MW How Warren Buffett went from picking horses to picking stocks - and what you can learn from it

By Charlie Garcia

Buffett's sharp insights on racing odds would later help him build his Berkshire Hathaway billions

Once the Oracle of Omaha stood outside a local horse track selling tips. Now Buffett is the safest bet around.

Long before he became the world's greatest value-stock investor, Warren Buffett was a preteen tipster for horse-racing bettors.

Omaha, Neb., 1941. Little Warren, all of 11 years old, hammering away at a Royal typewriter, processing racing intelligence most adults couldn't decode.

Buffett and a friend sold their Stable Boy Selections race-handicapping sheets for a quarter apiece outside Ak-Sar-Ben track - Nebraska spelled backward, the kind of wordplay that counted as clever in those days. Great business, until the bosses got wise and ran the kids off.

Young Buffett had already mastered "stooping"- digging through discarded race tickets among the sawdust and cigarette butts. Bettors threw away place and show tickets, believing only winners paid. This vivid image - Buffett rummaging through trash for overlooked value - perfectly captures his lifelong "cigar butt" investment philosophy.

Even then, Buffett wasn't betting on horses. He was betting on information. Not child's play. It was disciplined, precise, mathematical - calculating odds, weighing risks, placing bets on mispriced opportunities. He was processing information like a tiny human Bloomberg terminal.

That mindset stuck. Clear, calm, contrarian. It would make him billions.

Buffett tested his theories rigorously. As a teenager, he convinced his congressman father to request hundreds of horse handicapping books from the Library of Congress, and, while other kids were reading comic books, he ordered old racing forms from Chicago to back-test his systems. It wasn't gambling - it was applied mathematics.

At Ak-Sar-Ben, Buffett observed two kinds of bettors: "speed handicappers," betting purely on fastest times, and "class handicappers," favoring horses tested against stronger fields. Berkshire Hathaway $(BRK.A)$ $(BRK.B)$ blends these methods today, investing in companies with robust fundamentals and proven resilience against tough competition.

On Saturday evening, an estimated 150,000 fans will crowd Churchill Downs racetrack in Kentucky, betting their money on Journalism - a horse whose very name should trigger SEC investigations. In the 2024 Derby, Mystik Dan cruised home at 18-to-1 odds, surprising everyone except perhaps a lone racetrack bartender pouring mint juleps.

See: The best Kentucky Derby bet may actually be investing in Churchill Downs

Also on Saturday, an estimated 30,000 investors will gather in Omaha to worship at the altar of Buffett at Berkshire Hathaway's annual shareholder meeting, affectionately called the Woodstock of Capitalism.

Buffett's optimism on America's economy carries weight, but his massive cash pile speaks louder.

Once the Oracle of Omaha stood outside a local track selling tips. Now Buffett is the safest bet around. Because he isn't picking horses - he's picking America. Buffett always has. Betting against it? That has never worked.

But if Buffett loves America more than Ted Nugent loves his gun collection, why is Berkshire Hathaway hoarding $334 billion in cash - almost 60% of its $553 billion book value?

Benjamin Franklin said, "Words may show a man's wit, but actions his meaning." Buffett's optimism on America's economy carries weight, but his massive cash pile speaks louder.

Read: Will Warren Buffett talk about the trade war and market chaos at Berkshire's annual meeting?

This contradiction between Buffett's words and actions isn't random - it's rooted in a formative experience that transformed him forever. Buffett learned about risk the way many teenagers learn about alcohol - too much, too fast, with painful consequences. At 16, Buffett lost $175 on the horses at Charles Town track in West Virginia. That's the equivalent of dropping around $3,000 today. This taught him two critical rules: Emotional decisions destroy capital, and never double down on losses.

As Buffett tallied how many mornings it would take to earn back his racing losses, something inside the teenager hardened permanently - a protective wall between impulse and action that would eventually shelter billions of dollars. These lessons still shape Berkshire's conservative cash strategy.

Wall Street insists you stay all-in because "you can't time the market" - which sounds like your blackjack dealer murmuring, "Trust me. The deck's fair." Buffett instead waits, betting only when odds tilt decisively in his favor. He doesn't time markets. He times folly - striking when panic creates value.

Beneath his folksy exterior, Buffett is capitalism's apex predator. While hedge-fund managers frantically refresh their portfolio screens, Buffett patiently circles. From racing-form whiz kid collecting discarded tickets to market king collecting undervalued companies, Buffett has never changed his order but has perfected the art of finding value in what others discard. In the jungle of high finance, the most dangerous predator is the one disguised as a harmless grandfather with a cherry Coke.

