Warren Buffet
Warren E. Buffett was considered the second-wealthiest person in the United States in the early 2000s and the only one to have made his money through stock investing, as president and chief executive officer of Berkshire Hathaway Holdings, the most expensive and profitable listing on the New York Stock Exchange. Buffett, a deceptively shy and self-effacing man, sustained a reputation as the most astute investor in the United States for half of the twentieth century. He had become a genius at value investing and in the critical discernment of corporate talent and management. Conservative to a fault where money was concerned, he sustained a liberal, almost libertarian image in public life. Investors who followed his lead all became comfortably well off or even extraordinarily wealthy. His every investment was founded on an obligation to his investors to outperform every performance indicator.
Laying the Foundation
Buffett created Berkshire Hathaway in 1969, after shutting down his 13-year-long partnership with a select group of seven recruited investors (from among his family and friends). This group, formed in 1956, put in a total of $105,000, of which only $100 was Buffett's. By 1962 the group's capital had grown to more than $7 million, more than $1 million of which belonged to Buffett. He charged a fee of only 25 percent of profits above 6 percent, and he would forgo his fee if his performance did not exceed the return on government bonds, which yielded the same 6 percent.
Buffett alone had authority to make investments for the partnership, and he would answer no questions regarding them. New investments were allowed only once or twice annually, and he broadened his investor base as his profits grew, bringing in 90 more limited partners from throughout the nation at $100,000 each. (Laurence Tisch of Loews and CBS put in $300,000.) Buffett incorporated the group as Buffett Partnerships Limited and opened an office in Kiewit Plaza. This location would endure as the headquarters for what was to become Berkshire Hathaway, the most successful investment company in history. Within 10 years Buffett had assets of $44 million, of which nearly $7 million was his. In 1969 he determined that further suitable investments were unavailable and began to liquidate the partnership. By then the assets had grown to $104 million; Buffett's share came to more than $25 million. He had always said that someday he would be wealthy, but for Buffett this was only the beginning.
Buffett had become a master at arbitrage investing, taking large positions in stocks of companies that his research showed to be ripe for mergers, liquidations, or takeovers. He used margin borrowing to gain leverage, which helped him establish partnership positions that put him on corporate boards, where he could exercise influence. Undervalued companies were a specialty, as they proved vulnerable to large investments that enabled him to exert pressure for control. This was his key to gaining control of Berkshire Hathaway, which was to become the keystone of his rise to financial power.
He was joined in his enterprise in 1962 by Charles Munger, who became virtually an alter ego. Munger was possessed of a brilliant mind and a rapier wit and tongue, and the two became partners for over 40 years. During the years of the Buffett Partnership, they invested in a group of stagnant knitting mills that were slowly withering in New England. This was Berkshire Hathaway, which consisted of a struggling milling entity in the town of New Bedford, Massachusetts. Buffett examined the books of the company and began to discern greater value than was evident at first glance. The long history of the fabric industry in New England and the resolute men who had shaped it intrigued Buffett. He set about quietly purchasing blocks of shares as the stock began to slide. An internal fight between relatives over the future of the company played into his hands.
He visited the main plant in New Bedford and was shown the operations by Kenneth Chace. Chace was open and candid and shared with Buffett forty years' worth of corporate statements regarding the company. Buffett continued buying the stock both directly and through brokerage houses, and he saw in Chace a man who was virtually the model of the kind of business personality that interested him. Buffett invested in companies, but he always made sure that he was investing in the right kind of people. Chace was offered the presidency of the company as soon as Buffett took controlling interest. When he liquidated his original partnership, Buffett kept 29 percent of Berkshire, which would become the foundation of his new enterprise, the holding company Berkshire Hathaway.
The Boy Becomes the Man
When he was asked how he had discerned any value in his investments, Buffett said simply that he read thousands of annual reports and corporate statements. Value Line, Moody's, and Standard and Poor's were the core of his studies, followed by corporate publications. Buffett saw the library as the true basis of anyone's education; the fact that it was cheaper than the cost of attending college warmed his conservative heart even more. Buffett did not like to spend; he was a gatherer and a holder. His childhood was replete with stories of youthful enterprise, beginning at the age of six, when he bought six-packs of cola for 25 cents and then sold individual bottles for 5 cents each. He scoured golf courses for lost balls, which he then sold individually and by the dozen. When his father went to the U.S. Congress, Buffett took over several paper routes conveniently confined to large apartment houses. He kept careful records of all his customers, and when someone did not renew a subscription, he was quick to remind them and even to sell them a competing newspaper.
