Warren Buffett

Since 2000, Buffett has raised money for the Glide Foundation through online auctions. Bidders have donated up to $620,100 for the chance to have one meal with him.

Management style

When Buffett acquires a controlling interest in a business, he makes clear to the owner that:

• he will not interfere with the running of the company;
• he will make the hiring and compensation decision of the top executive; and
• capital allocated to the business will have a price tag (a hurdle rate) attached; this process is to motivate owners to send excess capital that does not return more than its cost to Berkshire headquarters rather than investing it at low returns. #redirect This cash is then free to be invested in opportunities that offer higher returns.

Besides his skills in managing Berkshire's cash flow, Buffett is skilled in managing the company's balance sheet. Since taking over Berkshire Hathaway, Buffett has weighted every decision against their impact on the balance sheet. He has succeeded in building Berkshire into one of the seven companies today that are still rated by Moody's as Aaa, the highest credit rating achievable and thus with the lowest cost of debt. Buffett takes comfort in the knowledge that, for the foreseeable future, his company will not be one of those shaken by economic or natural catastrophes. He repeated over the years that his catastrophe insurance operation is the only one he knew that can keep the checks clearing during financial turmoil.

Investment approach

The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:

• Is the company in an industry of good economics, i.e., not an industry competing on price points. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company?
• Are the earnings on an upward trend with good and consistent margins?
• Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt in few years from its earnings?
• ROE is consistent over its history and high compared to industry averages? Is it more than 12%? Or does the company have high and consistent Return on total capital?
• Does the company retain earnings for growth?
• The business should not have high maintenance cost of operations, low capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.
• Does the company reinvest earnings in good business opportunities? Track record of management accomplishing these investments?
• Is the company free to adjust prices for inflation?

Then he asks at what price is the business a bargain, and his answer typically is when it provides a higher rate of compounded return relative to other available investment opportunities.

Buffett has coined the term "economic moat", preferring to acquire companies which possess sustainable competitive advantages over their competitors.Investopedia. [What is an economic moat?]

Warren Buffett's letters to shareholders are a very valuable source in understanding his investment style and outlook. His shareholder letters are publicly available at: http://www.berkshirehathaway.com/letters/letters.html

Buffett's opinions

Buffett believes that many of the problems with the economies of the United States and other industrialized countries in recent years result from the proliferation of persons and organizations who produce nothing directly but are compensated based on the volume of business transactions which they facilitate.

Buffett feels that most stock trades are recommended and made primarily to benefit the brokers rather than the investors and has stated that he feels that the world would benefit if each person had a lifetime maximum number of stock trades (e.g. ten or twenty trades).

Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Buffett also views compensation under employee option plans as a direct business expense. He is appalled that Corporate America does not recognize this as a direct deduction from their earnings. He was consistently lobbying for a change in the Accounting Rules to reflect the compensation as an expense and not merely as a footnote. He was quoted as saying: "If it is not compensation, then what is it? If it does not belong in the profit and loss statement, then where does it belong?"

Buffett believes that the US dollar will lose value in the long run. He views the expanding trade account deficit as an alarming trend that will devalue the US dollar and US assets. As a result it is putting a larger portion of ownership of US assets in the hands of foreigners. This induced Buffett to enter the foreign currency market for the first time in 2002. And his foreign asset base has expanded ever since.

Public perception

Berkshire's annual reports and letters to shareholders, prepared by Buffett, frequently receive coverage by the financial media. Buffett's writings are known for containing literary quotes ranging from the Bible to Mae West, as well as hokey Midwestern advice and numerous jokes. Various websites extol Buffett's virtues while others decry Buffett’s business models or dismiss his investment advice and decisions.

Buffett is notoriously technophobic. He claims not to have an e-mail address. [Berkshire Hathaway's website] has been called a "homely page" by the Washington Post.

Criticism

Buffet has been criticised by groups such as Human Life International for his support for abortion even before the Roe v Wade decision, and for his support of population control. [link]

Historical timeline

1943: (13 years old)

• Buffett filed his first income tax return, deducting his bicycle as a work expense.

• He invested $1,200 of his savings into 40 acres (0.2 km²) of farmland.

• Buffett's first job was writing stock prices on a chalkboard at his father's brokerage. Later, he made $175 monthly delivering Washington Post newspapers.

