Warren Buffett

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Warren Buffett
Warren Buffett KU Visit.jpg
Buffett speaking to students from the University of Kansas School of Business, May 6, 2005
Born Warren Edward Buffett
(1930-08-30) August 30, 1930 (age 83)
Omaha, Nebraska, U.S.
Education Master of Science in Economics
Alma mater University of Nebraska–Lincoln; Columbia Business School
Occupation Chairman & CEO of Berkshire Hathaway
Years active 1951–present
Salary US$100,000[1]
Net worth Increase US$ 58.5 billion (2013)[2]
Religion Agnostic
Spouse(s) Susan Buffett (m. 1952–2004; her death)
Astrid Menks (m. 2006)[3]
Children Susan Alice Buffett
Howard Graham Buffett
Peter Andrew Buffett
Signature Warren Buffett Signature.svg

Warren Edward Buffett (/ˈbʌfɨt/; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is widely considered the most successful investor of the 20th century. Buffett is the chairman, CEO and largest shareholder of Berkshire Hathaway[4] and consistently ranked among the world's wealthiest people. He was ranked as the world's wealthiest person in 2008[5] and as the third wealthiest person in 2011.[6] In 2012, American magazine Time named Buffett one of the most influential people in the world.[7]

Buffett is called the "Wizard of Omaha", "Oracle of Omaha",[8] or the "Sage of Omaha"[9] and is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth.[10] Buffett is also a notable philanthropist, having pledged to give away 99 percent[11] of his fortune to philanthropic causes, primarily via the Gates Foundation. On April 11, 2012, he was diagnosed with prostate cancer,[12] for which he successfully completed treatment in September 2012.[13]

Early life

Buffett was born in 1930 in Omaha, Nebraska, the second of three children and only son of U.S. congressman Howard Buffett,[14] a fierce critic of the interventionist New Deal domestic and foreign policy, and his wife Leila (née Stahl). Buffett's DNA report revealed that his paternal ancestors hail from northern Scandinavia, while his maternal ancestors hail from Iberia (present-day Spain) or Estonia.[15] Buffett began his education at Rose Hill Elementary School in Omaha. In 1942, his father was elected to the first of four terms in the United States Congress, and after moving with his family to Washington, D.C., Warren finished elementary school, attended Alice Deal Junior High School, and graduated from Woodrow Wilson High School in 1947, where his senior yearbook picture reads: "likes math; a future stockbroker".[16]

Even as a child, Buffett displayed an interest in making and saving money. He went door to door selling chewing gum, Coca-Cola, or weekly magazines. For a while, he worked in his grandfather's grocery store. While still in high school he was successful in making money by delivering newspapers, selling golfballs and stamps, and detailing cars, among other means. Filing his first income tax return in 1944, Buffett took a $35 deduction for the use of his bicycle and watch on his paper route.[17] In 1945, in his sophomore year of high school, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in different barber shops.

Buffett's interest in the stock market and investing also dated to his childhood, to the days he spent in the customers' lounge of a regional stock brokerage near the office of his father's own brokerage company. On a trip to New York City at the age of ten, he made a point to visit the New York Stock Exchange. At the age of 11, he bought three shares of Cities Service Preferred for himself, and three for his sister.[18][19] While in high school he invested in a business owned by his father and bought a farm worked by a tenant farmer.

Benjamin Graham (1894–1976)
Phil Fisher (1907–2004)

Buffett entered college as a freshman in 1947 at the Wharton School of the University of Pennsylvania. He studied there for two years and joined the Alpha Sigma Phi fraternity.[20] He then transferred to the University of Nebraska–Lincoln where at the age of nineteen, he graduated with a Bachelor of Science in business administration. After being rejected by Harvard Business School, Buffett enrolled at Columbia Business School after learning that Benjamin Graham (author of "The Intelligent Investor" – one of his favorite books on investing) and David Dodd, two well-known securities analysts, taught there. He earned a Master of Science in economics from Columbia in 1951. Buffett also attended the New York Institute of Finance. 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]

Business career

Buffett was employed from 1951 to 1954 at Buffett-Falk & Co., Omaha as an investment salesman; from 1954 to 1956 at Graham-Newman Corp., New York as a securities analyst; from 1956 to 1969 at Buffett Partnership, Ltd., Omaha as a general partner; and from 1970 – present at Berkshire Hathaway Inc, Omaha as its Chairman, CEO.

