Warren Edward Buffett (More about business innovation)

Warren Edward Buffett (born August 30, 1930 in Omaha, Nebraska, United States) is an American investor, businessman, and philanthropist. He is one of the world's most successful investors and the largest shareholder and CEO of Berkshire Hathaway.^[4] He is constantly ranked by Forbes as the second richest person in the world after Bill Gateswith an estimated net worth of approximately $37.0 billion.^[5]

Buffet is often called the "Oracle of Omaha"^[6] or the "Sage of Omaha"^[7]and is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth.^[8] His 2006 annual salary was about $100,000, which is small compared to senior executive remuneration in comparable companies.^[9] In 2007, he earned a total compensation of $175,000, which included a base salary of just $100,000.^[10] In 2008, he again earned a total compensation of just $175,000, which included a base salary of $100,000.^[11] He lives in the same house in the central Dundee neighborhood of Omaha that he bought in 1958 for $31,500, today valued at around $700,000 (although he also does have a $4 million home in Laguna Beach, California).^[12] When Buffett spent $9.7 million^[13] of Berkshire's funds on a private jet in 1989, he jokingly named it "The Indefensible" because of his past criticisms of such purchases by other CEOs.^[14]

Buffet is also a notable philanthropist, having pledged to give away 85% of his fortune to the Gates Foundation. He also serves as a member of the board of trustees at Grinnell College.^[15]

In 1999, Buffett was named the top money manager of the twentieth century in a survey by the Carson Group, ahead of Peter Lynch and John Templeton,^[16] and in 2007, he was listed among Time's 100 Most Influential People in the world.^[17]

Biography

Early life

Warren Buffett was born in Omaha, Nebraska on August 30, 1930, the son of Howard Buffett. He worked at his grandfather's grocery store. In 1943, Buffett filed his first income tax return, deducting his bicycle and watch as a work expense for $35 for his work as newspaper delivery boy.^[18] After his father was elected to Congress, Buffett was educated at Woodrow Wilson High School, Washington, D.C., where he graduated in 1947.^[19] In 1945, in his freshman year of high school, Buffett and a friend spent $25.00 to purchase a used pinball machine, which they placed in a barber shop. Within months, they owned three machines in different locations.

Buffett first enrolled at The Wharton School, University of Pennsylvania, (1947–1949) where he joined the Alpha Sigma Phi Fraternity. His father and uncles were Alpha Sigma Phi brothers from the chapter in Nebraska. In 1950 he transferred to the University of Nebraska where he received a B.S. in Economics.^[20]

Buffett then enrolled at Columbia Business School after learning that Benjamin Graham, (the author of The Intelligent Investor), and David Dodd, two well-known securities analysts, taught there. He then received a M.S. in Economics, Columbia University, in 1951.

In Buffett’s own words:

I’m 15 percent Fisher and 85 percent Benjamin Graham.^[21]

The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing.^[22]

Career

Buffett was employed from 1951–1954 at Buffett-Falk & Co., Omaha as an Investment Salesman, from 1954–1956 at Graham-Newman Corp.,New York as a Securities Analyst, from 1956–1969 at Buffett Partnership, Ltd., Omaha as a General Partner and from 1970–Present atBerkshire Hathaway Inc, Omaha as its Chairman, CEO.

In 1951, Buffett discovered Graham was on the board of GEICO insurance. Taking a train to Washington, D.C. on a Saturday, he knocked on the door of GEICO's headquarters until a janitor allowed him in. There he met Lorimer Davidson, Geico's Vice President, and the two discussed the insurance business for hours. Davidson would eventually become Buffett's life-long friend and a lasting influence ^[23] and later recall that he found Buffett to be an “extraordinary man” after only fifteen minutes. Buffett graduated from Columbia and wanted to work on Wall Streethowever both his father and Ben Graham urged him not to. He offered to work for Graham for free, but Graham refused.^[24]

Buffett returned to Omaha and worked as a stockbroker while taking a Dale Carnegie public speaking course. Using what he learned, he felt confident enough to teach an "Investment Principles" night class at the University of Nebraska. The average age of his students was more than twice his own. During this time he also purchased a Sinclair Texaco gas station as a side investment however it did not turn out to be a successful business venture.