Buffett was grateful when his father, who had served four terms in the U.S. Congress, lost one of his campaigns, and the family left Washington, D.C. His father was a staunch conservative and a member of the John Birch Society, which was dedicated to combating liberal, socialist, or communist tendencies in society. His father always asked whether legislation "would add or subtract from human liberty." When he returned to Omaha, he put the young Warren to work in his brokerage office, chalking prices and quotations. With his mathematical mind, he enjoyed the job immensely, and the experience was to serve him well in his future career.
Back home in Omaha, Buffett used $1,200 saved from his paper routes to buy 40 acres of land, which he leased out to a farmer. He also developed a keen interest in horse racing. The statistics involved with weights, speed ratings, pace, past performance, and breeding variables intrigued him. He formed a partnership with a friend to print the "Stable Boy's Tip Sheet," sold at Ak-Sar-Ben racetrack. He and a partner also went into the pinball machine business, which generated a nice profit. His first venture into the stock market was at the age of 11, when he bought three shares each of Cities Service stock for his sister and himself at $38 and saw it drop to $27 and then climb to $40, at which point he sold, garnering a profit after costs of $5. The same stock then began to climb, reaching $200. This was a lesson to Buffett about staying in the market.
Foundations of Learning
While Buffett admired and loved his father, he tried to stay clear of his mother, who was given to rages that traumatized her children. To keep out of her way, Buffett spent more time in his father's offices. He was fascinated by numbers and money, especially how money could grow through compound interest. The notion of compounding interest never ceased to intrigue and delight him. He could compute and project interest rates off the top of his head in mid-conversation. His lifelong guiding credos were "Number One: Never Lose Money!" and "Number Two: Never Forget Number One!"
Buffett entered the Wharton School of Business at the University of Pennsylvania in 1947 and, after two years, determined that the instructors knew less about finance than he did. He returned to Omaha and finished undergraduate work at the University of Nebraska. Buffett then applied to Harvard graduate school but was denied admission. In the meantime, he had read what was to become a classic, The Intelligent Investor, by Benjamin Graham. Graham taught at Columbia University, and Buffett determined to go there to study; he soon became a Graham disciple. Graham believed that profits could be generated through ownership of stocks that were undervalued on the market. His concept was that stocks of companies that were well managed, sound, and grounded in a belief in their product could and should prosper as investments. Buffett's penchant for research and analysis, joined with a dogged conservatism about money, made him a natural believer in the Graham principles. He sought a job in Graham's investment firm, Graham and Newman, but was rejected. Graham was Jewish and was dedicated to providing openings in finance to Jewish students, who had a limited presence in investment houses. So Buffett went back to Omaha to sell stocks for his father.
In 1952 he married Susan Thompson, a student and friend of Buffett's sister at Northwestern University. In the early days of their marriage, he attempted to run a gas station, which did not succeed. In 1954, however, Graham relented and hired Buffett. He stayed with the firm for two years and became immersed in the Graham formula for money management and investments. Then Graham retired and closed down his company, but by then Buffett had generated a net worth of $140,000 and a wealth of knowledge and confidence about value investing. At the age of 26, he returned to Omaha and set about forming his own company, the Buffett Partnership.
Philosophy
His experience, combined with a reputation for honesty, hard work, and an encyclopedic knowledge of securities and finance stood him in good stead. Buffett possessed an ability to fuse self-interest with a desire to have his investors do well. He did not believe in stock tips, preferring instead that investors do the work, as he did, to find a stock worthy of investment. He believed that all stewardship of funds demanded an accounting and that leaving money at rest was unconscionable when there were opportunities to put it to work.
