Pinball Machine Arbitrage

Warren Buffett and his friend Don Danley created a successful pinball machine business as teenagers by buying broken machines cheap, repairing them, and placing them in barbershops on a revenue-share model.

Key Points:

• Initial Investment Strategy:

  • Buy broken pinball machines for very low cost ($15)
  • Repair costs were minimal ($3 in parts + labor)
  • Don handled repairs while Warren handled business development

• Business Model:

  • Place machines in barbershops
  • Split revenue 50/50 with shop owners
  • Collect coins weekly
  • First week yielded $5-6 revenue from single machine

• Growth Strategy:

  • Reinvest profits into more machines
  • Expanded to 40 barbershops
  • Used fictitious company name "Wilson Coin-Operated Amusement Company"
  • Presented themselves as representatives of "Mr. Wilson" to appear more professional

• Risk Management:

  • Low initial investment ($18 total per machine)
  • Guaranteed location through revenue share model
  • No overhead costs
  • Could repair and resell machines if locations didn't work out

The business demonstrated early principles of capital allocation with minimal risk and strong returns on investment.