In 1952 Buffett married Susan Thompson and the next year they had their first child, Susan Alice Buffett. In 1954, Buffett accepted a job atBenjamin Graham's partnership. His starting salary was $12,000 a year. Here, he worked closely with Walter Schloss. Graham was a tough man to work for. He was adamant that stocks provide a wide margin of safety after weighting the trade-off between their price and their intrinsic value. The argument made sense to Buffett but he questioned whether the criteria were too stringent and caused the company to miss out on big winners that had more qualitative values.^[24] This same year the Buffetts had their second child, Howard Graham Buffett. In 1956, Benjamin Graham retired and closed his partnership. At this time Buffett's personal savings were over $140,000 and he started Buffett Partnership Ltd., an investment partnership in Omaha.

In 1957, Buffett had three partnerships operating the entire year. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500. In 1958 the Buffett's third child, Peter Andrew Buffett, was born. Buffett operated five partnerships the entire year. In 1959, the company grew to six partnerships operating the entire year and Buffett was introduced to Charlie Munger. By 1960, Buffett had seven partnerships operating: Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff and Underwood. He asked one of his partners, a doctor, to find ten other doctors willing to invest $10,000 each in his partnership. Eventually eleven agreed. In 1961, Buffett revealed that Sanborn Map Company accounted for 35% of the partnership's assets. He explained that in 1958 Sanborn stock sold at only $45 per share when the value of the Sanborn investment portfolio was $65 per share. This meant that buyers valued Sanborn stock at "minus $20" per share and were unwilling to pay more than 70 cents on the dollar for an investment portfolio with a map business thrown in for nothing. This earned him a spot on the board of Sanborn.

Becoming a millionaire

In 1962, Buffett became a millionaire, because of Buffett's partnerships, which in January 1962, had in excess of $7,178,500, of which over $1,025,000 belonged to Buffett. Buffett merged all partnerships into one partnership. Buffett discovered a textile manufacturing firm, Berkshire Hathaway. Buffett's partnerships began purchasing shares at $7.60 per share. In 1965, when Buffett's partnerships aggressively began purchasing Berkshire, they paid $14.86 per share while the company had working capital (current assets minus current liabilities) of $19 per share. This did not include the value of fixed assets (factory and equipment). Buffett took control of Berkshire Hathaway at the board meeting and named a new president, Ken Chace, to run the company. In 1966, Buffett closed the partnership to new money. Buffett wrote in his letter:

unless it appears that circumstances have changed (under some conditions added capital would improve results) or unless new partners can bring some asset to the partnership other than simply capital, I intend to admit no additional partners to BPL.

In a second letter, Buffett announced his first investment in a private business — Hochschild, Kohn and Co, a privately owned Baltimore department store. In 1967, Berkshire paid out its first and only dividend of 10 cents. In 1969, following his most successful year, Buffett liquidated the partnership and transferred their assets to his partners. Among the assets paid out were shares of Berkshire Hathaway. In 1970, as chairman of Berkshire Hathaway, Buffett began writing his now-famous annual letters to shareholders.

However, he lived solely on his salary of $50,000 per year, and his outside investment income. In 1979, Berkshire began the year trading at $775 per share, and ended at $1,310. Buffett's net worth reached $620 million, placing him on the Forbes 400 for the first time.

In 2006, Buffett announced in June that he gradually would give away 85% of his Berkshire holdings to five foundations in annual gifts of stock, starting in July 2006. The largest contribution would go to the Bill and Melinda Gates Foundation.^[25]

In 2007, in a letter to shareholders, Buffett announced that he was looking for a younger successor, or perhaps successors, to run his investment business.^[26] Buffett had previously selected Lou Simpson, who runs investments at Geico, to fill that role. However, Simpson is only six years younger than Buffett.

In 2008, Buffett became the richest man in the world dethroning Bill Gates, worth $62 billion according to Forbes,^[27] and $58 billion according to Yahoo.^[28] Bill Gates had been number 1 on the Forbes list for 13 consecutive years.^[29]

Business

Acquisitions

See also: List of assets owned by Berkshire Hathaway

In 1973, 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.

In 1974, the SEC opened a formal investigation into Warren Buffett and Berkshire's acquisition of WESCO, due to possible conflict of interest. No charges were brought.

In 1977, Berkshire indirectly purchased the Buffalo Evening News for $32.5 million. Antitrust charges started, instigated by its rival, the Buffalo Courier-Express. Both papers lost money, until the Courier-Express folded in 1982.

