Buffett, Warren

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Buffett, Warren

(1930-)
Berkshire Hathaway Inc.

Overview

Warren Buffett is regarded as one of America's most brilliant investors and was one of its richest men in the late twentieth century. Though he rarely grants interviews, there are scores of books, articles, and websites devoted to his investment strategies. His own insights are revealed in his annual shareholder's letter and meeting of Berkshire–Hathaway, where he is chairman and CEO. The subject of a cult of personality among satisfied investors, Buffett has been variously dubbed "St. Warren," the "Oracle of Omaha," and the "Corn–Fed Capitalist" among other nicknames. Despite his vast fortune, he's remained somewhat of a midwestern folk hero, lunching on hamburgers, wearing rumpled suits, and living in the same house in Omaha, Nebraska, that he bought in 1958 for $31,500. Outside his business concerns, Buffett has professed interest in funding a foundation devoted to halting population growth worldwide and to reduce nuclear proliferation.

Personal Life

Warren Edward Buffett was born in Omaha, Nebraska, on August 30, 1930, the son of Howard Homan and Leila (Stahl) Buffett. His father was a stockbroker who was later elected to the U.S. House of Representatives. Buffett, quoted in a 1995 Time article, said he had always "wanted to be very, very rich." As a boy, he was often taken by his father to his workplace, where he had an opportunity to learn the stock market business at a very early age. Before he was even a teenager, Buffett was doing such routine duties at his father's office as chalking in stock prices on the main blackboard and charting the performance of various stocks. In 1942, when Buffett was 12 years old, he and his parents moved to Fredericksburg, Virginia, where they lived while his father served in Congress.

By the age of 16, Buffett was clearly a prodigy in the area of mathematics and statistics. He enrolled at the University of Pennsylvania, where he focused on mathematics and statistics and then moved to the University of Nebraska to finish his degree. He graduated at age 20 with a bachelor's degree and then entered Columbia University's graduate school of business, where he obtained a master's degree in business.

Buffett, who was once described by New York Times writer David Barboza as "a kind of Will Rogers character with John D. Rockefeller's bank account," lives a relatively unassuming life. He separated from his wife, Susan, in 1977 but maintains an amicable relationship with her and has no plans for a divorce. He is a good friend of Bill Gates, whose personal fortune is the only one in the world exceeding Buffett's own.

Buffett lives in Omaha with his girlfriend and former housekeeper, Astrid Menks. Though Buffett rarely gives interviews, he enjoys hosting an annual Berkshire Hathaway investors' meeting in his hometown. His wife lives in California, but as the second largest shareholder of Berkshire Hathaway, she may maintain control of the business if Buffett predeceases her.

Career Details

Buffett has claimed that his career started when his father exposed him to the stock market business as a child and taught him the basics of investing. He has declared that the great turning point in his life and career came when he met his mentor in business, Benjamin Graham. In 1954, after having worked at his father's brokerage business in Omaha, Buffett joined Graham's Wall Street investment firm, Graham–Newman Corporation. Buffett was already a genius at mathematics and statistical analysis when he met Graham, but Graham had a theory about the investment market that Buffett has used during most of his career. The Graham theory involved what Graham called "value investing." The core idea was that people picking stocks to invest in should buy shares of stock that are valued cheaper than the company's worth on paper, in conventional auditing terms.

It was a simple theory, but it required diligence and ambition to practice. Buffett's mathematical and statistical talent plus ambition enabled him to excel at finding out what companies were undervalued. He had to ignore everything published about a company, including its annual reports, go back to the "raw data" of the company, and make his own patient analysis, starting from scratch. Buffett personally analyzed every stock in which he invested and has consistently avoided markets he did not understand or knew little about.

During this period, Buffett married Susan Thompson, fathered two of his three children, and earned $140,000 in New York before he was 25. In 1956, when Graham shut down his firm on Wall Street, Buffett left New York, returned to Omaha, raised $105,000, and started an investment partnership. By the time Buffett ended the partnership in 1969, it had grown at an annual compounded rate of 29.5 percent and had a value of $105 million.

Buffett next turned his focus to Berkshire Hathaway, a struggling textile mill in Massachusetts, and bought several additional companies. Although he closed the textile manufacturing business in the mid–1980s, Buffett kept the name for his holding company, and he continued to head the company into the early twenty–first century. During the 1980s, Buffet also developed what became known as the "white knight" strategy of investing, by which he saved certain businesses from being bought out by competitors. He would infuse the company with the money it needed to fend off takeovers but allowed its existing management to continue running the business. Buffett demanded in return that his investment pay off well. He arranged to get a preferred stock that always carried a healthy dividend, whether the company did well or not. Though Buffett took the rather old–fashioned approach of investing in companies associated with everyday products, such as Coca–Cola, Gillette, and See's Candy, his conservative strategy made him exceptionally wealthy.

One of Buffett's most dramatic successes was his brief stint as chairman of the investment firm Salomon Inc., one of the world's largest investment services. Through Berkshire he had acquired a 12 percent minority interest in the firm in 1987—one of his white knight investments. In 1991 it was revealed that senior staff had engaged in illegal trading of government securities, and there was an apparent attempt to cover up the scandal once Salomon management learned of it. In addition, it grew evident that the company's finances were perilously dependent on a heavy debt load.