• In his senior year of high school, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in a barber shop. Within months, they owned three machines in different locations. They sold their business later in the year for $1,200 to a war veteran.
• By this time he had earned over $5,000 delivering newspapers.
• His father suggested he should attend college, a suggestion Buffett did not take well. Nevertheless, that year, he enrolled as a freshman at the Wharton School of the University of Pennsylvania.

• Buffett joins the Alpha Sigma Phi fraternity.

• Buffett transferred to the University of Nebraska. He was offered a job at J.C. Penney after college, but turned it down. He graduated from college in only three years by taking his last three credits over the summer. His savings had reached $9,800 by then.

• Buffett applied for admission to Harvard Business School and was turned down. He eventually enrolled at Columbia after learning that Benjamin Graham and David Dodd, two well-known securities analysts, were professors at Columbia.

• Buffett discovered Graham was on the Board of GEICO insurance at the time. After taking a train to Washington, D.C. on a Saturday, he knocked on the door of GEICO's headquarters until a janitor allowed him in. Buffett found Lorimer Davidson, the Vice President, on the sixth floor. They talked for four hours about the insurance business. Davidson recalled that he found Buffett to be an "extraordinary man" after fifteen minutes.Roger Lowenstein. Buffett: The Making of an American Capitalist. p. 43.
• Buffett graduated and wanted to go to work on Wall Street. Both his father and Ben Graham urged him not to. Warren offered to work for Graham for free but Graham refused. Buffett returned home and began dating Susan Thompson. Buffett purchased a Texaco gas station as a side investment, but that venture did not work out as well as he had hoped. Meanwhile, he worked as a stockbroker. During that time, Buffett also took a Dale Carnegie public speaking course. Using what he learned, he felt confident enough to teach a night class at the University of Nebraska, "Investment Principles". The average age of the students he taught was more than twice his own (he was only 21 at the time).

• Buffett married Susan Thompson in April of 1952. They rented an apartment for $65 a month. They had their first child, Susan and she is known as Susie.

• Benjamin Graham called Buffett and offered him a job at his partnership at a starting salary of $12,000 a year. Graham, who was a tough man to work for, was adamant that a stock provide a wide margin of safety after weighting the trade-off between its price and intrinsic value. Graham's demand that a stock be worth more than its price made sense to Buffett, but it also made him question whether the criteria were too stringent, causing them to miss out on some big winners that had more qualitative values. Buffett also worked closely with Walter Schloss.
• Warren and Susan Buffett had their second child, Howard Graham Buffett.

• Graham retired and folded up his partnership. Since leaving college six years earlier, Buffett's personal savings grew from $9,800 to over $140,000. The Buffett family returned home to Omaha. On May 1, Buffett created Buffett Associates, Ltd., an investment partnership. Seven family members and friends put in a total of $105,000. Buffett himself invested only $100. Over the course of the year, Buffett created two additional partnerships, eventually bringing the number under his management to three.

• Buffett added two more partnerships to his collection. He was then managing five investment partnerships from his home. With his wife about to have her third child, Peter, Buffett purchased a five-bedroom, stucco house on Farnam Street for $31,500. He has lived there ever since.

• His original partnership in its third year, the partners' money had doubled.

• Buffett was introduced to Charlie Munger, the man who would eventually become the Vice Chairman of Berkshire Hathaway, and an integral part of the company's success. The two got along immediately.

• Buffett asked one of his partners, a doctor, to find 10 other doctors who will be willing to invest $10,000 each into his partnership. Eventually, 11 doctors agreed to invest.

• With the partnerships worth millions, Buffett made his first $1 million investment in a windmill-manufacturing company.

• Buffett returned to New York with his wife Susan for a few weeks to raise capital from his old acquaintances. During the trip, he picked up a few partners and several hundred thousand dollars. The Buffett Partnership, which had begun with $105,000, by this time was worth $7.2 million. Warren and Susan Buffett personally held over $1 million of the assets. Buffett merged all of the partnerships into one entity known simply as Buffett Partnerships, Ltd. The operations were moved to Kiewit Plaza, a functional but less-than-grand office where they remain to this day. The minimum investment in the partnership was raised from $25,000 to $100,000. Buffett consulted Munger on Dempster, the windmill company. Munger suggested that Buffett hire Harry Bottle, a move that turned out to be very profitable. Bottle cut costs and laid off workers.
• Buffett discovered a textile manufacturing firm, Berkshire Hathaway, that was selling for under $8 per share. Buffett and Seabury Stanton, the President of Berkshire and a large shareholder at the time, differed in the buy back price by three-eighths. Negotiations broke off and BPL purchased every share in sight until it established a 49% position and installed Ken Chace as President.