His personal ethics and business acumen played out in private and in public. He once took umbrage when Boys Town of Omaha continued to plead poverty and exploit orphaned and homeless children to gain contributions, which Buffett found were simply hoarded by the home. He forced an exposé in the Omaha papers that compelled the home to change its practices. As a money manager, he insured that all investments made by Berkshire Hathaway returned cash to the headquarters in Omaha. He had a basic instinct about the capability of people and required only that they submit a monthly financial statement and, in the event of bad news, to report it immediately. His company moved to gain control of Borsheim Jewelry, Scott and Fetzer, Blue Chip Stamps, GEICO and General Reinsurance, Western Financial, the Omaha Sun Herald, See's Candies, the Omaha Furniture Mart, Executive Jet, and the Buffalo News as well as taking large stakes in Salomon Securities, Coca Cola, McDonald's, and International Bridge. He was always wary of getting a reputation as a liquidator or parasite bent on draining a company of its assets. Only the Buffalo News acquisition, through the auspices of Blue Chip Stamps, bore the heavy handprints of a take-no-prisoners capitalist assault.
Buffett and his personal newspaper agent from Omaha, Stanford Lipsey, sought to gain a monopoly on newspapers in the city of Buffalo. He made no secret that challenging the Buffalo Courier-Express's right to control publication of a Sunday edition would inevitably cause that paper's demise. The Sunday edition was the lifeblood of the Courier, a morning paper. The Buffalo Evening News was constrained as an evening paper with no Sunday edition. The message Buffett gave to the unions at both papers was that their influence and numbers were to be severely curtailed and that their best interests would be served by agreeing to publication of a weekend edition by the Evening News. The unions understood their position, and the collapse of the Courier soon followed. Buffett, in his triumphant, though hardly his finest, hour, coldly told the existing unions, which had assumed they would be rewarded financially for their help, that the workforce made no worthy contribution to production of profits, given the solitary control of the market by the new Buffalo News.
Economic Discipline
Buffett's foremost strength was loyalty. He possessed an unyielding faith in his system, and his investors placed great faith in him in return. His admonition "Don't sell B-H stock!" was a watchword never to be taken lightly. His own children disappointed him by selling some of their stock when they could more easily have borrowed against it as collateral. He encouraged his investment partners to hold on to their stakes through good times and bad. Though he insisted on complete control over investment decisions, he also believed that business leaders had to provide an accounting to investors. He despised the practice of doling out options to executives and board members. To him, this was virtual charity. He also did not care for dividend distributions, which represented an inability of the managers to usefully devote the funds to the company's growth.
From his first investing experience in Cities Service to the creation of Berkshire Hathaway, Buffett stayed the course of his convictions. By the early 2000s, he and his wife controlled almost 39 percent of Berkshire Hathaway, some $40 billion in value. Wealth as a way to fund personal expenditures was insignificant to Buffett. It meant more to him to have the ability to buy without actually making a purchase. He continued to live in the house that he had bought for $31,500. He owned just one car, a Lincoln Continental. His only luxury was a personal jet; though he named it Indefensible, he justified having it by pointing out that commercial aircraft had become uncomfortable for him after he became well known.
In a speech at the Wharton School of Business (April 21, 1999), Buffett laid out four rules for investment: 1. Understand the business in which you are investing. Look for businesses within a circle of personal competence. 2. Look for sound, fundamental economics. Seek out companies that have a sustainable economic advantage, one he called "a castle with a moat around it," using Coca Cola as an example whose brand name has endured for generations and which could not be bought even for millions of dollars. 3. Find competent leadership. Honest, capable, hardworking leaders are needed to lead companies with a sustainable economic advantage. His instruction to Berkshire Hathaway managers was to "Widen the moat. That keeps the castle valuable." 4. Buy at the right price if you want an investment to pay off. He explained how he had gone through company after company in Moody's investment manuals, searching for those that had large cash values yet were selling at low percentages of that value.
Social Concerns
Buffett did not like to give money away, which meant that he was losing it. His tastes were simple; he ate hamburgers and drank cherry Coke, and he loved to use baseball metaphors in his talks about investing. He gave over $1 million dollars to keep minor league baseball in Omaha. He also helped Grinnell College in Iowa purchase (for $13 million) a public radio station. Two years later, to Buffett's dismay, the college sold it for $48 million dollars. His wife was prone to take up causes in poor neighborhoods and pushed him to donate to them. He did so reluctantly, and inevitably his better sense proved correct, as the money ended up being wasted, in his view. He also supported the formation of a liberal magazine in Washington that proceeded to fail. Abortion and birth control were two of his wife's special projects, as was the welfare of the homeless and street youths. The two formed a group called the Glide Foundation as a vehicle to channel money to that cause. In the early 2000s it seemed that a Buffett foundation would be the eventual beneficiary of his wealth, but Buffett preferred not to think about it.
