Warren Buffet
Warren Edward Buffett born August 30, 1930 to his mother Leila and father Howard, a stockbroker-turned-Congressman. The second oldest, he had two sisters, and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head – a feat Warren still amazes business colleagues with today.
At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather’s grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making money. Five years later, Buffett took his first step into the world of high finance. At eleven years old, he purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Shortly after buying the stock, it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them – a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.
In 1947, Warren Buffett graduated from high school when he was 17 years old. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett only stayed two years, complaining that he knew more than his professors.
When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Despite working full-time, he managed to graduate in only three years.
Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as “too young”.
Buffett went on to enroll and graduate from Columbia University where he learned and eventually molded his investment philosophy around a concept pioneered by Benjamin Graham–value investing.
He attended New York Institute of Finance to specialize his economics background and soon after began various business partnerships, including one with Graham. After meeting Charlie Munger, Buffett created the Buffett Partnership. His firm would eventually acquire a textile manufacturing firm called Berkshire Hathaway and assume its name to create a diversified holding company.
Buffett worked from 1951 to 1954 at Buffett-Falk & Co. as an investment salesman; from 1954 to 1956 at Graham-Newman Corp. as a securities analyst; from 1956 to 1969 at Buffett Partnership, Ltd. as a general partner and from 1970, as Chairman and CEO of Berkshire Hathaway Inc.
In April 1952, Buffett discovered that 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 admitted him. 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, and would later recall that he found Buffett to be an “extraordinary man” after only fifteen minutes. Buffett 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.
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-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 was not successful.
In 1952, Buffett married Susan Thompson at Dundee Presbyterian Church. The next year they had their first child, Susan Alice. In 1954, Buffett accepted a job at Benjamin Graham’s partnership. His starting salary was $12,000 a year (about $107,000 today). There he worked closely with Walter Schloss. Graham was a tough boss.
He was adamant that stocks provide a wide margin of safety after weighing 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 other appealing features. That same year the Buffetts had their second child, Howard Graham.
In 1956, Benjamin Graham retired and closed his partnership. At this time Buffett’s personal savings were over $174,000 (about $1.53 million today) and he started Buffett Partnership Ltd.
In 1957, Buffett operated three partnerships. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500. In 1958 the Buffetts’ third child, Peter Andrew, was born. Buffett operated five partnerships that year.
In 1959, the company grew to six partnerships and Buffett met future partner Charlie Munger. By 1960, Buffett operated seven partnerships. 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 which earned him a spot on Sanborn’s board.
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. He merged these partnerships into one. Buffett invested in and eventually took control of a textile manufacturing firm, Berkshire Hathaway.
He 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 a board meeting and named a new president, Ken Chace, to run the company.
In 1966, Buffett closed the partnership to new money. He later claimed that the textile business had been his worst trade. 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.
Buffett has been the chairman and largest shareholder of Berkshire Hathaway since 1970, and his business exploits have had him referred to as the “Wizard”, “Oracle” or “Sage” of Omaha by global media outlets. He is noted for his adherence to value investing and for his personal frugality despite his immense wealth.
In 1970, 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.
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 joined its board. In 1974, the SEC opened a formal investigation into Buffett and Berkshire’s acquisition of Wesco Financial, 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 a $3.5 billion purchase of ABC on March 18, 1985 surprising the media industry, as ABC was four times bigger than Capital Cities at the time. Buffett helped finance the deal in return for a 25% stake in the combined company. The newly merged company, known as Capital Cities/ABC (or CapCities/ABC), was forced to sell some stations due to U.S. Federal Communications Commission ownership rules. The two companies also owned several radio stations in the same markets.
In 1987, Berkshire Hathaway purchased a 12% stake in Salomon Inc., making it the largest shareholder and Buffett a 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 Treasury rules. When this was brought to Gutfreund’s attention, he did not immediately suspend the rogue trader. Gutfreund left the company in August 1991. Buffett became Chairman of Salomon until the crisis passed.
In 1988, Buffett began buying The Coca-Cola Company stock, 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.
Buffett became a paper billionaire when Berkshire Hathaway began selling class A shares on May 29, 1990, with the market closing at US$7,175 a share. In 1998 he acquired General Re (Gen Re) as a subsidiary in a deal that presented difficulties—according to the Rational Walk investment website, “underwriting standards proved to be inadequate,” while a “problematic derivatives book” was resolved after numerous years and a significant loss. Gen Re later provided reinsurance after Buffett became involved with Maurice R. Greenberg at AIG in 2002.
