Buffett Biography

To buy a single share in Warren Buffett's Berkshire Hathaway, listed on the New York Stock Exchange, you will need $A131,500.00. When he took control of the company in 1965, its share price was US$16. Under his management, the share price has returned 629,311% to its stock holders. Owning over 400,000 Berkshire shares, it is no surprise that Buffett is the second richest person in the world - with only Bill Gates, his bridge partner and close friend - standing in his way. Buffett has made his $60bn fortune strictly from investing in the stock market, using the simple fundamental technique of value investing: Buy low, Sell high, or in some cases, don't sell at all.

Beginnings

Nicknamed the "Oracle of Omaha", Warren Edward Buffett was born on August 30 1930, son of Howard, a stockbroker turned politician and Leila, a housewife. From a young age, Warren Buffett openly expressed a desire to be rich and displayed an amazing understanding for numbers and money. Despite being naturally shy, he was known to impress his friends by memorising huge masses of numbers and calculating complex sums in his head.

dfqfyjbi22632.jpg While other six-year-olds were debating whether Superman or Spiderman was better equipped with to take on the might of Godzilla, young Warren was busy making money. He used his pocket money not for baseball cards, but to buy six packs of Coca-Cola to sell separately door-to-door for a 5c profit. He then moved onto delivering and eventually running his own paper route business, earning US$40 a week by employing 50 paper boys to deliver 500 papers. He even had a shot at buying and placing pinball machines in Barber shops down town, but that business was closed after the local mafia found out that someone was making money in their area. Just after entering high school, Buffett spent $1,200 of his business profits to buy 40 acres of farmland which he rented to tenants. The formula was in place from an early age: earn, save, invest and use the profits for further investments.

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Benjamin Graham

Warren Buffett was a smarter-than-average student. He kept mainly to himself and spent most of his school days running his business ventures and reading up on anything that could make him rich, including technical analysis. Buffett graduated from the University of Nebraska and went to study at Columbia under Benjamin Graham and his associate David Dodd. He had been rejected from the Harvard Business School and Columbia was Buffett's second preference after having read Benjamin Graham's book "The Intelligent Investor" at age 19. He was impressed by the professor's perception of the market and his distinction between investing and speculating.

Buffett was mesmerised by Graham's teaching techniques. It wasn't long before he found the foundations for his investment philosophy since buying his first lot of shares in Cities Services at $38 a pop at age 11. He sold them at $40, only to see them sky-rocket to $200 a year later; Buffett learnt his first lesson patience. Before Columbia, Buffett would spend hours drawing charts of daily price movements, looking for that magical formula that would some day make him rich. But Graham introduced Buffett to something a lot simpler than moving averages and Bollinger bands - the distinction between price and value, or in Graham's words "Value is what you get, price is what you pay". Buying $1 for 50c immediately made sense to Buffett. He excelled with his studies and obtained the only A+ that Graham had given in his whole 22 years of teaching. After graduating from Columbia, Buffett offered to work for Graham's investment firm Graham Newman for free but was turned down for reasons other than his capabilities. Although disappointed, Buffett joked years later saying "Ben made his customary calculation of value to price and said no". Buffett went back home to Nebraska and comfortably settled himself into his fathers stockbroking firm, where he frequently kept in contact with Graham and even found himself quoting him. When a relative asked him whether the firm would be renamed to "Buffett and Son" now that he had joined the firm, Warren wittily replied, "no it is going to be renamed Buffett and father".

While at his father's stockbroking firm, Buffett constantly phoned Graham to discuss stocks and share any investment ideas. The master must have been impressed, as it wasn't long before Graham gave Buffett an offer he couldn't refuse - to go and work for his investment company in New York. It was 1954 and the salaries on Wall St. were very un-Macquarie like, but US$12,000 a year was more than enough for the young Buffett to pack his bags and head to the Big Apple; there was hidden value in the pay packet and he knew it. He couldn't think of anything better than going to work for the investor he most admired and who he had built his investment philosophy on. At Graham-Newman, Buffett developed a close relationship with other value investing disciples that studied at Columbia under Graham, such as Walter Schloss, Tom Knapp and Ed Anderson. The crew at the firm were in a class of their own when it came to picking stocks. Graham taught his students to think of stocks as a fractional ownership of a real business and to quantify, quantify, quantify. Numbers never lied according to Graham. If the balance sheet and financial statement provided a margin of safety, Graham would buy without concerning himself too much about the qualitative aspects of the business such as management and business economics.

