Warren Buffett is the world’s most closely watched investor. The ‘Sage of Omaha’ addresses tens of thousands of shareholders at the annual Berkshire Hathaway shareholder meeting, often dubbed ‘Woodstock for capitalists’.
Born in 1930 in Omaha, Nebraska, the son of a Republican congressman, Buffett seemed destined for a life in business having set up several small enterprises while still in his teens.
While studying for a Masters in Economics at Columbia University, he received an A+ grade from his mentor Ben Graham, following which he set out on a career in investment.
The textile company Berkshire Hathaway, of which Buffett acquired control in 1965, was to become the vehicle for his subsequent investments. From 1965 to 2008, the company registered compound annual gains of 20.3%, compared to 8.9% for the S&P 500 (including dividends).
Succession is a key issue for the company, with both Buffett and his business partner Charlie Munger advancing in age. There are a few contenders for the top job, although it is likely that the roles of Chief Executive Officer and Chief Investment Officer will be separated when Buffett does eventually retire.
In the meantime, Buffett’s annual letters to shareholders are essential reading.
There are many elements to his style, but they can be summarised as buying understandable businesses, at a price that includes a margin of safety, and holding them forever. In practice, of course, it’s not so simple.
Buffett does not ‘play the stock market’, he buys businesses. He would not consider buying a share unless he was prepared to buy the whole company and hold it for at least ten years. “I buy on the assumption that they could close the market tomorrow and not reopen it for five years.” This is in contrast to the shorter investment horizon of Ben Graham. Although he said that his “favourite timeframe for holding a stock is forever”, Buffett has in fact dumped many shares in the past including Fannie Mae.
The businesses he buys should be simple and easily defensible, Coca-Cola being a typical example. “If you gave me $100bn and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.” Similarly with Wrigley’s: “I don’t think the internet is going to change how people chew gum.“
That preference for the understandable also extends to the company’s culture. While Buffett has made acquisitions outside the US, his focus is on American businesses where he is more at home with the culture. And as if to demonstrate that he can break all these rules when the opportunity is right, he bought 10% of the Chinese electric car company BDY, a foreign technology-based business.
In common with Graham, he is a big believer in having a margin of safety. “I’m open for business, but it’s got to be the best business in town when I do it.” Even getting 10% preference shares in Goldman Sachs and General Electric, he still wouldn’t have done the deal without an additional kicker in the form of warrants. Private investors just can’t emulate these sorts of deals. “I put a heavy weight on certainty. It’s not risky if you buy securities at a fraction of what they’re worth.“
Part of his strategy to achieve those purchase prices is to take a contrarian position, buying whatever is so out of favour that it has been mis-priced by the market. “You can’t buy what’s popular and do well.” This policy served him well in avoiding the boom and bust of the technology bubble, but has been less successful in recent times.
Buffett believed the worst of the credit crisis was over by May 2008, and that the support for Bear Stearns had effectively put an end to the problem. By the time Lehman Brothers collapsed in September he had to accept that we were facing an “economic Pearl Harbour“. Picking up financial shares at what seemed like bargains turned out to have been misjudged, but Buffett is always willing to admit his mistakes.
Having described complex derivatives as “weapons of financial mass destruction“, and advising not to do “equations with Greek letters in them“, he is now heavily invested in financial derivative products that he believes are fundamentally mis-priced, and therefore a buying opportunity.
Buffett lives modestly in a house he bought fifty years ago, and has criticised the extravagance of many in the corporate world.
Much of his personal wealth will be donated to charity, and in particular to the foundation established by his friend and fellow Berkshire board member Bill Gates.
He was a supporter of Barack Obama’s presidential campaign.
While Buffett’s actions are sometimes at variance with his pronouncements, it’s hard to fault the logic of his arguments, and impossible not to admire his success. Investors will continue to pore over his writings for many years to come.
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