Buffett, Warren 1930-

American Decades | Date: 2001

Warren Buffett
1930-

Chairman and ceo of berkshire hathaway inc.

The Oracle of Omaha

Without a doubt Warren Edward Buffett is the greatest stock investor in modern times, and perhaps the most prescient oracle in the history of the stock market. If an individual had invested $10,000 in Berk-shire Hathaway when Buffett purchased a controlling interest in 1965, by 1999 that individual's portfolio would have been worth $51 million. Had that same individual invested $10,000 in the Standard & Poor's 500-stock index, their portfolio would have been worth a mere $497,431. Yet, Buffett has not added a major position to the stock portfolio of Berkshire Hathaway since amassing 4.3 percent of McDonald's Corporation in 1995. During the second half of the 1990s he transformed what had previously been a sideline at Berkshire Hathaway into a main focus: the acquisition of entire companies. Between 1996 and 1999 Berkshire Hathaway, located in Omaha, Nebraska, spent $27.3 billion to purchase seven companies in industries as diverse as aviation, fast food, and home furnishings. The effect was immediate and dramatic. The shift in emphasis transformed Berkshire Hathaway from a closed-end fund to a bona fide operating company. In 1996 the stock portfolio of Berkshire Hathaway accounted for 76 percent of the company's $29.9 billion in assets; only three years later the assets in stocks plummeted to 32 percent while total assets quadrupled to $124 billion.

A Misunderstood Giant

The conventional wisdom is that Berkshire Hathaway stock will bring a premium because of Buffett's reputation as a latter-day King Midas. Certainly there is something to be said for Buffett's reputation. Yet, according to Alice Schroeder, a PaineWebber Insurance analyst who published a comprehensive study of Berkshire Hathaway, it is "possibly the most talked about and the least understood company in the world." Schroeder asserts, for instance, that despite the so-called Buffett premium, Berkshire stock is actually undervalued, trading far below its real value, which she has estimated to be between $91,000 and $97,000 per A share. In 1999 the A shares of Berkshire Hathaway stock traded at about $70,000. Schroeder explains the devaluation of Berkshire Hathaway stock by pointing out that the stock market misperceives the company as little more than the sum of the stocks in its portfolio and so tends to overreact to news about the seven stocks that form the core of Berkshire Hathaway's holdings: Coca-Cola, Gillette, American Express, Freddie Mac, Wells Fargo, Walt Disney, and the Washington Post Company. Despite changes that the company has undergone, Buffet remains true to his conservative precepts of investing. He prefers, as he puts it, a sure thing today to the next big thing, no matter how spectacular its potential might be. He will not, for example, invest in Internet stocks because no one can predict their performance over the next ten years. "I can't do it myself," he says, "and if I don't know, I don't invest."

When I Paint My Masterpiece

Buffett is all business almost all of the time. His tastes are simple, his habits frugal. Unlike the new generation of corporate leaders, such as Bill Gates or Jeff Bezos, Buffett neither spends money nor gives it away. He just makes it. He is an entrepreneur, not a philanthropist. Furthermore, in an era when most CEOs at least pay lip service to shareholder rights, Buffett is a throwback to an age when a corporate mogul was a corporate mogul and did as he pleased with his company. "Berkshire is the company I wanted to create," Buffett has said. "It's not the company that Alfred P. Sloan wanted to create. It fits me. I run it with our investors and managers in mind, but it is designed to fit me.… The problem I've got with doing anything else except what I'm doing," he admits, "is that there is nothing remotely as fun as running Berkshire.… Berkshire is my painting, so it should look the way I want it to when it's done."

Sources:

Anthony Bianco, "The Warren Buffett You Don't Know," Business Week (5 July 1999): 55-66.

Robert G. Hagstrom & Peter Lynch, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor (New York: John Wiley & Sons, 1997).

Roger Lowenstein, Buffett: The Making of An American Capitalist (New York: Doubleday, 1996).

Allan Sloan, "Buffett Takes it All With Him," Newsweek, 134 (27 November 1999): 53.

Theodore Spencer, "The Investors of the Century," Fortune, 140 (20 December 1999): 154-158.

Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.