Graham's selection criteria for stocks was very stringent and based purely on quantitative data. Despite consistently outperforming the market, it did cause the partnership to miss out on some big winners that Buffett had picked and considered to be undervalued at the time. Buffett's investment ideas made a heap of money, not only for Graham-Newman but for his personal account as well. Sometimes the stocks held in the partnership differed to those held in Buffett's personal account, as many of his money making ideas were rejected by Graham because they didn't meet the criteria. It wasn't that Buffett was questioning Graham's techniques, but that Graham's Cigar Butt approach was overlooking brand name companies with a competitive advantage, that were selling at what Buffett described as fair prices, rather than bargain based ones. The pair found themselves disagreeing on numerous topics of investing; for example, the importance placed on the qualitative attributes of a company. Graham liked to diversify to reduce risk, Buffett didn't. He believed that it was more risky to own shares in a lot of companies that one didn't know inside out. Buffett was, and still is a firm believer that great ideas don't come around often, so when they do, investors should buy and buy big.

Graham didn't concern himself with management when making his investment decisions, but Buffett considered management as an integral part of his selection. Graham needed a margin of safety, yet Buffett didn't mind paying a fair price for a world class brand name with a competitive advantage. He liked to think about why the numbers looked the way they did. It was black and white for Graham. The numbers either met the criteria or they didn't, he was never shy to say no. In 1956, two years after Buffett had joined him, Graham decided to retire and spend more time with his hobbies. As a consequence, the partnership was wound up because as one investor put it, Graham Newman can't continue because the only guy they have to run it is this kid named Warren Buffett. And who'd want to ride with him?

Buffett Partnership Ltd

After his Graham Newman days, Warren Buffett returned home to Omaha with no clear career path in mind. By that stage his father was no longer a stockbroker and Warren didn't fancy working for someone, other than Graham. He wanted to build an asset for himself. He decided to start his own investment vehicle called Buffett Partnership Limited where he was to manage his own money, along with those of close family and friends. Although most were impressed by the young fast talking Buffett and trusted him with their savings, some didn't. Many thought money managers should look the part, wear an expensive suit and sit at a big desk in a sky scraper, not work from home in casual clothes like Buffett did at the time. Buffett would generate his own investment ideas and refused to share them with anyone, including his wife Mary.

He read just about every annual report of each company listed on the stock exchange. When considering whether to invest in a company, he studies the company inside out, including its competitors. If I'm interested in a company, I'll buy 100 shares of all its competitors to get their annual reports. You must act like you are actually going into that business, and if you were, you'd want to know what your competitors were doing. If the company's share price was depressed and its business characteristics easy to understand, Buffett wanted to know about it. For Buffett, a night out in the town was sitting in his study reading 100 page plus annual reports, eating hamburgers and knocking down cans of cherry cola, searching for undervalued companies that he could deploy capital into. This was not a 9 to 5 job for Buffett, as long he was awake, the motor was running with an unlimited amount of petrol in the tank.

After opening the partnership in 1956, Buffett made a motza for himself and his partners despite his limited investment experience. His partnership went 13 years without recording a loss, which was a phenomenal achievement considering he was operating in a depressed market for half of those years. If one had put $10,000 in his original investing partnership at its inception in 1956, they would have come out with $267,691 by the time Buffett dissolved it in 1969. When an acquaintance asked him, "How to you do it", Buffett replied, "a couple of thousand annual reports a year". By the late sixties the sharemarket was booming and value investors found themselves sitting on a pile of cash, waiting for value to creep back into the market.

While investing his partnership's funds, Buffett came across Berkshire Hathaway Inc. which at the time was selling at US$8 a share yet had working capital per share of US$16. It was a classic Graham cigar-butt play and soon became the partnership's biggest holding. Even though Buffett had dissolved the partnership, its shareholders could elect to stay with Buffett as a shareholder of Berkshire Hathaway Inc. If an investor had chosen to do so - which many did - their original $10,000 would recently have been worth $50 million.