Buffett's patience isn't just psychological - it's mathematical, guided by specific metrics that flash warning signals to him while others see only opportunity. Consider the Buffett Indicator - Buffett's preferred valuation measure comparing total U.S. stock-market capitalization to GDP. Having recently peaked near 220%, the Buffett Indicator at close to 180% still doubles historical averages - a clear caution flag Buffett doesn't ignore.

America's debt now tops $36 trillion - 120% of GDP - ballooning by more than $4 billion daily, pressuring interest rates and consumer prices. Buffett sees these storm clouds clearly - and prepares accordingly.

Buffett isn't just sitting on his cash pile but stocking Berkshire's fridge with beer and pizza, clearly expecting trouble (or just an endless shareholder meeting). Berkshire recently bought a stake in Constellation Brands, maker of Corona beer, and has a stake in Domino's Pizza. Buffett's tastes, like his investments, remain reliably simple: durable, diversified and occasionally delicious.

Domestically, energy has become a significant focus, with substantial stakes in Chevron $(CVX)$ and Occidental Petroleum $(OXY)$. Buffett continues to favor industries likely to endure geopolitical tensions and inflationary pressures. Outside of the U.S., Berkshire owns shares of sturdy Japanese trading houses Mitsubishi (JP:8058) and Mitsui (JP:8031) - companies built to endure geopolitical storms.

A third of a trillion dollars in cash is heavy even for Buffett's famously deep pockets. What next?

Buffett laments that today's corporate Serengeti lacks affordable elephants - too many "unicorn" companies are crowding the watering hole. Rumors swirl around Occidental, where Berkshire already holds a substantial stake. Buffett's strategy remains reassuringly predictable: wait for a respected company's public stumble - like Goldman Sachs $(GS)$ in 2008 or Burlington Northern during railroad struggles - and then buy aggressively while others panic.

When the next economic disaster strikes - debt implosions, valuation meltdowns, tariff explosions - Buffett will calmly guide Berkshire Hathaway forward, scooping up opportunities faster than Kentucky Derby fans grabbing overpriced mint juleps.

The stableboy's stable bets

If Buffett were managing a portfolio of Saturday's Kentucky Derby contenders, he'd likely approach it just as he does stocks: applying both quantitative analysis and qualitative judgment.

First, he'd take a core position in this "Derby portfolio" and establish a margin of safety through show bets - wagers that pay off if the horse finishes anywhere in the top three positions. While show bets offer lower returns than win bets, they provide significantly higher probability of success - exactly the kind of favorable risk-reward ratio Buffett seeks in his core holdings.

There, Buffett might allocate most of the percentage to Journalism, the race favorite at 3-1 Morning Line odds as of late Friday. This consistent performer has won his last four races with superior speed figures that dominate the field. Like Buffett's Apple $(AAPL)$ and Coca-Cola $(KO)$ investments, Journalism combines predictable performance with technical superiority. A smaller portion would likely be given to Sovereignty, positioned at 5-1 odds. This improving colt with a powerful closing kick mirrors Buffett's Bank of America stake $(BAC.SI)$ - a quality operation with momentum that performs best when the competition is fiercest.

These show positions would form Buffett's defensive line - creating predictable returns like Berkshire's utilities and insurance businesses while funding his more adventurous plays. The remainder of his Derby portfolio would put "win" bets on several undervalued contenders mispriced through bias or oversight.

With this contrarian strategy, an allocation to Burnham Square, at 12-1 odds, would be a fit. This Blue Grass Stakes winner represents a classic Buffett value play - quality that's underappreciated by the market. Burnham Square parallels Buffett's American Express $(AXP)$ position - a consistent performer that keeps showing up while others chase flashier stories.

Luxor Cafe, at 15-1 Morning Line odds, would be another likely play. This Japanese contender has won four of six starts, showing consistency that translates well to any Derby chaos. Like Buffett's Japanese trading-company investments, Luxor Cafe represents the international diversification that American investors consistently undervalue.

Similarly, Tiztastic, at 20-1 odds, combines proven stamina with a trainer seeking his first Derby victory. Tiztastic parallels Buffett's Occidental Petroleum investment - a quality operation generating substantial cash flow that remains undervalued due to sector bias.

MW How Warren Buffett went from picking horses to picking stocks - and what you can learn from it

By Charlie Garcia

Buffett's sharp insights on racing odds would later help him build his Berkshire Hathaway billions

Once the Oracle of Omaha stood outside a local horse track selling tips. Now Buffett is the safest bet around.

Long before he became the world's greatest value-stock investor, Warren Buffett was a preteen tipster for horse-racing bettors.