In 1950, at the age of 20, Buffett had made and saved $9,800 (over $96,000 inflation adjusted for the 2014 USD[23]).[24] In April 1952, 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 lifelong friend and a lasting influence[25] 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 Street, however, both his father and Ben Graham urged him not to. He offered to work for Graham for free, but Graham refused.[26]

Buffett returned to Omaha and worked as a stockbroker while taking a Dale Carnegie public speaking course.[27] Using what he learned, he felt confident enough to teach an "Investment Principles" night class at the University of Nebraska-Omaha. 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, this did not turn out to be a successful business venture.

In 1952,[28] Buffett married Susan Thompson at Dundee Presbyterian Church and the next year they had their first child, Susan Alice Buffett. In 1954, Buffett accepted a job at Benjamin Graham's partnership. His starting salary was $12,000 a year (approximately $105,000 inflation adjusted for the 2012 USD[23]). There 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.[citation needed] That 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 $174,000 ($1.47 million inflation adjusted to 2012 USD[23]) and he started Buffett Partnership Ltd., an investment partnership in Omaha.

Buffett's home 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 Buffetts' 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, and Buffett pooled their money with a mere $100 original investment of his own. 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.

As a millionaire

In 1962, Buffett became a millionaire because of his partnerships, which in January 1962 had an excess of $7,178,500, of which over $1,025,000 belonged to Buffett. Buffett merged all partnerships into one partnership. Buffett invested in and eventually took control of a textile manufacturing firm, Berkshire Hathaway. In 1962, Warren Buffett began buying shares in Berkshire from Seabury Stanton, the owner, whom he later fired. Buffett's partnerships began purchasing shares at $7.60 per share. In 1965, when Buffett's partnerships began purchasing Berkshire aggressively, they paid $14.86 per share while the company had working capital 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. He would go on to claim that the textile business had been his worst trade.[29] He then moved the business into the insurance sector, and, in 1985, the last of the mills that had been the core business of Berkshire Hathaway was sold. 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 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. Capital Cities announced $3.5 billion purchase of ABC on March 18, 1985 surprised the media industry, as ABC was four times bigger than Capital Cities at the time. Berkshire Hathaway chairman Warren Buffett helped finance the deal in return for a 25% 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 a 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 Chairman 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% 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.

As a billionaire

Buffett became a billionaire on paper when Berkshire Hathaway began selling class A shares on May 29, 1990, when the market closed at $7,175 a share.[34] In 1998, in an unusual move, he acquired General Re (Gen Re) 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, former 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.[35] In 2010, the federal government settled with Berkshire Hathaway for $92 million in return for the firm avoiding prosecution in an AIG fraud scheme, and undergoing 'corporate governance concessions'.[36]

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 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.[37] 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.[38] Buffett had previously selected Lou Simpson, who runs investments at Geico, to fill that role. However, Simpson is only six years younger than Buffett.

Recession starting in 2007

Buffett ran into criticism[39] during the subprime crisis of 2007–2008, part of the recession that started in 2007, that he had allocated capital too early resulting in suboptimal deals. "Buy American. I am." he wrote for an opinion piece published in the New York Times in 2008.[40] Buffett called the downturn in the financial sector that started in 2007 "poetic justice".[41] Buffett's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his later deals suffered large mark-to-market losses.[42]

Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs.[43] Some of Buffett's Index put options (European exercise at expiry only) that he wrote (sold) were running at around $6.73 billion mark-to-market losses as of late 2008.[44] 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.[44] 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.[45]

In 2008, Buffett became the richest person in the world, with a total net worth estimated at $62 billion[46] by Forbes and at $58 billion[47] by Yahoo, overtaking Bill Gates, who had been number one on the Forbes list for 13 consecutive years.[48] In 2009, Gates regained the top position on the Forbes list, with Buffett shifted to second place. Both of the men's values dropped, to $40 billion and $37 billion respectively—according to Forbes, Buffett lost $25 billion over a 12-month period during 2008/2009.[49]

In October 2008, the media reported that Buffett had agreed to buy General Electric (GE) preferred stock.[50] The operation included special incentives: He received an option to buy 3 billion of GE stock, at $22.25, over the five years following the agreement, and Buffett also received a 10% dividend (callable within three years). In February 2009 Buffett sold some of the Procter & Gamble Co. and Johnson & Johnson shares from his portfolio.[51]

