Warren Buffett
From The Matrix
Warren Edward Buffett (born August 30, 1930) is a wealthy American investor and businessman. Nicknamed the "Oracle of Omaha", Buffett has amassed an enormous fortune from astute investments, particularly through his company Berkshire Hathaway, in which he holds a greater than 31% stake. With an estimated current net worth of $40 billion, he is ranked by Forbes as the second-richest person in the world, behind Microsoft chairman Bill Gates.
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[edit] Infobox
name = Warren Buffett birth_date = August 30, 1930 birth_place = Omaha, Nebraska occupation = Chief executive officer salary = $100,000 USD networth = $40 billion USD website = [1]
[edit] Biography
Buffett was born in Omaha, Nebraska, to Howard Buffett, a stockbroker and member of Congress, and Leila Buffett. Buffett has two sisters, Doris and Bertie. His grandfather owned a grocery store in Omaha.
He made his first share investment at the age of 11, purchasing Cities Services preferred 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 for the long term.
He attended the University of Nebraska (transferring there from the Wharton School at the University of Pennsylvania) and took a Master's degree in economics at Columbia Business School, studying under Benjamin Graham.
After receiving the only A+ Benjamin Graham ever handed out to his security analysis class, Buffett wanted to work at Graham-Newman but was turned down. He went to work at his father's brokerage as a salesman. A stock he pushed was GEICO. Buffett picked GEICO after noticing Graham was a director and had a large position in it. Never one to buy a stock on a whim, Buffett visited GEICO's head office on a weekend to investigate further. He knocked until someone opened the door, he was led to the future president of GEICO. Buffett introduced himself as Graham's student and was given a crash course on the insurance business and what gave GEICO an enduring advantage over their competitors. Buffett was exposed to the economics of selling direct, the wonderful float GEICO produces, its low combined ratio and the likes.
Buffett married Susan Thompson in 1952. They had three children together, Susie, Howard, and Peter. The couple began living separately in 1977 but remained married until Thompson's death in July 2004.
In 1954, Graham invited Buffett to Graham-Newman. There, he worked closely with Graham and Walter Schloss. Graham, a tough man to work for, was adamant that a stock provides a wide margin of safety after weighting the tradeoff between its price and intrinsic value. Graham's demand that a stock be worth more than its price made sense to Buffett, but it also made him question whether the criteria were too stringent, causing them to miss out on some big winners that had more qualitative values.
Buffett returned to Omaha in 1956 after two years. He had no specific career plans in mind until he met his first major client, who sought Buffett's expertise to manage investments for him. This paved the way for Buffett to establish his investment partnership, financed with his own money together with money from friends and family. He ran the partnership out of his bedroom, adhering closely to Graham's investment approach and compensation structure. The partnership was named Buffett Partnership Limited (BPL). BPL made approximately 30% gains year-over-year between 1956 to 1969, in a market where 7% to 11% was the norm. His partnership employed a three-prong approach:
- Generals: undervalued securities that possess margin of safety and met expected risk/return characteristics
- Arbitrages: company events that are not related to broader market changes such as mergers and acquisitions, liquidation, etc.
- Controls: build sizable holdings, ally with other shareholders or employ proxys to effect changes in companies
In 1962, BPL established a position in Berkshire Hathaway, a large manufacturing company in the declining textile industry that was selling below its working capital. Buffett and Seabury Stanton, the President of Berkshire and a large shareholder at the time, differed in the buy back price by three-eights. Negotiations broke off and BPL purchased every share in sight until it established a 49% position and installed Ken Chace as President. Buffett would dissolve all partnerships to focus on running Berkshire Hathaway. Charlie Munger, Berkshire's Vice Chairman, has 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 the bull market continued to roar, Buffett was strained to come up with investment ideas. In 1969, Buffett decided to liquidate his Partnership, he gave his limited partners a choice between cash or Berkshire shares (the one of two holdings he decided to keep). Buffett redirected the cash not required to maintain the textile business to acquire private businesses and stocks of public companies. At the core of his strategy was to purchase or build insurance or reinsurance companies and use them as super margin accounts to buy equities. Berkshire chooses managers who demonstrated unwavering underwriting discipline and cost consciousness throughout their careers. To align the interest with Berkshire shareholder's, insurance managers are compensated for underwriting profit and not for meeting revenue growth targets.