• Buffett sold Dempster for three times the amount he invested. The almost worthless company had built a portfolio of stocks worth more than $2 million alone during the time of Buffett's investment. The Buffett partnerships became the largest shareholder of Berkshire Hathaway.

• Due to a fraud scandal, American Express shares fell to $35. While the world was selling the stock, Buffett began to buy shares en masse.

• Buffett's father, Howard Buffett, died. Buffett began to purchase shares in the Walt Disney Company after meeting with Walt Disney. He invested $4 million [which was equal to around 5% of the company]. The American Express shares were selling for more than double the price Buffett paid for them. Buffett arranged a business coup - taking control of Berkshire Hathaway at the board meeting and naming a new President, Ken Chace, to run the company.

• Buffett's net worth reached $6,849,936.

• Berkshire paid out its first and only dividend of 10 cents. In October, Buffett wrote to his partners and told them he found no bargains in the roaring stock market of the '60s. His partnership was worth $65 million. He briefly considered leaving investing and pursuing other interests. American Express hit over $180 per share, making the partnership $20 million in profit on a $13 million investment.
• Berkshire Hathaway acquired National Indemnity Insurance at Buffett's direction. It paid $8.6 million.
• Buffett's net worth was now more than $10 million.

• The Buffett Partnership earned more than $40 million, bringing the total value to $104 million. Buffett became a trustee of Grinnell College, a prestigious liberal arts college in Iowa. He remains a trustee to this date, and is credited for guiding the college's immense endowment through the seventies and eighties; Grinnell College now has the highest endowment of any liberal arts college in the United States.

• Following his most successful year, Buffett closed the partnership and liquidated its assets to his partners. Among the assets paid out were shares of Berkshire Hathaway.
• Buffett's personal net worth reached $25 million.

• The Buffett Partnership was completely dissolved and divested of its assets. Buffett owned 29% of the stock outstanding in Berkshire Hathaway. He named himself chairman and began writing the annual letter to shareholders.
• Berkshire Hathaway made $45,000 from textile operations, and $4.7 million in insurance, banking and investments (Buffett's side investments made more than the company's primary business).

• At his wife's request, Buffett purchased a $150,000 summer home at Laguna Beach.

• Stock prices began to drop. At Buffett's direction, Berkshire borrowed money by issuing notes at 8%.
• Berkshire began to acquire stock in the Washington Post Company. Buffett became close friends with Katharine Graham, who controlled the company and its flagship newspaper, and became a member of its board of directors. Graham, in her autobiography, credited him with giving her the equivalent of a business degree through his personal tutoring and frequent advice, and said that she often called him several times a day in the early years of their friendship.

• Due to falling stock prices, the value of Berkshire's stock portfolio began to fall. Buffet's personal wealth was cut by more than 50%. The U.S. Securities and Exchange Commission opened a formal investigation into Warren GH Buffett and one of Berkshire's mergers. Nothing ever came of the investigation.

• Berkshire indirectly purchased the Buffalo Evening News for $32.5 million. Buffet would later be brought up on antitrust charges by a competing paper. Susan leaves Buffet, although not officially divorcing him. This caused considerable emotional distress for Buffett.^{[[Citing sources citation needed]]}

• Susan introduced Warren to Astrid Menks, who eventually moved in with him.

• Berkshire began to acquire stock in ABC. Trading at $290 per share, Buffet's net worth neared $140 million. However, he lived solely on his salary of $50,000 per year.

• Munger and Buffett created the Berkshire Charitable Contribution plan, allowing each shareholder to donate some of the company's profits to his or her personal charities.

• Buffett purchased Nebraska Furniture Mart for $60 million and ended the year with $1.3 billion in corporate stock portfolio.
• Berkshire began the year trading at $775 per share, and ended at $1,310. Buffet's net worth reached $620 million, placing him on the Forbes 400 for the first time.

• Buffett shut down the Berkshire textile mills after years of operation. He refused to allocate additional capital to it.
• For $315 million, Buffett purchased Scott & Fetzer, which produced commercial products such as Kirby vacuums and the World Book Encyclopedia. Buffet helped orchestrate the merger between ABC and Capital Cities. He was forced to leave the Board of the Washington Post because federal legislation prohibited him from sitting on the Boards of both Capital Cities and Kay Graham's Washington Post.