In addition to suggestions of mistiming, the wisdom in keeping some of Berkshire's major holdings, including the Coca-Cola Company (NYSE:KO) which in 1998 peaked at $86, was questioned. 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.[52]

In March 2009, Buffett said 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 feared that inflation levels that occurred in the 1970s—which led to a painful stagflation that lasted many years—might re-emerge.[53][54]

In 2009, Buffett invested $2.6 billion as a part of Swiss Re's campaign to raise equity capital.[55][56] Berkshire Hathaway already owned a 3% stake, with rights to own more than 20%.[57] Also in 2009, Buffett acquired Burlington Northern Santa Fe Corp. for $34 billion in cash and stock. Alice Schroeder, author of Snowball, said that a key reason for the purchase was to diversify Berkshire Hathaway from the financial industry.[58] Measured by market capitalization in the Financial Times Global 500, Berkshire Hathaway was the eighteenth largest corporation in the world as of June 2009.[59]

In 2009, Buffett divested his failed investment in ConocoPhillips, saying to his Berkshire investors,

I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40–$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.[60]

The merger with the Burlington Northern Santa Fe Railway (BNSF) closed upon BNSF shareholder approval in 1Q2010. This deal was valued at approximately $34 billion and represented an increase of the previously existing stake of 22%.[citation needed]

In June 2010 Buffett defended the credit-rating agencies for their role in the US financial crisis, claiming that:

Very, very few people could appreciate the bubble. That's the nature of bubbles – they're mass delusions.[61]

On March 18, 2011, Goldman Sachs was given Federal Reserve approval to buy back Berkshire's preferred stock in Goldman. Buffett had been reluctant to give up the stock, which averaged $1.4 million in dividends per day,[62][63] saying:

I'm going to be the Osama bin Laden of capitalism. I'm on my way to an unknown destination in Asia where I'm going to look for a cave. If the U.S. Armed forces can't find Osama bin Laden in 10 years, let Goldman Sachs try to find me.[64]

In November 2011, it was announced that over the course of the previous eight months, Buffett had bought 64 million shares of International Business Machine Corp (IBM) stock, worth around $11 billion. This unanticipated investment raised his stake in the company to around 5.5 percent—the largest stake in IBM alongside that of State Street Global Advisors. Buffett had said on numerous prior occasions that he would not invest in technology because he did not fully understand it, so the move came as a surprise to many investors and observers. During the interview, in which he revealed the investment to the public, Buffett stated that he was impressed by the company's ability to retain corporate clients and said, "I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM."[65]

In May 2012, Buffett's acquisition of Media General, consisting of 63 newspapers in the south-eastern U.S., was announced.[66] The company was the second news print purchase made by Buffett in one year.[67]

Interim publisher James W. Hopson announced on July 18, 2013 that the Press of Atlantic City would be sold to Buffett’s BH Media Group by ABARTA, a private holding company based in Pittsburgh, U.S. At the Berkshire shareholders meeting in May 2013, Buffett explained that he did not expect to "move the needle" at Berkshire with newspaper acquisitions, but he anticipates an annual return of 10 percent. The Press of Atlantic City became Berkshire's 30th daily newspaper, following other purchases such as Virginia, U.S.' Roanoke Times and The Tulsa World in Oklahoma, U.S.[68]

During a presentation to Georgetown University students in Washington, D.C. in late September 2013, Buffett compared the U.S. Federal Reserve to a hedge fund and stated that the bank is generating "$80 billion or $90 billion a year probably" in revenue for the U.S. government. Buffett also advocated further on the issue of wealth equality in society:

We have learned to turn out lots of goods and services, but we haven’t learned as well how to have everybody share in the bounty. The obligation of a society as prosperous as ours is to figure out how nobody gets left too far behind.[69]

Personal life

Buffett married Susan Buffett (née Thompson) in 1952. They had three children, Susie, Howard and Peter. The couple began living separately in 1977, although they remained married until her death in July 2004. Their daughter, Susie, lives in Omaha and does charitable work through the Susan A. Buffett Foundation and is a national board member of Girls, Inc. In 2006, on his seventy-sixth birthday, Warren married his longtime companion, Astrid Menks, who was then 60 years old. She had lived with him since his wife's departure to San Francisco in 1977.[70] 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 Christmas cards to friends were signed "Warren, Susie and Astrid".[71] 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.[72]