Buffett has stated that most of his fortune will pass to his Buffett Foundation. On principle, he is opposed to the transfer of great fortunes from one generation to the next. The bulk of the estate of his wife, valued at $2.6 billion, went to that foundation when she died in 2004.[2]
In 2003 Buffett placed second to Ralph Nader in a online web poll, conducted by iswitched.org, of possible candidates for the Green Party nominee for President in 2004.[3]
Despite his immense wealth, Buffet is famous for his unpretentious lifestyle. He continues to live in the same suburban house in Omaha he bought in 1957 for $31,500. His chairman's salary from Berkshire Hathaway of $100,000 per annum is modest by corporate American standards.
Buffett currently lives in Omaha with long-time partner Astrid Menks, introduced to him by Susan Thompson when she separated from Buffett. His daughter Susie also lives in Omaha and does charitable work through her Susan A. Buffett Foundation and as a national board member of Girls Inc.
[edit] Timeline
Education:
Employment:
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1945: first job came writing stock prices on a chalkboard at his father's brokerage. Later, he made $175 monthly delivering Washington Post newspapers. He filed his first income tax return at age 13, deducting his bicycle as a work expense. At fourteen years old, he invested $1,200 of his savings into 40 acres (0.2 km²) of farmland.
1947:
In his senior year of high school, Buffett and a friend purchased a used pinball machine at a cost of $25 and placed it in a nearby barber shop. Within months, he owned three machines in three different locations. The business was sold later in the year for $1,200 to a war veteran.
By this time he had earned over $5,000 delivering newspapers.
His father suggested he should attend college, a suggestion Buffett did not take well. Nevertheless, that year, he enrolled as a freshman at the Wharton School of Finance and Commerce in Pennsylvania.
1949:
In 1949, he transferred to the University of Nebraska.
He is offered a job at J.C. Penney after college, but turned it down. He graduated from college in only three years by taking his last three credits over the summer. His savings had reached $9,800 by then.
1950:
Buffett applied for admission to Harvard Business School and was turned down. He eventually enrolled at Columbia after learning that Ben Graham and David Dodd, two well-known securities analysts, were professors at Columbia.
1951:
Buffett discovered Ben Graham was on the Board of GEICO insurance at the time.
He took a train to Washington, D.C., and knocked on the door of its headquarters until a janitor allowed him in. After asking if anyone was working, he found a man on the sixth floor, who turned out to be the Financial Vice President of the company. They talked for hours while Buffett questioned him on the business and insurance in general.
Buffett graduated and wanted to go to work on Wall Street. Both his father and Ben Graham urge him not to. Warren offered to work for Graham for free but Graham refused.
Buffett returned home and began dating Susan Thompson.
Buffett purchased a Texaco gas station as a side investment. It didn't work out as well as he hoped. Meanwhile, he was working as a stockbroker.
Buffett took a Dale Carnegie public speaking course. Using what he learned, he felt confident enough to teach a night class at the University of Nebraska, "Investment Principles". The average age of the students he taught were more than twice his own (he was only 21 at the time).
1952:
Warren Buffett and Susan Thompson got married in April. They rented an apartment for $65 a month, and had their first child, named Susie.
1954:
Benjamin Graham called Buffett and offered him a job at his partnership. His starting salary was $12,000 a year.
Warren and Susan Buffett have their second child, Howard Graham Buffett.
1956:
Graham retired and folded up his partnership. Since leaving college six years earlier, Buffett's personal savings grew from $9,800 to over $140,000.
The Buffett family returned home to Omaha. On May 1st, Warren Buffett created Buffett Associates, Ltd. Seven family members and friends put in a total of $105,000. Buffett himself invested only $100.
Over the course of the year, Buffett created two additional partnerships, eventually bringing the number under his management to three.
1957:
Buffett added two more partnerships to his collection. He was then managing five investment partnerships from his home.
With his wife about to have her third child, Peter Buffett, Warren Buffett purchased a five-bedroom, stucco house on Farnham Street for $31,500. He has lived there ever since.
