $250, 000 in 5 years following the Fool’s recommendations.

    Any thoughts and recommendations? Anyone else gone down this path?

    Is there anybody at the Fool that offers one on one investment counseling? Should I post this elsewhere on the Fool?

    Thanks

    Investor4450

  • Report this Comment On January 07, 2014, at 12:06 PM, notalivein1919 wrote:

    A great message. Buy quality and wait for the benefits. Words to invest by! Having said that, these stories--published frequently--always make me wonder how many of the readers were investing in 1919 (or whatever the far distant year cited is/was). The answer is "probably none", so is such a return "relevant" (to heirs I guess)? In addition, I'm not expecting to be alive 95 years from now, so that future $10 million won't do me any good (heirs yes, again). My quick scratching indicates KO returned something like 14% compounded since 1919. I'd take it, for sure, but "only" 14% takes some of the magic out of turning $40 into millions. Berkshire has done a lot better than 14%, right?

    Happy investing everyone

  • Report this Comment On January 07, 2014, at 12:13 PM, TMFMorris wrote:

    @TheShoeshineBoy -- I would absolutely agree (and assert Buffett would too) that valuation is a critical part of any investment decision, and understand that is crucial. I do think too that we can at times become trapped thinking we should only buy at certain times, or a company has to hit a specific valuation before we consider an investment in it (whether it be P/E, P/BV, or any other metric). My hope with the article was to show that valuation is vitally important, but there is danger in only investing by only considering the fluctuations of prices over a narrow time window if you believe you will hold the stock of the company for the next 10-15 years (or longer). Buffett goes on to say that the price of Coca-Cola stock fell to $20 just one year later, and while your compounded return is greater if you invested then, you nonetheless still end up with a phenomenal return by investing at $40.

    @pampam23 -- I would by no means say always put your cash into stocks, and as @tchams asserts, transaction costs can truly eat away at your returns. Common wisdom notes everyone should have a 3-6 month emergency savings plan in cash, with no intention of every investing that, in addition to any other savings that may be needed (house, college, etc.). There is definitely value in investing a fixed amount into low-cost mutual funds/stocks each month. However there is definitely value in having cash in your investment portfolio as a reserve, and Morgan Housel wrote a great article "How I think About Cash," that I would recommend to you.

    @tchams -- great advice!

    @Investor4450 -- thank your son for his service. My older brother is a 1st Lieutenant in the Marine Corps, so I am always appreciative of our service men and women. You are in a privileged place financially, and I think the Motley Fool could have great options for you. Please feel free to email me, pmorris@fool.com, and I can willingly pass along your information to the services team that would be better able to assist you.

  • Report this Comment On January 07, 2014, at 12:38 PM, RxPro wrote:

    @investor4450

    You're 59, so what you should do depends on your retirement plan. You claim it to be excellent but is it a 401k with $3M in it? Or is it a $10k monthly pension? One of these will be seriously dented by a $330k mortgage as well as not be transferable to your sons. You say you have no worries but I would be extremely worried about paying off $330k at AGE SIXTY unless I had a $1M+ investment account.

    Either way, your first step should be to be debt free. There is no way someone your age should have a mortgage. If you have a 401k with lots of spare money, then pay off the house. Otherwise you need to downsize. Its too late for you to be worrying about investing and trying to double your money in 5 years, I mean about 20 years too late. If you paid off your mortgage 20 years ago you would have had money to invest.

    I don't understand how you think selling the house will free up $250k when you still owe $330k unless you plan on moving in with one of your sons? If you downsize you will need that money to purchase your new home, unless you plan on taking out a mortgage anyway and investing that, which again, at your age is a horrible idea.

    So let me get straight to the point:

    1) pay off house; if you can't: sell it and buy what you can afford

    2) work as long as you want to and invest free cash in dividend stocks and bonds (50/50)

    3) understand you will never be able to accumulate tons of wealth but will have a comfortable retirement and eventually a decent account to give as inheritance

  • Report this Comment On January 07, 2014, at 1:42 PM, SonyaWiley wrote:

    Dear Warren

    I'll be back in the stock market later this month.