Warren Buffett disowned his son Peter's adopted daughter, Nicole, in 2006 after she participated in the Jamie Johnson documentary, The One Percent. Although his first wife had referred to Nicole as one of her "adored grandchildren",[73] Buffett wrote her a letter stating, "I have not emotionally or legally adopted you as a grandchild, nor have the rest of my family adopted you as a niece or a cousin." [74][75][76]

His 2006 annual salary was about $100,000, which is small compared to senior executive remuneration in comparable companies.[77] In 2007 and 2008, he earned a total compensation of $175,000, which included a base salary of just $100,000.[78][79] 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 owns a $4 million house in Laguna Beach, California).[80] In 1989, after having spent nearly $6.7 million of Berkshire's funds on a private jet, Buffett named it "The Indefensible". This act was a break from his past condemnation of extravagant purchases by other CEOs and his history of using more public transportation.[81]

Bridge is such a sensational game that I wouldn't mind being in jail if I had three cellmates who were decent players and who were willing to keep the game going twenty-four hours a day.

—Buffett on bridge[82]

Buffett is an avid player of bridge, which he plays with fellow fan Gates.[83] He spends 12 hours a week playing the game.[84] In 2006, he sponsored a bridge match for the Buffett Cup. Modeled on the Ryder Cup in golf, held immediately before it, and in the same city, a team of twelve bridge players from the United States took on twelve Europeans in the event. He is a dedicated, lifelong follower of Nebraska football, and attends as many games as his schedule permits. He supported the hire of Bo Pelini following the 2007 season stating, "It was getting kind of desperate around here".[85] He watched the 2009 game against Oklahoma from the Nebraska sideline after being named an honorary assistant coach.[86]

Warren Buffett worked with Christopher Webber on an animated series with chief Andy Heyward, of DiC Entertainment, and then A Squared Entertainment. The series features Buffett and Munger, and teaches children healthy financial habits for life.[87][88] Buffett was raised Presbyterian but has since described himself as agnostic.[89] In December 2006 it was reported that Buffett does not carry a cell phone, does not have a computer at his desk, and drives his own automobile,[90] a Cadillac DTS.[91] Buffett reads five newspapers every day, beginning with the Omaha World Herald, which his company bought in 2011. He wears tailor-made suits from the Chinese label Trands; earlier he wore Ermenegildo Zegna.[92]

Health

On April 11, 2012, Buffett was diagnosed with stage I prostate cancer during a routine test.[93] He announced he would begin two months of daily radiation treatment from mid-July; however, in a letter to shareholders, Buffett said he felt "great - as if I were in my normal excellent health - and my energy level is 100 percent". On 15 September 2012, Buffett announced that he had completed the full 44-day radiation treatment cycle, saying "it's a great day for me" and "I am so glad to say that's over".[94]

Recognition

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.[95] In 2007, he was listed among Time's 100 Most Influential People in the world.[96] In 2011, President Barack Obama awarded him the Presidential Medal of Freedom.[97] Most recently, Buffett, along with Bill Gates, was named the most influential global thinker in Foreign Policy's 2010 report.[98]

Politics

Buffett and President Obama at the Oval Office, July 14, 2010

In addition to other political contributions over the years, Buffett has formally endorsed and made campaign contributions to Barack Obama's presidential campaign. On July 2, 2008, Buffett attended a $28,500 per plate fundraiser for Obama's campaign in Chicago hosted by Obama's National Finance Chair, Penny Pritzker and her husband, as well as Obama advisor Valerie Jarrett.[99] Buffett backed Obama for president, and intimated that John McCain's views on social justice were so far from his own that McCain would need a "lobotomy" for Buffett to change his endorsement.[100] During the second 2008 U.S. presidential debate, candidates John McCain and Barack Obama, after being asked first by presidential debate mediator Tom Brokaw, both mentioned Buffett as a possible future Secretary of the Treasury.[101] Later, in the third and final presidential debate, Obama mentioned Buffett as a potential economic advisor.[102] Buffett was also finance advisor to California Republican Governor Arnold Schwarzenegger during his 2003 election campaign.[103]

Writings

Warren Buffett's writings include his annual reports and various articles. Buffett is recognized by communicators[104] as a great story-teller, as evidenced by his annual letters to shareholders. He warned about the pernicious effects of inflation:[105]

The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation.