1958:
The third year of the partnership completed, Buffett doubled the partners' money.
1959:
Buffett was introduced to Charlie Munger, the man who would eventually become the Vice Chairman of Berkshire Hathaway, and an integral part of the company's success. The two got along immediately.
1960:
Buffett asked one of his partners, a doctor, to find 10 other doctors who will be willing to invest $10,000 each into his partnership. Eventually, 11 doctors agreed to invest.
1961:
With the partnerships worth millions, Buffett made his first $1 million investment in a windmill-manufacturing company.
1962:
Buffett returned to New York with his wife Susan for a few weeks to raise capital from his old acquaintances. During the trip, he picked up a few partners and several hundred thousand dollars. The Buffett Partnership, which had begun with $105,000, by this time was worth $7.2 million. Warren and Susan Buffett personally own over $1 million of the assets.
Buffett merged all of the partnerships into one entity known simply as Buffett Partnerships, Ltd. The operations were moved to Kiewit Plaza, a functional but less-than-grand office, (where they remain to this day). The minimum investment in the partnership was raised from $25,000 to $100,000.
Buffett consulted Munger on Dempster, the windmill company. Munger recommended Harry Bottle, a move that turned out to be very profitable. Bottle cut costs, laid off workers, and caused the company to generate cash.
Buffett discovered a textile manufacturing firm, Berkshire Hathaway, that was selling for under $8 per share. He began to buy the stock.
1963:
Buffett sold Dempster for three times the amount he invested. The almost worthless company had built a portfolio of stocks worth more than $2 million alone during the time of Buffett's investment. The Buffett partnerships became the largest shareholder of Berkshire Hathaway.
1964:
Due to a fraud scandal, American Express shares fell to $35. While the world was selling the stock, Buffett began to buy shares en masse.
1965:
Buffett's father, Howard Buffett, died. Buffett began to purchase shares in Walt Disney Co. after meeting with Walt Disney. He invested $4 million [which was equal to around 5% of the company]. The American Express shares were selling for more than double the price Buffett paid for the them. Buffett arranges a business coup - taking control of Berkshire Hathaway at the board meeting and naming a new President, Ken Chace, to run the company.
1966:
Buffett's personal investment in the partnership reached $6,849,936.
1967:
Berkshire paid out its first and only dividend of 10 cents. In October, Buffett wrote to his partners and told them he found no bargains in the roaring stock market of the '60s. His partnership was then worth $65 million. His personal net worth stood at more than $10 million. He briefly considered leaving investing and pursuing other interests. American Express hit over $180 per share, making the partnership $20 million in profit on a $13 million investment. Berkshire Hathaway acquired National Indemnity Insurance at Buffett's direction. It paid $8.6 million.
1968:
The Buffett Partnership earned more than $40 million, bringing the total value to $104 million.
1969:
Following his most successful year, Buffett closed the partnership and liquidated its assets to his partners. Among the assets paid out were shares of Berkshire Hathaway. Buffett's personal stake stood at $25 million. He was only 39 years old.
1970:
The Buffett Partnership was completely dissolved and divested of its assets. Warren Buffett owned 29% of the stock outstanding in Berkshire Hathaway. He named himself chairman and began writing the annual letter to shareholders. Berkshire Hathaway made $45,000 from textile operations, and $4.7 million in insurance, banking and investments. Buffett's side investments made more than the actual company itself.
1971:
At his wife's request, Buffett purchased a $150,000 summer home at Laguna Beach.
1973:
Stock prices began to drop. At Buffett's direction, Berkshire borrowed money by issuing notes at 8%.
Berkshire began to acquire stock in the Washington Post Company. Buffett became close friends with Katharine Graham, who controlled the company and its flagship newspaper, and became a member of its board of directors. Graham, in her autobiography, credited him with giving her the equivalent of a business degree through his personal tutoring and frequent advice, and said that she often called him several times a day in the early years of their friendship.
1974:
Due to falling stock prices, the value of Berkshire's stock portfolio began to fall. Warren's personal wealth was cut by more than 50%. The U.S. Securities and Exchange Commission opened a formal investigation into Warren Buffett and one of Berkshire's mergers. Nothing ever came of it.