    Love Sonya

  • Report this Comment On January 07, 2014, at 3:31 PM, TXObjectivist75 wrote:

    Can we give more realistic investing examples, like on 40 year time frames, and not 95 years, which is about as relevant as saying if you had invested in Standard Oil in 1876 you'd have one million trillion gazillion dollars now!

  • Report this Comment On January 08, 2014, at 2:40 AM, ES44AC wrote:

    I became interested in the stock market and first began investing about 5 years ago, just before Obama was elected, I invested in a firearm manufacturer. That stock is up more than tenfold since I purchased it. I began working for a Berkshire subsidiary about 3 years ago and they allow me to purchase B shares at no transaction cost so I do that every paycheck. I've watched the stocks go up and down, and up and down again. It doesn't really bother me that they go up and down, other than the timing of the transactions seems a little odd. Sometimes the timing benefits me and other times not. Even though we have an excellent retirement I still participate in the 401k (11% of my gross goes in) and the stock purchase (~10% of my net goes in). I also have my rainy day savings. If something were to happen in my occupation, I hope I'd be relatively employable with my college degree.

    My comment is merely an observation that both angles can be profitable. I timed the market with the first purchase (+1050%), and I can't really time the market with the 401k (+22%) and stock purchase (+23%). Obviously I'm aware that I can't pick a stock like the firearm manufacturer every day.

  • Report this Comment On January 08, 2014, at 3:07 PM, ifool100 wrote:

    I believe Warren likes to buy good companies that he understands, when they are on sale. I think by not "timing the market" he meant jumping in and out based on technicals. Waiting until a company is severely undervalued is not so much timing the market as getting a good deal.

  • Report this Comment On January 08, 2014, at 3:40 PM, AlexJLong wrote:

    The best way to make $10 million on the stock market is to start with $20 million.

  • Report this Comment On January 08, 2014, at 4:29 PM, pondee619 wrote:

    The year just ended 2013. The start year of this example 1919. Time to make that $10 million 94 years. Age in 1919 to have earned a sare $40? (average yearly salary $500) 14 years of age? plus 94= 108. Average life span of someone born in 1905?

    The average life expectancy in the U.S. was 47 years. http://www.freerepublic.com/focus/f-chat/1425436/posts. What good is 10 million dollars to a person dead for 61 years?

    Lets keep it real Fool. No one can or will invest for 94 years. Life kinda sorta gets in the way. A holding period of "forever" is impractable to everyone. If you aren't going to use your investments at some point, what is the point. You save/invest now to spend later.

    I agree with TXObjectivist75 above, please stop the hype. Lets keep the discussions to something that is acheivable in a life span. That which may be attainable in 94 years is of no use to me. Nor to any other working person.

  • Report this Comment On January 08, 2014, at 4:34 PM, rootguy2013 wrote:

    I think buying the container store today would be a good example of buffet's strategy after if fell 14%. a lot of people are busying timing the market and jumping off this growth stock so somebody looking to use buffett's strategy of holding on for the long term can get a good deal today.

    on the other hand, the container store would have still be a good deal yesterday. but making an extra 15% up front is a great deal!

  • Report this Comment On January 08, 2014, at 4:53 PM, BachHandel wrote:

    If anyone could find it, I would be very interested to see the financial statements for Coca-Cola in 1919. I'd also be interested in seeing their valuation metrics (P/E, P/S, P/BV, etc.)

    The thing that gets me with articles like this one, is that (my guess) is that when Coca-Cola went public in 1919, it would have been priced more like your typical small cap, growth companies, which are not exactly the type of companies that I see Warren Buffet owning today.