—Buffett, Fortune (1977)

In his article "The Superinvestors of Graham-and-Doddsville", Buffett rebutted the academic Efficient-market hypothesis, that beating the S&P 500 was "pure chance", by highlighting the results achieved by a number of students of the Graham and Dodd value investing school of thought. In addition to himself, Buffett named Walter J. Schloss, Tom Knapp, Ed Anderson (Tweedy, Brown Inc.), William J. Ruane (Sequoia Fund, Inc.), Charles Munger (Buffett's own business partner at Berkshire), Rick Guerin (Pacific Partners, Ltd.), and Stan Perlmeter (Perlmeter Investments).[106] In his November 1999 Fortune article, he warned of investors' unrealistic expectations:[107]

Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%!

—Buffett, Fortune (1999)

Style

Buffett's speeches are known for mixing business discussions with attempts at humor. Each year, Buffett presides over Berkshire Hathaway's annual shareholder meeting in the Qwest Center in Omaha, Nebraska, an event drawing over 20,000 visitors from both United States and abroad, giving it the nickname "Woodstock of Capitalism".[108] Berkshire's annual reports and letters to shareholders, prepared by Buffett, frequently receive coverage by the financial media. Buffett's writings are known for containing quotations from sources as ranging between the Bible and Mae West,[109] as well as advice in a Midwestern folk style, and numerous jokes.

Wealth

In 2008 he was ranked by Forbes as the richest person in the world with an estimated net worth of approximately US$62 billion.[110] In 2009, after donating billions of dollars to charity, Buffett was ranked as the second richest man in the United States with a net worth of US$37 billion[111][112] with only Bill Gates ranked higher than Buffett. His net worth is up to $58.5 billion as of September 2013.[113]

Philanthropy

The following quote from 1988 highlights Warren Buffett's thoughts on his wealth and why he long planned to re-allocate it:

I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die. (Lowe 1997:165–166)

From an article by The New York Times: "I don't believe in dynastic wealth", Warren Buffett said, calling those who grow up in wealthy circumstances "members of the lucky sperm club".[114] Buffett has written several times of his belief that, in a market economy, the rich earn outsized rewards for their talents:

A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth. If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention.[115]

His children will not inherit a significant proportion of his wealth. This is consistent with statements he has made in the past indicating his opposition to the transfer of great fortunes from one generation to the next.[116] Buffett once commented, "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing".[117]

In June 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill & Melinda Gates Foundation.[118] He pledged about the equivalent of 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation (worth approximately US$30.7 billion as of June 23, 2006),[119] making it the largest charitable donation in history, and Buffett one of the leaders of philanthrocapitalism.[120] The foundation will receive 5% of the total donation on an annualised basis each July, beginning in 2006. (Significantly, however, the pledge is conditional upon the foundation's giving away each year, beginning in 2009, an amount that is at least equal to the value of the entire previous year's gift from Buffett, in addition to 5% of the foundation's net assets.) Buffett also will join the board of directors of the Gates Foundation, although he does not plan to be actively involved in the foundation's investments.[121][122]

This is a significant shift from previous statements Buffett has made, having stated that most of his fortune would pass to his Buffett Foundation.[123] The bulk of the estate of his wife, valued at $2.6 billion, went to that foundation when she died in 2004.[124] He also pledged $50-million to the Nuclear Threat Initiative, in Washington, where he has served as an adviser since 2002.[125]

In 2006, he auctioned his 2001 Lincoln Town Car[126] on eBay to raise money for Girls, Inc.[127] In 2007, he auctioned a luncheon with himself that raised a final bid of $650,100 for the Glide Foundation which was won by Mohnish Pabrai and Guy Spier.[128] On June 27, 2008, Zhao Danyang, a general manager at Pure Heart China Growth Investment Fund, won the 2008 5-day online "Power Lunch with Warren Buffett" charity auction with a bid of $2,110,100. Auction proceeds benefit the San Francisco Glide Foundation.[129][130] The following year, executives from Toronto-based Salida Capital paid US$1.68 million to dine with Buffett.[131] The June 9, 2012 auction for lunch with Buffett yielded a record figure of $3,456,789; the highest figure paid for lunch with the investor. The Glide auction's winners traditionally dine with Buffett at New York's Smith and Wollensky steak house. The restaurant donates at least $10,000 to Glide each year to host the auction lunch.[132]

In a letter to Fortune Magazine's website in 2010 Buffett remarked:

My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well... I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate's distribution of long straws is wildly capricious.

[133]

This statement was made as part of a joint proposal with Bill Gates to encourage other wealthy individuals to pool some of their fortunes for charitable purposes.