In 1979, Berkshire began to acquire stock in ABC. With the stock trading at $290 per share, Buffett's net worth neared $140 million. Capital Cities' announced $3.5 billion purchase of ABC on March 18, 1985, surprising the media industry, as ABC was some four times bigger than Capital Cities was at the time. Berkshire Hathaway chairman Warren Buffett helped financed the deal in return for a 25 percent stake in the combined company.^[30] The newly merged company, known as Capital Cities/ABC (or CapCities/ABC), was forced to sell off some stations due to FCC ownership rules. Also, the two companies owned several radio stations in the same markets. ^[31]

In 1987, Berkshire Hathaway purchased 12% stake in Salomon Inc., making it the largest shareholder and Buffett the director. In 1990, a scandal involving John Gutfreund (former CEO of Salomon Brothers) surfaced. A rogue trader, Paul Mozer, was submitting bids in excess of what was allowed by the Treasury rules. When this was discovered and brought to the attention of Gutfreund, he did not immediately suspend the rogue trader. Gutfreund left the company in August 1991.^[32] Buffett became CEO of Salomon until the crisis passed; on September 4 1991, he testified before Congress.^[33]

In 1988, Buffett began buying stock in Coca-Cola Company, eventually purchasing up to 7 percent of the company for $1.02 billion. It would turn out to be one of Berkshire's most lucrative investments, and one which it still holds. In 2002, Buffett entered in $11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his total gain on these contracts was over $2 billion.

In 1998, he acquired General Re, (in a rare move, for stock). In 2002, Buffett became involved with Maurice R. Greenberg at AIG, with General Re providing reinsurance. On March 15, 2005, AIG's board forced Greenberg to resign from his post as Chairman and CEO under the shadow of criticism from Eliot Spitzer, attorney general of the state of New York. On February 9, 2006, AIG and the New York State Attorney General's office agreed to a settlement in which AIG would pay a fine of $1.6 billion.^[34]

In 2009, Warren Buffett invested $2.6 billion as a part of Swiss Re's raising equity captal.^[35][36] Berkshire Hathaway already owns a 3% stake, with rights to own more than 20%.^[37]

[edit]Late 2000s recession

Buffett ran into criticism,^[38] during the subprime crisis of 2007–2008, part of the late 2000s recession, that he has allocated capital too early resulting in suboptimal deals.

Buffett has called the 2007—present downturn in the financial sector "poetic justice".^[39]

Buffett's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his recent deals appear to be running into largemark-to-market losses.^[40]

Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs at $123^[41] only for it to fall to below $60. Furthermore some of Buffett's Index put options (European exercise at expiry only) that he wrote (sold) are currently running around $6.73 billion mark-to-market losses.^[42] The scale of the potential loss prompted the SEC to demand that Berkshire produce, "a more robust disclosure" of factors used to value the contracts.^[42]

Buffett also helped Dow Chemical pay for its $18.8 billion takeover of Rohm & Haas. He thus became the single largest shareholder in the enlarged group with his Berkshire Hathaway, which provided $3 billion, underlining his instrumental role during the current crisis in debt and equity markets.^[43]

In October 2008, the media reported that Warren Buffett had agreed to buy General Electric (GE) preferred stock, when it was trading in the mid 20s of dollar.^[44] The operation included extra special incentives: he received an option to buy 3 billion GE at $22.25 in the next five years and also received a 10% dividend (callable within three years). However, shortly after, GE gave up tens of billions in market capitalization and just bounced off a low of $8.80 in February 23, 2009, a price that has not been seen in over a decade. GE's stock price continued to fall after that point, and by early March, for example, it had declined to an 18 year low. Events like these have prompted a wave of criticism against Berkshire Hathaway and Warren Buffett. In February 2009, Warren Buffett unloaded part of Procter & Gamble Co and Johnson & Johnson shares from his portfolio.^[45]

Some have claimed that there is a financial incentive for Berkshire Hathaway to keep the myth that Buffett is an “oracle” alive and that the company is dependent on the Warren Buffett myth: that exaggerated sense of comfort investors share when it comes to Buffett’s beliefs and recommendations.^[46] In addition to suggestions of mistiming, questions have been raised as to the wisdom in keeping some of Berkshire's major holdings including The Coca-Cola Company (NYSE:KO) which in 1998 peaked at $86. Buffett discussed the difficulties of knowing when to sell in the company's 2004 annual report: "That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it’s the windshield through which investors must peer, and that glass is invariably fogged."^[47] In March 2009, Buffett stated in a cable television interview that the economy had "fallen off a cliff... Not only has the economy slowed down a lot, but people have really changed their habits like I haven't seen." Additionally, Buffett fears we may revisit a 1970s level of inflation, which led to a painful stagflation that lasted many years.^[48][49]