Laying the Foundation
Buffett created Berkshire Hathaway in 1969, after shutting down his 13-year-long partnership with a select group of seven recruited investors (from among his family and friends). This group, formed in 1956, put in a total of $105,000, of which only $100 was Buffett's. By 1962 the group's capital had grown to more than $7 million, more than $1 million of which belonged to Buffett. He charged a fee of only 25 percent of profits above 6 percent, and he would forgo his fee if his performance did not exceed the return on government bonds, which yielded the same 6 percent.
Buffett alone had authority to make investments for the partnership, and he would answer no questions regarding them. New investments were allowed only once or twice annually, and he broadened his investor base as his profits grew, bringing in 90 more limited partners from throughout the nation at $100,000 each. (Laurence Tisch of Loews and CBS put in $300,000.) Buffett incorporated the group as Buffett Partnerships Limited and opened an office in Kiewit Plaza. This location would endure as the headquarters for what was to become Berkshire Hathaway, the most successful investment company in history. Within 10 years Buffett had assets of $44 million, of which nearly $7 million was his. In 1969 he determined that further suitable investments were unavailable and began to liquidate the partnership. By then the assets had grown to $104 million; Buffett's share came to more than $25 million. He had always said that someday he would be wealthy, but for Buffett this was only the beginning.
Buffett had become a master at arbitrage investing, taking large positions in stocks of companies that his research showed to be ripe for mergers, liquidations, or takeovers. He used margin borrowing to gain leverage, which helped him establish partnership positions that put him on corporate boards, where he could exercise influence. Undervalued companies were a specialty, as they proved vulnerable to large investments that enabled him to exert pressure for control. This was his key to gaining control of Berkshire Hathaway, which was to become the keystone of his rise to financial power.
He was joined in his enterprise in 1962 by Charles Munger, who became virtually an alter ego. Munger was possessed of a brilliant mind and a rapier wit and tongue, and the two became partners for over 40 years. During the years of the Buffett Partnership, they invested in a group of stagnant knitting mills that were slowly withering in New England. This was Berkshire Hathaway, which consisted of a struggling milling entity in the town of New Bedford, Massachusetts. Buffett examined the books of the company and began to discern greater value than was evident at first glance. The long history of the fabric industry in New England and the resolute men who had shaped it intrigued Buffett. He set about quietly purchasing blocks of shares as the stock began to slide. An internal fight between relatives over the future of the company played into his hands.
He visited the main plant in New Bedford and was shown the operations by Kenneth Chace. Chace was open and candid and shared with Buffett forty years' worth of corporate statements regarding the company. Buffett continued buying the stock both directly and through brokerage houses, and he saw in Chace a man who was virtually the model of the kind of business personality that interested him. Buffett invested in companies, but he always made sure that he was investing in the right kind of people. Chace was offered the presidency of the company as soon as Buffett took controlling interest. When he liquidated his original partnership, Buffett kept 29 percent of Berkshire, which would become the foundation of his new enterprise, the holding company Berkshire Hathaway.
The Boy Becomes the Man
When he was asked how he had discerned any value in his investments, Buffett said simply that he read thousands of annual reports and corporate statements. Value Line, Moody's, and Standard and Poor's were the core of his studies, followed by corporate publications. Buffett saw the library as the true basis of anyone's education; the fact that it was cheaper than the cost of attending college warmed his conservative heart even more. Buffett did not like to spend; he was a gatherer and a holder. His childhood was replete with stories of youthful enterprise, beginning at the age of six, when he bought six-packs of cola for 25 cents and then sold individual bottles for 5 cents each. He scoured golf courses for lost balls, which he then sold individually and by the dozen. When his father went to the U.S. Congress, Buffett took over several paper routes conveniently confined to large apartment houses. He kept careful records of all his customers, and when someone did not renew a subscription, he was quick to remind them and even to sell them a competing newspaper.