• Berkshire share price reached $3,000.

• In the aftermath of the stock market crash of October 1987, Berkshire lost 25% of its value, dropping from $4,230 per share to around $3,170.

• Buffett began buying stock in Coca-Cola Company, eventually purchasing up to 7 percent of the company for $1.02 billion. It would turn out to be one of Berkshire's most lucrative investments.

• Berkshire rose from $4,800 per share to over $8,000. Buffet's net worth rose with it to $3.8 billion.

• Buffett participated in a conference sponsored by Cardozo Law School (New York) and organized by Lawrence A. Cunningham, which resulted in Cunningham editing and publishing a thematically-arranged collection of Buffett's famous letters to shareholders called The Essays of Warren Buffett. This is among the best ways to gain in-depth knowledge of Buffett's ideas and experience.

• Buffett purchased nearly 130 million ounces of silver as an investment at about $6 per ounce. In 2006, he disclosed having sold the precious metal. (2006): Reuters [link] URL accessed on 2006-05-12

• Buffett entered in $11 billion worth of forward contracts to deliver US dollars against other currencies. By April 2006, his total gain on these contract was over $2 billion.

• By December 31 his gain on the contracts from last year was over $600 million dollars.
• Buffett also placed second to Ralph Nader in an online web poll, conducted by iswitched.org, of possible candidates for the Green Party nominee for President in 2004.

• Buffett is criticized for the position he held on the board of Coca-Cola Company, since some institutional investors saw this as a conflict of interest with Berkshire's ownership of Dairy Queen and McLane, heavy buyers of many Coca-Cola products. Buffett's reply: "Do they want us to favor Pepsi?"

• The gains from the 2002 contract were reduced in 2005 when the US dollar strengthened. Hurricane Katrina caused losses to Berkshire's reinsurance divisions.

• Buffett and Berkshire Hathaway faced difficulties over their General Re Insurance unit, which was accused of questionable dealings with American International Group.
• Buffett makes many acquisitions during the year, including Business Wire, Russell Corporation, PacifiCorp, ISCAR Metalworking and Agro-Logic, a small agricultural manufacturing company. ISCAR and Agro-Logic are both Israeli companies that Buffet purchased within a week of each other. "We are investing $4 billion in an amazing band of people from Israel", Buffet said of ISCAR, which is the largest purchase he has ever made outside of the United States.
• In March, Berkshire's board unanimously agreed on who would succeed Buffett as CEO if he dies or is removed. The identity of his successor is not publicly known.Associated Press. [Buffett's successor picked in case of death, 'decay'.] March 5, 2006.
• Buffett announced in June that he will give away more than 80% or about $37 billion of his $44 billion fortune to five foundations in annual gifts of stock starting in July 2006. The largest contribution will go to the Bill and Melinda Gates Foundation.

Personal life

Buffett likes to eat at Gorat's Steak House in Omaha, Nebraska. He drinks up to 15 cans of Coca-Cola each day.AskMen.com. [Warren Buffett] He used to drive a 2001 Lincoln Town CarForbesAutos.com. [Top 10 Vehicles Owned by Billionaires.] March 2006., though he recently purchased a Cadillac DTS.Fortune.com. [Buffett backs GM--and buys a Caddy] He is a big fan of the card game bridge, and often plays it with Bill Gates.From a TWiT episode.

Buffett is currently working on an animated series with DiC Entertainment chief Andy Heyward. According to information presented by Buffett at the Berkshire Hathaway annual meeting on May 6, 2006, the series will feature Buffett and Munger in roles and the series will teach children healthy financial habits for life. Cartoon drawings of Buffett and Munger were displayed throughout the events during the weekend and the special movie before the meeting began was in animation form by Heyward.

References

External links

• ["Warren Buffett gives away his fortune"] - Charity Announcement
• [Berkshire Hathaway Official Website] - Source for annual reports, with included commentary from Warren Buffett.
• [Warren Buffett, Unplugged] - by Susan Pulliam and Karen Richardson (WSJ, 11/12/2005)
• [Article by Warren Buffett] - "The Superinvestors of Graham-and-Doddsville" written by Warren Buffett on May 17, 1984 for Columbia Business School Magazine.
• [The philanthropy of Warren Buffett] - David Walsh, World Socialist Web Site
• [Stock quote Berkshire Hathaway A]
• [Stock quote Berkshire Hathaway B]

Personalities of Wall Street

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