Buffett, Warren

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BUFFETT, WARREN

Regarded by many as America's most brilliant investor and recognized as one of the richest men in the United States during the late twentieth century, Warren Buffett (1930–) has become a legend during his lifetime. Buffett's folksy pronouncements along with his long-time home address in Omaha, Nebraska, mask a shrewd and aggressive approach to business. When he was a boy Buffett had the life goal of being "very, very rich" as he once put it. He certainly achieved that goal by becoming a multi-billionaire.

Buffett was born in Omaha on August 30, 1930. While he was still a boy Buffet often accompanied his father to work. His father's stockbrokerage firm, became a familiar haunt for the boy. Before he reached his teenage years Buffett was already doing routine duties around the office. He chalked stock prices on the office blackboard and charted performance records of various equities. In 1942 the family moved to Fredericksburg, Virginia. They lived there while his father served Nebraska as a U.S. Congressman. According to Robert Lenzner writing in Forbes magazine (18 October 1993), Buffett credits his father as an important role model: "I have never known a better human being than my Dad."

When he was only sixteen, Buffett enrolled at the University of Pennsylvania where he studied mathematics and statistics. At age twenty he received a Bachelor's from the University of Nebraska. He then entered Columbia University's Graduate School of Business where he obtained an MBA.

After working briefly for his father in Omaha, Buffett joined the New York investment firm of his mentor Benjamin Graham. Buffett later claimed that the great turning point in his life and career came when he met Graham. Graham identified undervalued companies by avoiding the use of annual reports. He concentrated instead on exacting analyses of balance sheets and profit and loss statements. Buffett's facility in math and statistics enabled him to become adept at this analysis. However, he later realized that although statistical bargains often turned out to be winners, it made sense to also look for companies that were undervalued for other reasons.

When Graham closed his Wall Street firm in 1956, Buffett left New York and returned to Omaha. There he started an investment partnership that he managed until 1969. To drum up business he gave seminars for doctors and other professionals seeking advice on how to invest their money. Many of them decided to put their savings under Buffett's management after they heard him speak. Other investors in his partnership were either former business school classmates or Wall Street financiers. Several of Buffett's early backers now hold stock portfolios worth tens of millions.

In a joint interview with Microsoft Corporation chairman Bill Gates in Fortune (20 July 1998) Buffett explained why he eventually terminated the investment partnership: "[I] closed it up because I couldn't find anything. I hadn't lost the ability to value companies; there just weren't any left that were cheap enough, and I wasn't in the business of shorting stocks." Within a decade, however, the situation had changed. As Buffett said: ". . . in the mid-1970s, every security you looked at was really dramatically undervalued."

Buffett preached that the key to making money in the stock market was to pick good stocks at good prices and to stay with a company as long as it continued to be well-managed. He left frenetic trading to others and hung on to stocks even if they became overvalued. Buffett bought stock in companies that made products he understood and felt comfortable with. His major holdings, for example, included Coca Cola Company and Gillette Company. He also had three major media holdings: The Washington Post, Capital Cities/ABC, and the Buffalo News. He never invested heavily in technology stocks or in foreign companies because these were not market categories with which he was familiar. According to Lenzner in Forbes Buffett's basic rule was "Don't put too many eggs in your basket and pick them carefully."

In the mid-1960s Buffett bought controlling interest in Berkshire Hathaway, a failing textile business in New Bedford, Mass. He briefly attempted to maintain Berkshire Hathaway as a textile company and simultaneously continue his investment activities. In the end he liquidated the textile business but retained its name for his investment company. He used his base in the company to buy stocks in the wildly under priced market of the 1970s and 1980s. Between 1977 and 1991, according to Michael Lewis in The New Republic (17 February 1992), Berkshire Hathaway grew from a pool of $180 million in risk capital to one of more than $11 billion.

During the 1980s Buffett also developed a very lucrative "white knight" strategy. Using this strategy he saved certain businesses from being bought out by competition. He often stepped in to save a business by infusing it with the cash it needed to fend off takeovers. In exchange, he expected a return on his investment in the form of preferred stock that guaranteed a healthy dividend whether or not the company performed well.

Buffett summed up his views on investment in Fortune magazine: "What you want to do was attract shareholders who were very much like you, with the same time horizons and expectations. We don't talk about quarterly hearings, we don't have an investor relations department, and we don't have conference calls with Wall Street analysts, because we don't want people who were focusing on what's going to happen next quarter or even next year. We want people to join us because they want to be with us until they die."

See also: Wall Street