About Me
WARREN BUFFETTThe greatest investor ever. Buffett has amassed an enormous fortune from astute investments, particularly through the company Berkshire Hathaway, of which he is the largest shareholder and CEO. With an estimated current net worth of around US$46 billion, he is ranked by Forbes as the second-richest person in the world, behind only Microsoft chairman Bill Gates. In June 2006, he made a commitment to give away his fortune to charity, with 85% of it going to the Bill and Melinda Gates Foundation Buffett's donation was the largest act of charitable giving in United States history. Despite his immense wealth, Buffett is famous for his unpretentious and frugal lifestyle. His annual salary of $100,000 is tiny by the standards of senior executive remuneration in other S&P 500 companies, which averaged about $9 million in 2003 Buffett was born in Omaha, Nebraska to Howard, a stockbroker and United States Representative, and Leila Buffett. He began working at his father's brokerage at the age of 11, and that same year made his first stock purchase, buying Cities Services shares for $38 each. He sold them when the price reached $40, only to see them rocket to $200 a few years later. This taught him the importance of investing in good companies for the long term. At the age of 14 he spent $1,200 he had saved up from two paper routes [citation needed] to buy 40 acres of farmland which he then rented to tenant farmers. Buffett initially attended the Wharton School at the University of Pennsylvania, then transferred to the University of Nebraska. There he began his interest in investing after reading Benjamin Graham's The Intelligent Investor. He obtained a Master's degree in economics in 1951 at Columbia Business School, studying under Benjamin Graham, alongside other future value investors including Walter Schloss and Irving Kahn. Another influence on Buffett's investment philosophy was the well known investor and writer Philip Fisher. After receiving the only A+ Benjamin Graham ever handed out to a student in his security analysis class, Buffett wanted to work at Graham-Newman but was initially turned down. He went to work at his father's brokerage as a salesman until Graham offered him a position in 1954. Buffett returned to Omaha two years later, when Graham retired. Buffett established Buffett Associates, Ltd., his first investment partnership, in 1956. It was financed by $100 from Buffett, the general partner, and $105,000 from seven limited partners consisting of Buffett's family and friends. Buffett created several additional partnerships which were later consolidated as Buffett Partnership Limited. He ran the partnerships out of his bedroom, adhering closely to Graham's investment approach and compensation structure. These investments made in excess of 30% compounded annually between 1956 to 1969, in a market where 7% to 11% was the norm. Buffett employed a three-pronged approach: 1. Generals: undervalued securities that possess margin of safety and meet expected return-to-risk characteristics ([8]) 2. Arbitrages: company events that are not related to broader market changes, such as mergers and acquisitions, liquidation, etc. 3. Controls: build sizeable holdings, ally with other shareholders or employ proxies to effect changes in companies In 1962 Buffett Partnerships began purchasing shares of Berkshire Hathaway, a large manufacturing company in the declining textile industry that was selling below its working capital. Buffett would eventually dissolve all his partnerships to focus on running Berkshire Hathaway. At the time, Charlie Munger, Berkshire's current Vice Chairman, remarked that purchasing the company was a mistake, due to the failure of the textile industry. Berkshire, however, became one of the largest holding companies in the world, as Buffett redirected the company's excess cash to acquire private businesses and stocks of public companies. At the core of his strategy were insurance companies, due to the large cash reserves ("float") they must keep on hand to pay out future claims. Essentially, the insurer does not own the float, but may invest it and keep any proceeds. Under the influence of his friend and business partner Charlie Munger, Buffett's investment approach moved away from a strict adherence to Graham's principles, and he began to focus on high-quality businesses with enduring competitive advantages. He described such advantages as a "moat" that kept rivals at a safe distance, as opposed to commodity businesses, which sell undifferentiated products and face direct competition. A classic example of a wide-moat company is Coca-Cola, because consumers are willing to pay more for a Coke than for a generic beverage with a similar taste. On the other hand, salt is considered a commodity product because consumers generally have no preferences for one brand of salt over another. Investment in wide-moat businesses has become a hallmark of Berkshire Hathaway, particularly when buying whole companies rather than public stocks. As a result, it now owns a large number of businesses which are dominant players in their respective industries, specialize in various niche markets, or possess other unique characteristics to separate them from their competitors. Buffett views himself as a capital allocator above anything else. His primary responsibility is to allocate capital to businesses with good economics and keep their existing management to lead the company. When Buffett acquires a controlling interest in a business, he makes clear to the owner the following: * He will not interfere with the running of the company. * He will make the hiring and compensation a decision of the top executive. * 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.[citation needed] This cash is then free to be invested in opportunities that offer higher returns. Buffett's hands-off approach has held strong appeal and created room for his managers to perform as owners and ultimate decision makers of their businesses. This acquisition strategy enabled Buffett to buy companies at fair prices because the sellers wanted room to operate independently after selling. 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 weighed every decision against its impact on the balance sheet. He has succeeded in building Berkshire into one of the eight companies (as of 2005) 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. Buffett's philosophy on business investing is a modification of the value investing approach of his mentor Benjamin Graham. Graham bought companies because they were cheap compared to their intrinsic value. He was of the belief that as long as the market undervalued them relative to their intrinsic value he was making a solid investment. He reasoned that the market will eventually realize it has undervalued the company and will correct its course regardless of what type of business the company was in. In addition he believes that the business has to have solid economics behind it. 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 even in years when earnings are lower than average? * Is ROE consistent over its history, more than 12%, and high compared to the industry average? 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? Does management have a good track record of profiting from these investments? * Is the company free to adjust prices for inflation? Buffett's next concern would be when to buy. He does not hurry to invest in businesses with undiscernible value. He will wait for market corrections or downturns to buy solid businesses at reasonable prices, since stock-market downturns present buying opportunities. He is countercultural in being conservative when speculation is rampant in the market and being aggressive when others are fearing for their capital. This contrarian strategy is what led Buffett's company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on potential opportunities during the same period. 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 that possess sustainable competitive advantages over their competitors. Warren Buffett's letters to shareholders are a very valuable source in understanding his investment style and outlook. Buffett married Susan Thompson in 1952. They had three children, Susie, Howard, and Peter. The couple began living separately in 1977, though they remained married until her death in July 2004. His daughter Susie lives in Omaha and does charitable work through the Susan A. Buffett Foundation and as a national board member of Girls, Inc. On his 76th birthday Buffett married his longtime companion, Astrid Menks, who had lived with him since his wife's departure. Interestingly, it was Susan Buffett who arranged for the two to meet before she left Omaha to pursue her singing career. All three were close, and holiday cards to friends were signed "Warren, Susie and Astrid" (as per Roger Lowenstein's book, Buffett: The Making of an American Capitalist). Susan Buffett briefly discussed this relationship in an interview on the Charlie Rose Show shortly before her death, in a rare glimpse into Buffett's personal life ([16]). Buffett is an avid player of the card game bridge. He has said that he spends 12 hours a week playing bridge ([17]). He often plays with Bill Gates. In 2006, he sponsored a bridge match for the ([18]). In this event, modeled on the Ryder Cup in golf (and held immediately before it and in the same city), a team of twelve bridge players from the United States took on twelve Europeans. Buffett likes to eat at Gorat's Steak House in Omaha, where he always purchases a T-bone steak and Cherry Coke. He used to drive a 2001 Lincoln Town Car ([19]) which he auctioned on eBay to raise money for Girls Inc. ([20], [21]). He currently drives a Cadillac DTS ([22]). Warren 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. /