Berkshire Hathaway

qvsfqntj22627.jpg When Buffett first stumbled over Berkshire Hathaway, it was an old cotton mill textile business with no unique characteristic, selling commodity products which were constantly cutting its prices to compete for market share. Its business economics were poor, but its price was too good to refuse; another classic Graham cigar butt play. Keeping costs to a bare minimum without losing market share was the key to this business and Buffett realised that from the outset. He bought 29% of the company and appointed Ken Chase, a well respected local as the president. He wanted managers whose personal interests were in line with those of shareholders and that could keep inventory and overheads low, with growth not being a priority, "I'd rather have a $10 million business making 15% than $100 million business making 5%" was his favourite quote. Buffett didn't interfere with the day-to-day operation of the business, he would just demand Chase send a monthly report and warn him of any nasty surprises. At the beginning, Berkshire turned over healthy profits thanks to a booming textile industry and a healthy economy. Instead of paying out dividends, Buffett used the profits to invest in an insurance company he had his eye on for some time, National Indemnity. It was an attractive business that was selling at a great price and provided him with what is known as float. Insurance companies would collect premiums upfront and payout claims later if need be, meaning Buffett would have loads of funds to invest in what he thought to be undervalued companies in the meantime.

It wasn't long before the textile industry fell to its knees and Berkshire's profits began to shrink as it attempted to keep up with competitors. The textile business was tougher than what Buffett had anticipated. I consistently required capital to maintain and upgrade machinery for little or no return, and there was no customer loyalty to be had once competitors lowered their prices. Having realised this, he was no longer interested in poor businesses and began to invest Berkshire's profits in insurance and banking. By 1970, profits from the textiles business represented 0.94% of Berkshire's overall earnings. It was an important business lesson for Buffett. He learnt that investing in a company with no competitive advantage will inevitably lead to mediocre profits in the long run, no matter how cheaply you buy the company. A person that helped him realise this was Charlie Munger, now vice-chairman of Berkshire Hathaway. The two met at a dinner party and hit it off immediately. Buffett has said in the past that the two think so much alike, "it's scary". Despite many years of poor returns from the textile business, the initial returns did provide Buffett with the springboard to invest in companies that resulted in Berkshire becoming what it is today.

What is more amazing about the investment vehicle that Buffett has created is the competitive advantage that it has in regards to mergers and acquisitions. Berkshire has become so big that it no longer prefers to buy parcels of shares in listed companies, but whole companies outright. Buffett set out his criteria in Berkshire's annual report and as a result, companies approach him, not the other way round. The beauty about Buffett is that he forgets he buys the business and the owners forget they have sold it to him. Every month they send him the financial results and may call him for advice, but other than that, Buffett doesn't influence how the business operates. Only one manager has walked out on Buffett in his entire career and that was Mrs. B, a Russian migrant, who turned a $500 loan from her uncle into a furniture store (Nebraska Furniture Mart) that now produces annual sales of $150 million. At the age of 96, yes 96, Mrs. B walked out of Nebraska Furniture dissatisfied with the way her sons were running the business, and opened another furniture store across the road in direct competition. Many books have been written about Buffett's investment success, but many have failed to highlight his unique managerial capabilities. Although many investment firms stray from family owned businesses because of the difficulty in obtaining them, Buffett loves them, and together with his accommodating management strategy, Berkshire Hathaway is the company that family businesses go to when they want to sell up and ensure their business remain intact rather be split up. He views his company as a gigantic basket of "wonderful businesses run by wonderful people". I am proud to provide a good home for many businesses. It is like finding a home for a painting. Business owners who are looking to sell can either sell their businesses to Berkshire, (like putting paintings in a Metropolitan Museum of Art) or sell to an LBO and let them tear it up, dress up the accounting, and resell it, (like selling a painting to a porn shop).