Omaha, Neb., 1941. Little Warren, all of 11 years old, hammering away at a Royal typewriter, processing racing intelligence most adults couldn't decode.

Buffett and a friend sold their Stable Boy Selections race-handicapping sheets for a quarter apiece outside Ak-Sar-Ben track - Nebraska spelled backward, the kind of wordplay that counted as clever in those days. Great business, until the bosses got wise and ran the kids off.

Young Buffett had already mastered "stooping"- digging through discarded race tickets among the sawdust and cigarette butts. Bettors threw away place and show tickets, believing only winners paid. This vivid image - Buffett rummaging through trash for overlooked value - perfectly captures his lifelong "cigar butt" investment philosophy.

Even then, Buffett wasn't betting on horses. He was betting on information. Not child's play. It was disciplined, precise, mathematical - calculating odds, weighing risks, placing bets on mispriced opportunities. He was processing information like a tiny human Bloomberg terminal.

That mindset stuck. Clear, calm, contrarian. It would make him billions.

Buffett tested his theories rigorously. As a teenager, he convinced his congressman father to request hundreds of horse handicapping books from the Library of Congress, and, while other kids were reading comic books, he ordered old racing forms from Chicago to back-test his systems. It wasn't gambling - it was applied mathematics.

At Ak-Sar-Ben, Buffett observed two kinds of bettors: "speed handicappers," betting purely on fastest times, and "class handicappers," favoring horses tested against stronger fields. Berkshire Hathaway (BRK.A) (BRK.B) blends these methods today, investing in companies with robust fundamentals and proven resilience against tough competition.

On Saturday evening, an estimated 150,000 fans will crowd Churchill Downs racetrack in Kentucky, betting their money on Journalism - a horse whose very name should trigger SEC investigations. In the 2024 Derby, Mystik Dan cruised home at 18-to-1 odds, surprising everyone except perhaps a lone racetrack bartender pouring mint juleps.

See: The best Kentucky Derby bet may actually be investing in Churchill Downs

Also on Saturday, an estimated 30,000 investors will gather in Omaha to worship at the altar of Buffett at Berkshire Hathaway's annual shareholder meeting, affectionately called the Woodstock of Capitalism.

Buffett's optimism on America's economy carries weight, but his massive cash pile speaks louder.

Once the Oracle of Omaha stood outside a local track selling tips. Now Buffett is the safest bet around. Because he isn't picking horses - he's picking America. Buffett always has. Betting against it? That has never worked.

But if Buffett loves America more than Ted Nugent loves his gun collection, why is Berkshire Hathaway hoarding $334 billion in cash - almost 60% of its $553 billion book value?

Benjamin Franklin said, "Words may show a man's wit, but actions his meaning." Buffett's optimism on America's economy carries weight, but his massive cash pile speaks louder.

Read: Will Warren Buffett talk about the trade war and market chaos at Berkshire's annual meeting?

This contradiction between Buffett's words and actions isn't random - it's rooted in a formative experience that transformed him forever. Buffett learned about risk the way many teenagers learn about alcohol - too much, too fast, with painful consequences. At 16, Buffett lost $175 on the horses at Charles Town track in West Virginia. That's the equivalent of dropping around $3,000 today. This taught him two critical rules: Emotional decisions destroy capital, and never double down on losses.

As Buffett tallied how many mornings it would take to earn back his racing losses, something inside the teenager hardened permanently - a protective wall between impulse and action that would eventually shelter billions of dollars. These lessons still shape Berkshire's conservative cash strategy.

Wall Street insists you stay all-in because "you can't time the market" - which sounds like your blackjack dealer murmuring, "Trust me. The deck's fair." Buffett instead waits, betting only when odds tilt decisively in his favor. He doesn't time markets. He times folly - striking when panic creates value.

Beneath his folksy exterior, Buffett is capitalism's apex predator. While hedge-fund managers frantically refresh their portfolio screens, Buffett patiently circles. From racing-form whiz kid collecting discarded tickets to market king collecting undervalued companies, Buffett has never changed his order but has perfected the art of finding value in what others discard. In the jungle of high finance, the most dangerous predator is the one disguised as a harmless grandfather with a cherry Coke.

Buffett's patience isn't just psychological - it's mathematical, guided by specific metrics that flash warning signals to him while others see only opportunity. Consider the Buffett Indicator - Buffett's preferred valuation measure comparing total U.S. stock-market capitalization to GDP. Having recently peaked near 220%, the Buffett Indicator at close to 180% still doubles historical averages - a clear caution flag Buffett doesn't ignore.

America's debt now tops $36 trillion - 120% of GDP - ballooning by more than $4 billion daily, pressuring interest rates and consumer prices. Buffett sees these storm clouds clearly - and prepares accordingly.