    One other thought to ponder: suppose in 1919, you had bought shares in Royal Crown International, or another soda beverage maker, Moxie. Royal Crown is now one of five parts of a generic beverage manufacturer, the entire company of which is worth a mere $762 million compared with Coca-Cola's $176 billion. As for Moxie, in 1919, it's sales were outpacing that of Coca-Cola and it was the drink of choice for a somewhat popular baseball player named Ted Williams and President Calvin Coolidge. Where are they today? I think you might be able to still buy Moxie up near Maine or perhaps other parts of New England, but not many places other than that.

    The point is, it is somewhat disingenuous in my opinion to even print articles like this one about how much you could have made by buying one share of Coke at a time before my grandfather was even born.

    Can you make money investing in good companies? Yes. But I'd recommend that you first invest in teaching yourself how to read and understand financial statements and how to think like an entrepreneur before you go placing your bets on who will be the next Coca Cola. Remember, you could end up with the next Moxie.

  • Report this Comment On January 08, 2014, at 7:04 PM, cmalek wrote:

    @investor4450:

    "I have been with the Fool since 2004 (Stock Advisor)and I could see at least doubling the $250, 000 in 5 years following the Fool’s recommendations."

    You are neglecting one minor detail - Past performance does not guarantee future results. You MAY double your stake but you can also get wiped out.

  • Report this Comment On January 08, 2014, at 7:31 PM, NOTvuffett wrote:

    Let's see, he came from a family with money, and the first thing he bought was a textile factory. That doesn't sound too smart, lol Live and learn I guess, lol.

  • Report this Comment On January 08, 2014, at 8:53 PM, TMFTheDude wrote:

    Great article, Patrick. Keep up the good work!

  • Report this Comment On January 08, 2014, at 9:42 PM, LDTEX3 wrote:

    I am a great fan of The Motley Fool and a paid subscriber.

    However, I find "articles" such as this are a bit embarassing as one of the faithful "foolish".

    In 1919 my grandfather was a young child and would not have had $40 in which to buy a stock to leave to future generations.

    Pondee619 and BachHandel are both correct in their objective assessments.

    I do own a KO option as suggested by the Fool and its still in the red.

  • Report this Comment On January 08, 2014, at 10:06 PM, MyCruiseWright2 wrote:

    If you want a good strategy for investing for the future read Alexander Green, "The Gone Fishing Portfolio". Another good bet is to invest in companies that are to big to fail.

  • Report this Comment On January 08, 2014, at 11:05 PM, john795806 wrote:

    I'm not sure what the "take home" message is. Sure, buy and hold Coca-Cola would have worked, but of all of the stocks available in 1919, how would one know to have picked Coca-Cola? Lots of companies tanked during the depression of the 1930s. And what companies would you buy today that you think are going to be around for the next century? What would have happened if, in 1919, I had bought 5 companies instead of one--and saw 2 of them go bust--closer to the real likelihood? My overall returns would not look so great, even if one of my 5 were Coca-Cola.

    I basically get the idea of buying a company based on its intrinsic value, which is what Buffett does. But I have a job already, and it has nothing to do with determining the intrinsic value of companies. I am not an expert in this and don't intend to become one. So if I take home one message, it is to invest in something similar to Berkshire Hathaway and let a pro do the work for me.

    I do not agree that "timing the market" does not work, and is no better than throwing darts at a stock listing, as the author claims. Looking at a stock's momentum and other immediate indicators is part of many successful investment strategies, such as the CAN-SLIM method used by Investor's Business Daily, which consistently out-performs the market.

  • Report this Comment On January 09, 2014, at 10:11 AM, AceInMySleeve wrote:

    All I need is 1$ and the right lotto numbers.

  • Report this Comment On January 09, 2014, at 10:47 AM, Chrisk51 wrote:

    If I had that much money. I would give them some before you die. Back in 1976 When my grandma retired. She bought each of her daughters These beautiful. Very, Very, expensive china dishes. She said she did it so that she would have something to leave them when she died. She is still alive she is 95 years old. My mother died 2 years ago of diabetes. She got to see the dishes 1 year before she lost her eye sight. When my grandma finally decided to give the dishes early. My mother would have gotten them out a couple times a year for 30 years and enjoyed them.