[edit] Management Style
Buffett gained control of numerous businesses through Berkshire Hatahway, his investment vehicle. When he acquires a controlling interest in a business, he makes clear to the owner that 1) he will not interfere with the running of the company; 2) he will make the hiring and compensation decision of the top man; and 3) 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 do not return more than their cost to Berkshire headquarter rather than investing them at low returns. Template:Ref 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 since these successful business owners wanted room to operate independently.
Berkshire's strategy includes:
- purchasing 80% to 100% interest of businesses with consistent earning powers;
- pieces of great businesses at fair or bargain prices in the stock market;
- arbitrage positions in mergers or liquidations;
- purchasing silver and other commodities;
- purchasing bonds at heavily discounted prices;
- taking long and short positions in the US dollar and other currencies;
- buying convertible preferred shares in companies under distress;
- redeploying cash from the insurance business to other areas; and
- decentralization of subsidiaries
This process repeated over several decades is the economic engine that grew Berkshire from a textile manufacturer to twelfth place on the Fortune 500 list in 2005.
Besides his skills in managing Berkshire's cash flow statement and income statement, Buffett is skilled in managing the company's balance sheet. Since taking over Berkshire Hathaway, Buffett has weighted every decision against their impact on the balance sheet. Knowing that he is not a computer prodigy or an innovation genius, Buffett set out to obtain a competitive advantage by building a financial fortress. He has succeeded in building Berkshire into one of the seven companies today that are still rated by Moody's as AAA, the highest credit rating achievable and thus with the lowest cost of capital. Buffett takes comfort that in the foreseeable future his company will not be one of those shaken by economic or natural catastrophes. He repeated over the years that his insurance operation is the only one he knew that can clear the check the next morning.
His purchases of entire companies with Berkshire's cash included National Indemnity from Jack Ringwalt, National Fire and Marine Insurance, Illinois National Bank and Trust from Eugene Abegg, Blue Chip Stamps, See's Candies, Buffalo News, Wesco Financials, Mutual Savings and Loans, Associated Retail Stores, etc.
When choosing common stocks, Berkshire employs a focused strategy with a medium to long term horizon. Stock picks from 1970s through 1980s included GEICO, Washington Post Company, Capital Cities/ABC, Ogilvy & Mather International, Interpublic Group of Companies, Knight-Ridder Newspaper, Kaiser Industries, SAFECO Corporation, Amerada Hess, Affiliated Publications, Media Generals, Times Inc., General Foods, R.J. Reynolds Industries, Beatrice, F.W. Woolworth Company, Exxon Corporation, Handy & Harman, Freddie Mac, Coca-Cola Companies, etc. Arbitrage positions included Arcata Corporation which was sold to Kohlberg, Kravis, Roberts & Co. (KKR).
Besides his regular meetings with his mentor Ben Graham, Berkshire Vice-Chairman Charlie Munger, Columbia alumni and investing friends such as Bill Ruane of Sequoia Fund, Walter Schloss of Schloss Associates and Tom Knapp, Buffett would also meet with his circle of business friends such as the savvy investor Laurence Tisch of Loews Corporation, Washington Post Chair Katharine Graham and Capital Cities's Tom Murphy.
Berkshire Hathaway holds yearly meetings that are heavily attended by these investors, many of them families. It has been called the "Capitalist Woodstock".
Buffett's investing philosophy has been discussed in several books, including ones by Mary Buffett, his former daughter-in-law.
[edit] Buffett's views
[edit] Taxes
Estate tax
Buffett told The New York Times that the estate tax played a "critical role" in promoting economic growth by helping create a society in which success is based on merit rather than inheritance. Repealing the estate tax, he said, would be equivalent to "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."
Dividend tax
When the U.S. Senate discussed a proposal that dividends to be 50 % tax free in 2003, then 100 % tax free in 2004 through 2006, Buffett wrote an opinion piece in the Washington Post saying it would "further tilt the tax scales toward the rich".
Instead of the Senate's tax-cut plan, Buffett proposed it provide tax reductions to those who need and will spend the money in the form of a Social Security tax "holiday" or a tax rebate to lower-income people.