Buffett isn't just sitting on his cash pile but stocking Berkshire's fridge with beer and pizza, clearly expecting trouble (or just an endless shareholder meeting). Berkshire recently bought a stake in Constellation Brands, maker of Corona beer, and has a stake in Domino's Pizza. Buffett's tastes, like his investments, remain reliably simple: durable, diversified and occasionally delicious.

Domestically, energy has become a significant focus, with substantial stakes in Chevron (CVX) and Occidental Petroleum (OXY). Buffett continues to favor industries likely to endure geopolitical tensions and inflationary pressures. Outside of the U.S., Berkshire owns shares of sturdy Japanese trading houses Mitsubishi (JP:8058) and Mitsui (JP:8031) - companies built to endure geopolitical storms.

A third of a trillion dollars in cash is heavy even for Buffett's famously deep pockets. What next?

Buffett laments that today's corporate Serengeti lacks affordable elephants - too many "unicorn" companies are crowding the watering hole. Rumors swirl around Occidental, where Berkshire already holds a substantial stake. Buffett's strategy remains reassuringly predictable: wait for a respected company's public stumble - like Goldman Sachs (GS) in 2008 or Burlington Northern during railroad struggles - and then buy aggressively while others panic.

When the next economic disaster strikes - debt implosions, valuation meltdowns, tariff explosions - Buffett will calmly guide Berkshire Hathaway forward, scooping up opportunities faster than Kentucky Derby fans grabbing overpriced mint juleps.

The stableboy's stable bets

If Buffett were managing a portfolio of Saturday's Kentucky Derby contenders, he'd likely approach it just as he does stocks: applying both quantitative analysis and qualitative judgment.

First, he'd take a core position in this "Derby portfolio" and establish a margin of safety through show bets - wagers that pay off if the horse finishes anywhere in the top three positions. While show bets offer lower returns than win bets, they provide significantly higher probability of success - exactly the kind of favorable risk-reward ratio Buffett seeks in his core holdings.

There, Buffett might allocate most of the percentage to Journalism, the race favorite at 3-1 Morning Line odds as of late Friday. This consistent performer has won his last four races with superior speed figures that dominate the field. Like Buffett's Apple (AAPL) and Coca-Cola (KO) investments, Journalism combines predictable performance with technical superiority. A smaller portion would likely be given to Sovereignty, positioned at 5-1 odds. This improving colt with a powerful closing kick mirrors Buffett's Bank of America stake (BAC) - a quality operation with momentum that performs best when the competition is fiercest.

These show positions would form Buffett's defensive line - creating predictable returns like Berkshire's utilities and insurance businesses while funding his more adventurous plays. The remainder of his Derby portfolio would put "win" bets on several undervalued contenders mispriced through bias or oversight.

With this contrarian strategy, an allocation to Burnham Square, at 12-1 odds, would be a fit. This Blue Grass Stakes winner represents a classic Buffett value play - quality that's underappreciated by the market. Burnham Square parallels Buffett's American Express $(AXP.AU)$ position - a consistent performer that keeps showing up while others chase flashier stories.

Luxor Cafe, at 15-1 Morning Line odds, would be another likely play. This Japanese contender has won four of six starts, showing consistency that translates well to any Derby chaos. Like Buffett's Japanese trading-company investments, Luxor Cafe represents the international diversification that American investors consistently undervalue.

Similarly, Tiztastic, at 20-1 odds, combines proven stamina with a trainer seeking his first Derby victory. Tiztastic parallels Buffett's Occidental Petroleum investment - a quality operation generating substantial cash flow that remains undervalued due to sector bias.

(MORE TO FOLLOW) Dow Jones Newswires

May 03, 2025 07:55 ET (11:55 GMT)

MW How Warren Buffett went from picking horses to -2-

Another international diversifier would be Admire Daytona, at 30-1 odds. While conventional wisdom dismisses UAE Derby winners in the Kentucky Derby, this Japanese-bred colt has an edge the market isn't recognizing. Similarly, Buffett's energy investments like Chevron remain undervalued while generating substantial cash flows, dividends and buybacks that many investors overlook amid green-energy enthusiasm.

So whether you're wagering at Churchill Downs or investing your life's savings, take Buffett's advice: Allocate selectively, hold patiently and let time multiply your returns.

More: Can anyone replace Buffett? Shareholders ponder Berkshire's equity portfolio once the Oracle of Omaha steps aside.

Also read: These 8 stocks could be Berkshire Hathaway's next big bets

-Charlie Garcia

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 03, 2025 07:55 ET (11:55 GMT)

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