fsitcupy22626.jpg With over US$40 billion sitting in the till, one might rightly think that Buffett would be surrounded by a 100,000 square metre house with gold ceilings, yachts, paintings and fancy cars. But that would be very un-Buffett, like as he still lives in the same home he bought back in 1958 for $31,000. Instead of fine dinning, he enjoys indulging in junk food; burgers, french fries, sundaes and cherry flavoured cola, being some of his favourites, and loves to eat at "Gorats", his favourite local steakhouse. Word has it that he begins his day at 6:00am on the treadmill, gets to work just before the market opens, or sometimes even after, and spends around eight hours a day reading (newspapers, magazines, annual reports) and a couple of hours on the telephone - mainly to managers. While many of today's corporate leaders are busy communicating with their managers via the internet and video link across the globe, Buffett refuses to have a computer or even a calculator in his office, preferring to calculate all the sums in bqyszewh22624.jpg his head, include future free cash flow calculations that Excel spread sheets are usually used for. He only started using a computer when others alluded to him that he was able to play bridge, a hobby of his, over the internet with his friends. When he's not doing what he does best, heÃ's generously providing invaluable investment advice to thousands of US and international college students. In the 2006-2007 school year, 35 university classes, including one from IBMEC in Brazil, will come to Omaha for sessions with me. I take almost all in aggregate, more than 2,000 students to lunch at Gorat's. And they love it. Buffett is the lowest paid chief executive of the largest 200 companies in the United States paying himself measly US$100,000 a year; one could argue, not even enough to get a Paris Hilton out of bed in the morning. It is a remarkably low remuneration considering he is running a company worth over US$145.7 billion.

The big question is how long can Warren Buffett keep it up? He is 77 years of age. When asked when he was thinking of calling it quits, he replied with a typical witty Buffett remark, "five years after I die". The quest for his next acquisition continues, with retirement the last thing in mind. Even at this ripe age, his desire to find quality businesses at attractive prices is as strong as ever. It's not the money that drives Buffett, he has enough of it to last him a hundred lives over - its the love of doing what he does; allocating Berkshire's capital into appropriate acquisitions and listed companies, just like he did when he was running the Buffet partnership in his early twenties. Once, when asked why this strong desire to make so much money, he replied: "its not that I want money. It's the fun of making money and watching it grow". If the family friend who asked him the question didn't believe him then, she does now. Ownership of this great company is not restricted to a selected group of people; anyone can own it, that's the beauty of the stock market. By being listed on the New York Stock Exchange, Buffett has allowed and encourages anyone who agrees with his value based philosophy to jump on the share registry, I have. Let's think about it, you can be a part owner one of the best performing companies in the world, have one of the greatest investors of all time with a proven 30 year track record happily working for you for only US$100,000 a year, and you have the opportunity to have your wealth tied up with his.

This is an extraordinary story about an extraordinary investor. From a little boy selling cola door to door, to becoming the biggest shareholder of Coca cola; to delivering the Washington Post in his school days to owning 18% of the company, Buffett has build what is today a $160 billion plus conglomerate and in the process has personally amassed the second biggest fortune ever. He is admired for his honesty and his uncanny ability of making shareholders truly feel like owners. His annual letters to shareholders are read by millions of people and he concludes each one by saying, Moreover, we (Charlie Munger) have long had jobs that we love, in which we are helped every day in countless ways by talented and cheerful associates. No wonder we tap-dance to work.

Buffet's Investment Principles in a Nut Shell:

  1. Only invest in businesses you understand: If you don't understand it, don't invest in it. (One value investing guru in the US said he had failed as a father because he had caught his son checking an internet company's share price.)
  2. No one got extremely rich from diversifying. Great ideas don't come around often, when they do his advice is, buy big. You only one good investment idea to make you rich.
  3. Rule number one, Don't lose money, Rule number two, Don't forgot rule number one.
  4. Avoid commodity based businesses: Only invest in companies with a competitive advantage. (otherwise known as a moat)
  5. Remain unemotional: Never succumb to greed, fear and anxiety.
  6. Always know why you're becoming a part owner of a company and why you no longer want to be: Decisions should be obvious to onlookers. You must be able to explain why you bought something in a paragraph.
  7. Pay a fair price for an exceptional company, but never overpay.

Quotations taken from primary and secondary sources

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