Buffett was grateful when his father, who had served four terms in the U.S. Congress, lost one of his campaigns, and the family left Washington, D.C. His father was a staunch conservative and a member of the John Birch Society, which was dedicated to combating liberal, socialist, or communist tendencies in society. His father always asked whether legislation "would add or subtract from human liberty." When he returned to Omaha, he put the young Warren to work in his brokerage office, chalking prices and quotations. With his mathematical mind, he enjoyed the job immensely, and the experience was to serve him well in his future career.
Back home in Omaha, Buffett used $1,200 saved from his paper routes to buy 40 acres of land, which he leased out to a farmer. He also developed a keen interest in horse racing. The statistics involved with weights, speed ratings, pace, past performance, and breeding variables intrigued him. He formed a partnership with a friend to print the "Stable Boy's Tip Sheet," sold at Ak-Sar-Ben racetrack. He and a partner also went into the pinball machine business, which generated a nice profit. His first venture into the stock market was at the age of 11, when he bought three shares each of Cities Service stock for his sister and himself at $38 and saw it drop to $27 and then climb to $40, at which point he sold, garnering a profit after costs of $5. The same stock then began to climb, reaching $200. This was a lesson to Buffett about staying in the market.
Foundations of Learning
While Buffett admired and loved his father, he tried to stay clear of his mother, who was given to rages that traumatized her children. To keep out of her way, Buffett spent more time in his father's offices. He was fascinated by numbers and money, especially how money could grow through compound interest. The notion of compounding interest never ceased to intrigue and delight him. He could compute and project interest rates off the top of his head in mid-conversation. His lifelong guiding credos were "Number One: Never Lose Money!" and "Number Two: Never Forget Number One!"
Buffett entered the Wharton School of Business at the University of Pennsylvania in 1947 and, after two years, determined that the instructors knew less about finance than he did. He returned to Omaha and finished undergraduate work at the University of Nebraska. Buffett then applied to Harvard graduate school but was denied admission. In the meantime, he had read what was to become a classic, The Intelligent Investor, by Benjamin Graham. Graham taught at Columbia University, and Buffett determined to go there to study; he soon became a Graham disciple. Graham believed that profits could be generated through ownership of stocks that were undervalued on the market. His concept was that stocks of companies that were well managed, sound, and grounded in a belief in their product could and should prosper as investments. Buffett's penchant for research and analysis, joined with a dogged conservatism about money, made him a natural believer in the Graham principles. He sought a job in Graham's investment firm, Graham and Newman, but was rejected. Graham was Jewish and was dedicated to providing openings in finance to Jewish students, who had a limited presence in investment houses. So Buffett went back to Omaha to sell stocks for his father.
In 1952 he married Susan Thompson, a student and friend of Buffett's sister at Northwestern University. In the early days of their marriage, he attempted to run a gas station, which did not succeed. In 1954, however, Graham relented and hired Buffett. He stayed with the firm for two years and became immersed in the Graham formula for money management and investments. Then Graham retired and closed down his company, but by then Buffett had generated a net worth of $140,000 and a wealth of knowledge and confidence about value investing. At the age of 26, he returned to Omaha and set about forming his own company, the Buffett Partnership.
Philosophy
His experience, combined with a reputation for honesty, hard work, and an encyclopedic knowledge of securities and finance stood him in good stead. Buffett possessed an ability to fuse self-interest with a desire to have his investors do well. He did not believe in stock tips, preferring instead that investors do the work, as he did, to find a stock worthy of investment. He believed that all stewardship of funds demanded an accounting and that leaving money at rest was unconscionable when there were opportunities to put it to work.
His personal ethics and business acumen played out in private and in public. He once took umbrage when Boys Town of Omaha continued to plead poverty and exploit orphaned and homeless children to gain contributions, which Buffett found were simply hoarded by the home. He forced an exposé in the Omaha papers that compelled the home to change its practices. As a money manager, he insured that all investments made by Berkshire Hathaway returned cash to the headquarters in Omaha. He had a basic instinct about the capability of people and required only that they submit a monthly financial statement and, in the event of bad news, to report it immediately. His company moved to gain control of Borsheim Jewelry, Scott and Fetzer, Blue Chip Stamps, GEICO and General Reinsurance, Western Financial, the Omaha Sun Herald, See's Candies, the Omaha Furniture Mart, Executive Jet, and the Buffalo News as well as taking large stakes in Salomon Securities, Coca Cola, McDonald's, and International Bridge. He was always wary of getting a reputation as a liquidator or parasite bent on draining a company of its assets. Only the Buffalo News acquisition, through the auspices of Blue Chip Stamps, bore the heavy handprints of a take-no-prisoners capitalist assault.