Bill Gates's wife Melinda urged people to learn a lesson from the philanthropic efforts of the family that sold its home and gave away half of its value, as detailed in The Power of Half.[134][135] On December 9, 2010, Buffett, Bill Gates, and Facebook CEO Mark Zuckerberg, signed a promise they called the "Gates-Buffett Giving Pledge", in which they promised to donate to charity at least half of their wealth over time, and invited others among the wealthy to donate 50% or more of their wealth to charity.[136][137]

Public positions

Health care

Buffett has described the health care reform under President Barack Obama as insufficient to deal with the costs of health care in the US, though he supports its aim of expanding health insurance coverage.[138] Buffett compared health care costs to a tapeworm, saying that they compromise US economic competitiveness by increasing manufacturing costs.[138] Buffett thinks health care costs should head towards 13 to 14% of GDP.[139] (Under the Patient Protection and Affordable Care Act, the CMS actuary has projected health care costs will reach almost 20% of GDP by 2020.)[140] Buffett said "If you want the very best, I mean if you want to spend a million dollars to prolong your life 3 months in a coma or something then the US is probably the best", but he also said that other countries spend much less and receive much more in health care value (visits, hospital beds, doctors and nurses per capita).[141]

Buffett faults the incentives in the US medical industry, that payers reimburse doctors for procedures (fee-for-service) leading to unnecessary care (overutilization), instead of paying for results.[142] Buffett has cited Atul Gawande's 2009 article in the New Yorker[143] as being a useful study in the problems of US health care, with its documentation of unwarranted variation in Medicare expenditures between McAllen, Texas and El Paso, Texas.[142] Buffett also brought up the problem of lobbying by the medical industry, saying that they are very focused on maintaining their income.[144]

Taxes

See also: Buffett Rule

Buffett stated that he only paid 19% of his income for 2006 ($48.1 million) in total federal taxes (due to their being from dividends & capital gains), while his employees paid 33% of theirs, despite making much less money.[145] “How can this be fair?” Buffett asked, regarding how little he pays in taxes compared to his employees. "How can this be right?" He also added:

"There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning."[146][147]

Buffett favors the inheritance tax, saying that repealing it would be like "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics".[148] In 2007, Buffett testified before the Senate and urged them to preserve the estate tax so as to avoid a plutocracy.[149] Some critics have argued that Buffett (through Berkshire Hathaway) has a personal interest in the continuation of the estate tax, since Berkshire Hathaway has benefited from the estate tax in past business dealings and had developed and marketed insurance policies to protect policy holders against future estate tax payments.[150] Buffett believes government should not be in the business of gambling, or legalizing casinos, calling it a tax on ignorance.[151]

Trade deficit

Buffett views the United States' expanding trade deficit as a trend that will devalue the US dollar and US assets. He believes that the US dollar will lose value in the long run, as a result of putting a larger portion of ownership of US assets in the hands of foreigners. In his letter to shareholders in March 2005, Warren Buffett predicted that in another ten years' time the net ownership of the U.S. by outsiders would amount to $11 trillion.

Americans ... would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an 'ownership society' will not find happiness in – and I'll use hyperbole here for emphasis – a 'sharecropping society’.

Author Ann Pettifor has adopted the image in her writings and has stated: "He is right. And so the thing we must fear most now, is not just the collapse of banks and investment funds, or of the international financial architecture, but of a 'sharecropper society, angry at its downfall".[152]

Dollar and gold

The trade deficit induced Buffett to enter the foreign currency market for the first time in 2002. However, he substantially reduced his stake in 2005 as changing interest rates increased the costs of holding currency contracts. Buffett continues to be bearish on the dollar, and says he is looking to acquire companies which derive a substantial portion of their revenues from outside the United States. Buffett emphasized the non-productive aspect of a gold standard for the USD 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.

In 1977, Buffett was also quoted as saying about stocks, gold, farmland, and inflation:

Stocks are probably still the best of all the poor alternatives in an era of inflation – at least they are if you buy in at appropriate prices.[153]

Investing in China

Buffett invested in PetroChina Company Limited and in a rare move, posted a commentary[154] on Berkshire Hathaway's website stating why he would not divest from the company despite calls from some activists to do so, due to its connection with the Sudanese civil war that caused Harvard to divest from the company in 2005. He did, however, sell this stake soon afterwards, sparing him the billions of dollars he would have lost had he held on to the company in the midst of the steep drop in oil prices beginning in the summer of 2008.

