Does investment maestro Warren Buffet trade in penny stocks?

Warren Buffett, undoubtedly, has been the world’s most successful serial investor. With a net worth of over US$100 billion, Mr Buffett at one point in time, was the world’s richest man. He and Bill Gates of Microsoft Corporation used to slug it out for the top slot. But that was before the big-tech boom – which saw Jeff Bezos of Amazon Inc (NASDAQ:AMZN) enhancing his fortunes left, right and centre.

Born in 1930, Mr Buffett, now the CEO of Berkshire Hathaway (NYSE:BRK.A), started his career in a very entrepreneurial way: among his early business ventures, Buffett used to sell chewing gums, Coca-Cola bottles, and weekly magazines – all door to door.

In his early days, the doyen of the investment world used to work at his grandfather’s grocery store and make newspaper deliveries. In what offers a glimpse into his business acumen, even at a young age of 14, when he filed his first income tax return in 1944, he took a US$35 deduction on his bicycle (which he used for newspaper deliveries) and $10 for watch repair.

Warren Buffett has not only been known for having a Midas touch when it comes to investment, but if you read him very closely, you would realise that there is yet another very interesting facet about him: he saves. Such is his austerity, that at a time when his peer billionaires are splurging staggering sums of money on lavish mansions, Mr Buffett still lives in his US$652,619 house.

Bought for US$31,500 in 1958 which would translate to US$250,000 in the present time; the house is now worth an estimated US$652,619. Spread over 6,570 sq feet, the house has 5 bedrooms and 2.5 bathrooms, and he calls it the "third-best investment he's ever made."

Cut to 2021, his high returns and simple way of doing things have made his company – Berkshire Hathaway – one of the most sought-after by the investors. The class A shares of the company, as of now, trade at an astounding US$413,890. Imagine this: his entire house is just 58% more costly than one share of the company he founded. Compare that to the world’s richest man Jeff Bezos – his US$165 million Beverly Hill estate is 47,091 times costlier than one share of the company he founded (Amazon Inc).

But how did Buffett start on his investing strategy? And did he ever invest in penny stocks? These are the questions that pique almost everyone’s curiosity.

So, what do you mean by penny stocks?

In the simplest terms possible, if one share of a small company costs less than US$5, it is called a penny stock. In the past, penny stocks referred to the stocks costing one dollar per share or less. The definition was modified later when the US Securities Exchange Commission raised the bar to US$5 per share. Most of the penny stocks trade through over-the-counter (OTC) transactions at the electronic OTC Bulletin Board (OTCBB) or through privately-owned OTC Markets Group. There is no trading floor per se for the OTT transactions. However, despite crowding at OTC exchanges, some penny stocks trade on large exchanges such as the New York Stock Exchange (NYSE), as well.

Does Warren Buffett invest in penny stocks?

Well, nowadays, Warren Buffett doesn’t trade much in penny stocks. However, in his early days, Mr Buffett used to mint money through what he called a cigar-butt strategy.

“My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life, for both relative and absolute investment performance,” he wrote in his letter to shareholders of Berkshire Hathaway in 2014.

He also credited his business partner Charlie Munger for the turnaround in his strategy. “It took Charlie Munger to break my cigar-butt habits and set the course for building a business that could combine huge size with satisfactory profits,” he admitted in the same letter.

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