Buffett and his personal newspaper agent from Omaha, Stanford Lipsey, sought to gain a monopoly on newspapers in the city of Buffalo. He made no secret that challenging the Buffalo Courier-Express's right to control publication of a Sunday edition would inevitably cause that paper's demise. The Sunday edition was the lifeblood of the Courier, a morning paper. The Buffalo Evening News was constrained as an evening paper with no Sunday edition. The message Buffett gave to the unions at both papers was that their influence and numbers were to be severely curtailed and that their best interests would be served by agreeing to publication of a weekend edition by the Evening News. The unions understood their position, and the collapse of the Courier soon followed. Buffett, in his triumphant, though hardly his finest, hour, coldly told the existing unions, which had assumed they would be rewarded financially for their help, that the workforce made no worthy contribution to production of profits, given the solitary control of the market by the new Buffalo News.
Economic Discipline
Buffett's foremost strength was loyalty. He possessed an unyielding faith in his system, and his investors placed great faith in him in return. His admonition "Don't sell B-H stock!" was a watchword never to be taken lightly. His own children disappointed him by selling some of their stock when they could more easily have borrowed against it as collateral. He encouraged his investment partners to hold on to their stakes through good times and bad. Though he insisted on complete control over investment decisions, he also believed that business leaders had to provide an accounting to investors. He despised the practice of doling out options to executives and board members. To him, this was virtual charity. He also did not care for dividend distributions, which represented an inability of the managers to usefully devote the funds to the company's growth.
From his first investing experience in Cities Service to the creation of Berkshire Hathaway, Buffett stayed the course of his convictions. By the early 2000s, he and his wife controlled almost 39 percent of Berkshire Hathaway, some $40 billion in value. Wealth as a way to fund personal expenditures was insignificant to Buffett. It meant more to him to have the ability to buy without actually making a purchase. He continued to live in the house that he had bought for $31,500. He owned just one car, a Lincoln Continental. His only luxury was a personal jet; though he named it Indefensible, he justified having it by pointing out that commercial aircraft had become uncomfortable for him after he became well known.
In a speech at the Wharton School of Business (April 21, 1999), Buffett laid out four rules for investment: 1. Understand the business in which you are investing. Look for businesses within a circle of personal competence. 2. Look for sound, fundamental economics. Seek out companies that have a sustainable economic advantage, one he called "a castle with a moat around it," using Coca Cola as an example whose brand name has endured for generations and which could not be bought even for millions of dollars. 3. Find competent leadership. Honest, capable, hardworking leaders are needed to lead companies with a sustainable economic advantage. His instruction to Berkshire Hathaway managers was to "Widen the moat. That keeps the castle valuable." 4. Buy at the right price if you want an investment to pay off. He explained how he had gone through company after company in Moody's investment manuals, searching for those that had large cash values yet were selling at low percentages of that value.
Social Concerns
Buffett did not like to give money away, which meant that he was losing it. His tastes were simple; he ate hamburgers and drank cherry Coke, and he loved to use baseball metaphors in his talks about investing. He gave over $1 million dollars to keep minor league baseball in Omaha. He also helped Grinnell College in Iowa purchase (for $13 million) a public radio station. Two years later, to Buffett's dismay, the college sold it for $48 million dollars. His wife was prone to take up causes in poor neighborhoods and pushed him to donate to them. He did so reluctantly, and inevitably his better sense proved correct, as the money ended up being wasted, in his view. He also supported the formation of a liberal magazine in Washington that proceeded to fail. Abortion and birth control were two of his wife's special projects, as was the welfare of the homeless and street youths. The two formed a group called the Glide Foundation as a vehicle to channel money to that cause. In the early 2000s it seemed that a Buffett foundation would be the eventual beneficiary of his wealth, but Buffett preferred not to think about it.
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