Buffett posed a hypothetical situation in which Berkshire Hathaway, which does not pay a dividend, paid $1 billion in dividends next year.
His 31 % ownership would give him an additional $310 million in income (tax free). This would reduce his tax rate from about 30 % to 3 %, while his office secretary would still have a tax rate of about 30 %.
"The 3 % overall federal tax rate I would pay -- if a Berkshire dividend were to be tax free -- seems a bit light," Buffett wrote.
"Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets," Buffett added.
Property tax
Warren Buffett used his own properties to illustrate an example.
His home in Omaha, Nebraska, is valued at about $500,000, and its recent annual property tax was $14,401.
His home in Laguna Beach, California, is valued at $4.0 million, and its recent annual property tax was $2,264.
Buffett said in a Wall Street Journal interview that taxes on his Nebraska home grew by $1,920 this year, while those on the California home rose by only $23, thanks to limitations on increases in property tax established by California Proposition 13 (1978).
"In effect, it makes no sense," Buffett told the Wall Street Journal, in reference to large differences in tax assessments by region.
Income tax
Buffett opposed President George W. Bush's income tax cuts as favoring the wealthy. "Class warfare is being waged in America," he wrote. "My class is clearly winning." In the 2004 presidential elections he supported Democratic candidate John Kerry and served as Kerry's economic adviser.
[edit] Other views
Buffett believes that much of the problem with the economies of the United States and other industrialized countries in recent years results from the proliferation of persons and organizations who produce nothing directly but are compensated based on the volume of business transactions which they facilitate.
Buffett feels that most stock trades are recommended and made primarily to benefit the brokers rather than the investors and has stated that he feels that the world would benefit if each person had a lifetime maximum number of stock trades (e.g. ten or twenty trades).
He states that he sees his fellow Berkshire Hathaway investors as partners and hopes that they take their investment likewise, as a long-term or lifelong investment; he discourages those with a short-term view from investing in Berkshire Hathaway.
He prefers Berkshire Hathaway shareholders actually to take physical possession of their share certificates rather than allowing their shares to be held by a brokerage firm in "street name".
Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
[edit] Investments
Among the companies he invested in during his tenure as managing partner of the Buffett Partnership was Berkshire Hathaway, a New Bedford textile company. Buffett eventually liquidated the textile business but kept the name and turned the shell of the company into an investment business. He used the cash flow from the textile business to make acquisitions in the insurance field, which generated a steady cash flow for even further investments.
Buffett customarily focuses his investments in companies with good long-term growth potential. Identifying such companies is the difficult part. Historically, more value has been generated by the companies he owns, although large investments in publicly-traded companies such as American Express have attracted more attention.
Buffett famously avoids high tech companies, not because they are inherently less desirable, but because he prefers businesses he understands.
Buffett has always been attracted to insurance companies because they generate substantial float deriving from their insurance premiums. These companies provide a source of funds that he then allocates to Berkshire Hathaway's subsidiaries and uses to acquire new companies. Berkshire owns GEICO, a provider of various types of property (primarily car) insurance, and General Re, notable for being slightly more adventurous in entering markets such as reinsurance and the nascent life settlement market.
Buffett is still living in the same house in suburban Omaha that he paid $31,500 for in the 1950s. He is famous for being frugal in both investing and in his personal life.
In addition to being a major investor in The Coca-Cola Company, and a Director on that company's Board, he is also a fan of their products. In his 1991 letter to shareholders, Buffett said that he drinks five cans of Cherry Coke a day.
Warren Buffett has not yet named any clear successors to run Berkshire Hathaway. He has disclosed that a letter to Berkshire's board of directors exists—only to be opened after his death. It likely suggests his role as CEO be split in two—with one executive handling the operations of the company and the other executive in charge of its various investments. During the annual shareholders meetings in 2002, 2003, and 2004, he dropped hints as to which two persons will take over both roles.
[edit] External links
- Berkshire Hathaway Official Website - Source for annual reports, which usually includes commentary from Warren Buffett.
- Warren Buffett, Unplugged - by Susan Pulliam and Karen Richardson (WSJ, 11/12/2005)
[edit] Biographical information
The page was seeded with material from Wikipedia