  • Report this Comment On January 09, 2014, at 10:49 AM, Chrisk51 wrote:

    sorry meant that comment for "investor 4450"

  • Report this Comment On January 09, 2014, at 11:25 AM, CraigWPowell wrote:

    Berkshire Hathaway’s ( BRK.A BRK.B): Annual shareholder letter: http://stockpicks247.blogspot.co.il/2013/03/berkshire-hathaw...

  • Report this Comment On January 09, 2014, at 11:57 AM, grandpa1 wrote:

    Investing is a lot like raising flowers. When blooms decline, take a look at what is underneath. If you can't improve the soil to make the flowers happy then maybe you should change the flowers to some that can thrive in the soil you have.

    Coke is a long term bloomer, Kodak was good for a time but needed to be replaced.

  • Report this Comment On January 10, 2014, at 12:29 PM, TheShoeshineBoy wrote:

    @john795806. Though I haven't followed IBD in many years, I do have some experience with it. Can't even tell you if O’Neil is still around but I've seen him speak in person years ago and read most of his writings. I have used IBD combined with other sources in the past to outperform the market and win investment competitions. I'm self taught in investments having read most every book ever written up to maybe mid 1990's, and was Series7 in December 1987, was half way through the brokers exam study when the crash of '87 happened.

    The one thing I agree with from O’Neil, Low PE stocks are often Low PE for a reason and often High PE is a sign of growth and something going on positive in a business. Most books written about markets teach buy Low PE. My experience over the years is most institutional money buys stock when it has super high PE because there is a lack of earnings, they buy when the company looks like it's heading for bankruptcy and the price is super low but PE is sometimes misleadingly over 100. This is the exact opposite of what most amateur investors do. That said, I have had great success buying funds with lower than average forward PE's.

    I agree with that part of O’Neil teaching, BUT, many people don't realize years ago they launched a mutual fund, I believe the name was “New USA Fund” and it was run by David Ryan who was widely touted as having won the U.S. Investing Championships by using CANSLIM. The fund quickly lost so much money they merged it into another fund. This is often done to hide the horrible performance and hide the failure. I have no idea how he has done since then, I do not follow it, but I do feel people should be aware. I take a broader view of markets now as my age has somewhat reduced my risk tolerance, I also have my own opinions after about 40 years of observations, so I don't read as much of others opinions as I used to. Highly recommend John Trains “Money Master” books.

  • Report this Comment On January 10, 2014, at 12:59 PM, noname2 wrote:

    today if ya have $40 buy silver

  • Report this Comment On January 10, 2014, at 1:31 PM, stevor86 wrote:

    all you sheeple invest in what I've already invested in, driving up the price real high so I can jump out early, get richer, and then you can hope you get out fast enough before everybody else figures it's topped out and it's time to get out before everybody getting causes it to crash.

    Pyramid scheme, essentially.

  • Report this Comment On January 10, 2014, at 3:51 PM, leaderoftheback wrote:

    it's not even 11% return, annualized. Depending on your tax rate, it could be a lot less. Slow and steady (and a really long life) wins the race.

  • Report this Comment On January 10, 2014, at 4:03 PM, Enjoyyourmoney wrote:

    1919 coke

    2014 Quadrise

  • Report this Comment On January 10, 2014, at 10:25 PM, Hfish1212 wrote:

    Warren is waiting for me to tell him how to live to a 100 years of age and still give a damn about money. That's going to cost him!

  • Report this Comment On May 16, 2014, at 1:49 AM, weatherb0y4 wrote:

    Much quicker way to turn $40 into $10 million:

    In 2010 spend $40 on 800 bitcoins at 5 cents each.

    In 2011 sell the 800 bitcoins for $30 each = $24,000

    In 2012 buy 480,000 litecoins for 5 cents each

    In 2013 sell 480,000 litecoins for $40 dollars each, which equals $19.2 million.

    now we just need to find someone with a time machine - or rather, stop regretting things you missed out in the past and look for other opportunities in the future!

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