During a 2005 investigation of an accounting fraud case involving AIG, Gen Re executives became implicated. On March 15, 2005, the AIG board forced Greenberg to resign from his post as Chairman and CEO after New York state regulators claimed that AIG had engaged in questionable transactions and improper accounting.
On February 9, 2006, AIG agreed to pay a US$1.6 billion fine. In 2010 the U.S. government agreed to a US$92 million settlement with Gen Re, allowing the Berkshire Hathaway subsidiary to avoid prosecution in the AIG case. Gen Re also made a commitment to implement “corporate governance concessions,” which required Berkshire Hathaway’s Chief Financial Officer to attend General Re’s audit committee meetings and mandated the appointment of an independent director.
In 2002, Buffett entered in US$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 US$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.
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. Buffett had previously selected Lou Simpson, who runs investments at Geico, to fill the role; however, Simpson is only six years younger than Buffett.
Buffett ran into criticism 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. Buffett called the downturn in the financial sector that started in 2007 “poetic justice”. 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.
Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs. Some of Buffett’s 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. 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.
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 crisis in debt and equity markets.
In 2008, Buffett became the richest person in the world, with a total net worth estimated at $62 billion by Forbes and at $58 billion by Yahoo, overtaking Bill Gates, who had been number one on the Forbes list for 13 consecutive years. 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.
In October 2008, the media reported that Buffett had agreed to buy General Electric (GE) preferred stock. The operation included special incentives: He received an option to buy three billion shares 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 Procter & Gamble Co. and Johnson & Johnson shares from his personal portfolio.
In addition to suggestions of mistiming, the wisdom in keeping some of Berkshire’s major holdings, including The Coca-Cola Company, which in 1998 peaked at $86, raised questions. 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.
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 years of painful stagflation—might re-emerge.
Buffett is a notable philanthropist, having pledged to give away 99 percent of his fortune to philanthropic causes, primarily via the Bill & Melinda Gates Foundation. In 2009, with Bill Gates and Mark Zuckerberg, Warren founded The Giving Pledge, whereby billionaires pledge to give away at least half of their fortunes.
On August 14, 2014, the price of Berkshire Hathaway’s shares hit US$200,000 a share for the first time, capitalizing the company at US$328 billion. While Buffett had given away much of his stock to charities by this time, he still held 321,000 shares worth US$64.2 billion. On August 20, 2014, Berkshire Hathaway was fined $896,000 for failing to report December 9, 2013 purchase of shares in USG Corporation as required.
In 2009, Buffett invested $2.6 billion as a part of Swiss Re’s campaign to raise equity capital. Berkshire Hathaway already owned a 3% stake, with rights to own more than 20%. 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.[72] Measured by market capitalization in the Financial Times Global 500, Berkshire Hathaway was the eighteenth largest corporation in the world as of June 2009.
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.
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%.
In June 2010, Buffett defended the credit-rating agencies for their role in the US financial crisis, claiming:
Very, very few people could appreciate the bubble. That’s the nature of bubbles – they’re mass delusions.
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, 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.
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.”
In May 2012, Buffett’s acquisition of Media General, consisting of 63 newspapers in the south-eastern U.S., was announced. The company was the second news print purchase made by Buffett in one year.
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.
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.
After the difficulties of the economic crisis, Buffett managed to bring its company back to its pre-recession standards: in Q2 2014, Berkshire Hathaway made $6.4 billion in net profit, the most it had ever made in a three-month period.
On December 16, 2015, Buffett endorsed Democratic candidate Hillary Clinton for president. On August 1, 2016, Buffett challenged Donald Trump to release his tax returns. On October 10, 2016, after another reference to him in the 2nd 2016 presidential debate, Buffett released his own tax return. He said he had paid $1.85 million in federal income taxes in 2015 on an adjusted gross income of $11.6 million, meaning he had an effective federal income tax rate of around 16 percent.
Buffett also said he had made more than $2.8 billion worth of donations last year. Buffett said, “I have been audited by the IRS multiple times and am currently being audited. I have no problem in releasing my tax information while under audit. Neither would Mr. Trump — at least he would have no legal problem.” This was a measured response to Trump saying he was unable to release his tax information due to being under audit.