In October 2008, Buffett invested in new energy automobile business by paying $230 million for 10% of BYD Company (SEHK1211), which runs a subsidiary of electric automobile manufacturer BYD Auto. In less than one year, the investment has reaped him over 500% return of profit.[155]

Tobacco

During the RJR Nabisco, Inc. hostile takeover fight in 1987, Buffett was quoted as telling John Gutfreund:[156]

I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.

—Buffett, quoted in Barbarians at the Gate: The Fall of RJR Nabisco

Speaking at Berkshire Hathaway Inc.'s 1994 annual meeting, Buffett said investments in tobacco are:[157]

fraught with questions that relate to societal attitudes and those of the present administration. I would not like to have a significant percentage of my net worth invested in tobacco businesses. The economy of the business may be fine, but that doesn't mean it has a bright future.

—Buffett, Berkshire Hathaway annual meeting (1994)

Coal

In 2007, Buffett's PacifiCorp, a subsidiary of his MidAmerican Energy Company, canceled six proposed coal-fired power plants. These included Utah's Intermountain Power Project Unit 3, Jim Bridger Unit 5, and four proposed plants previously included in PacifiCorp's Integrated Resource Plan. The cancellations came in the wake of pressure from regulators and citizen groups, including a petition drive organized by Salt Lake City commercial real estate broker Alexander Lofft and directed at Buffett personally. The 1,600 petitioners, who described themselves in a letter to Buffett as "a collection of citizens, business owners and managers, service professionals, public servants, and organization representatives ... your friends and new customers here in Utah," explained that, in their view, any further expansion of coal generation in Utah would "compromise our health, obscure our viewsheds, shrink and contaminate our watersheds, and thin out our most beloved snow pack," concluding that "our attractiveness as a place to live and work is also threatened, and so is our economic competitiveness as a major metro area and a state, compromising our recent gains in income and property values".[158]

Renewable energy

In December 2011, Buffett's MidAmerican Energy Holdings agreed to buy a $2 billion solar energy project under development in California and a 49 percent stake in a $1.8 billion plant in Arizona. He already owns wind farms and these are his first forays into solar power.[159]

Expensing of stock options

He has been a strong proponent of stock option expensing on the Income Statement. At the 2004 annual meeting, he lambasted a bill before the United States Congress that would consider only some company-issued stock options compensation as an expense, likening the bill to one that was almost passed by the Indiana House of Representatives to change the value of Pi from 3.14159 to 3.2 through legislative fiat.[160]

When a company gives something of value to its employees in return for their services, it is clearly a compensation expense. And if expenses don't belong in the earnings statement, where in the world do they belong?[161]

Klamath river

American Indian tribes and salmon fishermen sought to win support from Warren Buffett for a proposal to remove four hydroelectric dams from the Klamath River. He had David Sokol respond that the FERC would decide the question.[162][163]

Google and Facebook

In May 2012, Buffett said he avoids buying stock in new social media companies like Facebook and Google because it is hard to estimate future value. He also stated that initial public offering (IPO) of stock are almost always bad investments. Investors should be looking to companies that will have good value in ten years.[164]

Books about Buffett

Numerous books have been written about Warren Buffett and his investment strategies. In October 2008, USA Today reported that there were at least 47 books in print with Buffett's name in the title. The article quoted the CEO of Borders Books, George Jones, as saying that the only other living persons named in as many book titles were U.S. presidents, major world political figures, and the Dalai Lama.[165] Buffett said that his own personal favorite is a collection of his essays called The Essays of Warren Buffett,[166] which he described as "a coherent rearrangement of ideas from my annual report letters" as edited by Larry Cunningham.[165]

Some best-selling, or otherwise notable, books about Buffett:

Bibliography

  • The Essays of Warren Buffett : Lessons for Corporate America, Warren Buffett and Lawrence A. Cunningham, The Cunningham Group; revised edition (April 11, 2001), ISBN 978-0-9664461-1-1
  • The Essays of Warren Buffett: Lessons for Corporate America, Second Edition, Warren E. Buffett and Lawrence A. Cunningham, The Cunningham Group; 2nd edition (April 14, 2008), ISBN 978-0-9664461-2-8

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Further reading

External links

Honorary titles
Preceded by
Ingvar Kamprad
World's richest person
?–1995
Succeeded by
Bill Gates
Preceded by
Bill Gates
World's richest person
2008–2009
Succeeded by
Bill Gates