Buffett on Reinvesting

Warren Buffett, who is regarded as the most successful investor of all time, is known for his strategies as well as treating his stocks like business. Buffett has had immense success and luck, turning a textile firm into a conglomerate worth hundreds of billions of dollars, so it is no surprise that businessman tend to ask Buffett what they could be doing to catch his eye.

Buffett has a ton of advice for entrepreneurs (which you can find here and here) but I feel like some of them are more obvious and self-explanatory than others. For example, it is pretty obvious how being frugal can benefit you and your business, but how about reinvesting?

If you’re a business owner, at the first sign of profit, rather than spending that you should try to put it back into your business and better the quality. If you reinvest your profit, you in turn enable growth for your business.

“The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit, and in the next year earns 20% of $120 million,” Buffett said at a past shareholder meeting.

Buffett has been practicing his own advice since he was a young boy; during high school he purchased a used pinball machine for $25 and placed it in a barber shop. After there was enough profit, Buffett reinvested his earnings and purchased more pinball machines. Eventually, Buffett’s business had 8 different pinball machines, and when he sold the business— for $1,200— he purchased some stock and launched a new business. He recognized the value of reinvesting early on, and now he is passing on the importance of it.

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