The resulting management shake–up brought in Buffett, already a director at Salomon, as the firm's chairman. Simultaneously, Salomon was on the brink of bankruptcy because the U.S. Treasury Department penalized it with a ban on participating in federal securities auctions. The same day the crippling ban was announced, Buffett pleaded successfully with authorities at the Treasury and the Federal Reserve to reverse the ban. This critical victory saved Salomon from financial collapse; and both Buffett's management decisions and his high esteem in the investment world quickly stabilized Salomon's market position, which was heading into a free fall until he stepped in. Though he withdrew as chairman less than a year later, Buffett reduced Salomon's debt and, more important, helped restore confidence in Salomon. His investment in Salomon paid off in 1997 when the firm was sold to the Travelers Group for $9 billion. Of that amount, Berkshire Hathaway's share was worth about $1.9 billion, more than twice his initial investment a decade earlier.

Since about the mid–1990s, Buffett has concentrated on the reinsurance business. His single biggest purchase came in 1998, when Berkshire spent $22 billion to acquire General Re Corporation, a company providing reinsurance for catastrophes such as earthquakes, floods, and hurricanes. This move, according to industry analysts, basically transformed Berkshire from a closed–end fund to a real holding company. Between 1996 and 1999, Berkshire's assets increased four–fold, from $29.9 billion to $124 billion.

Another change in focus for Buffett was real estate investment trusts (REITs), publicly traded companies that own properties like shopping malls and apartment complexes. In 1999 he disclosed expenditures of $50 million for shares in four REITs. Much of this sum came from Buffett's personal funds. In addition, however, he continues to look for big acquisitions for Berkshire. Business Week has reported that Buffett would like to find a $10 to $15 billion acquisition for the company.

Buffett's emphasis on value investing has proved immensely profitable. By 1999, class A shares of Berkshire Hathaway were priced at $77,000 per share, and class B shares sold for about $2,500 per share. Buffett's personal worth in 1999 was estimated at $36 billion.

Chronology: Warren Buffett

1930: Born.

1950: Received B.A. in math and statistics from University of Pennsylvania.

1952: Obtained M.B.A. at Columbia University.

1952: Apprenticed at his father's brokerage in Omaha.

1954: Joined Benjamin Graham's investment firm on Wall Street.

1956: Established Buffett Partnership Ltd. in Omaha.

1965: Gained control of Berkshire Hathaway Company.

1969: Dissolved successful partnership.

1991: Became interim chairman of Salomon Brothers brokerage firm.

2001: Net worth estimated at $32.3 billion.

In November 2001, Buffett's Berkshire–Hathaway was nearing a deal with creditors of Fruit of the Loom to buy the apparel maker out of bankruptcy for about $840 million. Fruit of the Loom, a 130–year–old Chicago company known for its namesake underwear, filed for Chapter 11 protection in December 1999 hampered by heavy debt and manufacturing and inventory problems. Berkshire has been negotiating to buy the apparel giant which, at the time of bankruptcy filing, claimed one–third of the U.S. market for men and boys underwear.

Social and Economic Impact

Warren Buffett's investments have held significant sway over a number of large U.S. companies and even whole industries. He has built up a major position in the insurance industry, which accounted for about two–thirds of Berkshire's 1997 revenues, by purchasing such companies as GEICO Corporation and General Re. Other fully owned subsidiaries include the H. H. Brown Shoe Company, International Dairy Queen, and See's Candies. Buffett has also purchased long–standing minority stakes in American Express, Coca–Cola, the Washington Post, and Gillette. In a surprise 1998 move, however, Buffett invested heavily in silver—capturing over a third of the world market—because he thought it was undervalued. This was an uncharacteristic choice for Buffett because commodity investments are usually regarded as more speculative and short–lived than his conservative long–term approach deems appropriate.

At the close of the twentieth century, Buffett was well known as a billionaire capitalist who made his own fortune. He is famous for such eccentricities as wearing rumpled suits and drinking five Cherry Cokes a day. He has declared himself an agnostic and has arranged that after his death his money will endow the Buffett Foundation, which he established in the mid 1960s and which is managed by Buffett's former son–in–law, Allen Greenberg. The foundation disbursed about $11 to $12 million annually in the late 1990s for programs oriented to halting population growth worldwide and fighting nuclear proliferation. Analysts believe that, when the foundation receives its full endowment after Buffett's death, it will be the largest philanthropy in the world.

Buffett has said, in the entrepreneurial spirit, that he intends to leave his three children just $5 million apiece out of his more than $36 billion. He explained this decision in a 1988 interview with Esquire: "I think kids should have enough money to be able to do what they want to do, to learn what they want to do, but not enough money to do nothing."

In Berkshire Hathaway's 1989 annual report, Buffett wrote: "We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." In applying the investment strategy he developed with Graham, Buffett has always done his own company analyses. He is known by this hands–on style, and is perhaps the only billionaire who has always figured his own income taxes.

As Buffett put it in a Business Week article in 1999, "Berkshire is my painting, so it should look the way I want it to when it's done . . . Berkshire is the company I wanted to create. It's not the company 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."

According to financial advisor Tom Wolf, Buffett once told Berkshire Hathaway shareholders that if he were teaching a class on security analysis, he might ask his students to determine a value for Internet stocks that had no earnings but sold at high price–to–earnings ratios. And if any of the students did, he would fail them.

While tech issues continued to plummet in 2001 to new lows, Berkshire's stock was setting a series of new highs. That year, Berkshire was comfortably cushioned from short–term pressures by its insurance businesses, which accounted for roughly half of its profits. That year, Buffett reportedly sent a newsletter to shareholders stating, "We have embraced the twenty–first century by entering such cutting–edge industries as brick, carpet, insulation and paint. Try to control your excitement."

Buffett has been one of the most successful capitalists of the twentieth century. Using his analytical skills, he has invested in other people's ideas, inventions, and organizations, and through them has amassed great personal wealth. In 1991 a Wall Street Journal reporter described Buffett as "a standard bearer for long–term investing, the perfect antidote to the get–rich–quick schemers of Wall Street."