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Warren Buffett
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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. He was ranked by Forbes as the richest person in the world during the first half of 2008, with an estimated net worth of $62.0 billion. Often called the "Oracle of Omaha," or "the Sage of Omaha", Buffett is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth.
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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. He was ranked by Forbes as the richest person in the world during the first half of 2008, with an estimated net worth of $62.0 billion. Often called the "Oracle of Omaha," or "the Sage of Omaha", Buffett is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth. His 2006 annual salary was about $100,000, which is vanishingly small compared to senior executive remuneration in comparable companies.
When Buffett spent $9.7 million 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. 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. Buffett also is a notable philanthropist. In 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill & Melinda Gates Foundation. In 2007, he was listed among Time's 100 Most Influential People in The World. He also serves as a member of the board of trustees at Grinnell College.
Biography
Early life
Warren Buffett was born in Omaha, Nebraska on 30th August 1930. One of his influential mentors was Benjamin Graham. Graham’s philosophy had such an impact on Buffett that he enrolled in Columbia Business School to study directly under him. In Buffett’s own words: “I’m 15 percent Fisher and 85 percent Benjamin Graham.” As Buffett often would say about Graham’s teachings: “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.”
Buffett was educated at Woodrow Wilson High School, Washington, D.C. in 1947. He first enrolled at The Wharton School, University of Pennsylvania, (1947–1949), but then transferred to the University of Nebraska in 1950, where he received a B.S. in Economics. He then received a M.S. in Economics, Columbia University, in 1951. Buffett was employed at 1951–1954 Buffett-Falk & Co., Omaha—Investment Salesman, then 1954–1956 Graham-Newman Corp., New York—Securities Analyst, then 1956–1969 Buffett Partnership, Ltd., Omaha—General Partner, then 1970–Present Berkshire Hathaway Inc, Omaha—Chairman, CEO.
Career
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. 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. In 1949, he was initiated into Alpha Sigma Phi Fraternity while an undergraduate at the Wharton School at the University of Pennsylvania. His father and uncles also were Alpha Sigma Phi brothers from the chapter at Nebraska, to which Warren eventually transferred. In 1950, Buffett applied for admission to Harvard Business School, but was turned down. Buffett enrolled at Columbia Business School after learning that Benjamin Graham and David Dodd, two well-known securities analysts, taught there. In 1951, Buffett discovered Graham was on the board of GEICO insurance at the time. After taking a train to Washington, D.C. on a Saturday, Buffett knocked on the door of GEICO's headquarters until a janitor allowed him in. There, he met Lorimer Davidson, the vice president, who was to become a lasting influence on him and life-long friend. They talked for four hours about the insurance business. Davidson recalled that he found Buffett to be an “extraordinary man” after fifteen minutes. Buffett graduated from Columbia and wanted to work on Wall Street. Both his father and Ben Graham urged him not to. Buffett offered to work for Graham for free, but Graham refused. He purchased a Sinclair Texaco gas station as a side investment, but that venture did not work out as well as he had hoped. Meanwhile, he worked as a stockbroker. During that time, Buffett also took a Dale Carnegie public speaking course. Using what he learned, he felt confident enough to teach a night class at the University of Nebraska, "Investment Principles." The average age of the students he taught was more than twice his own.
In 1952, Buffett married Susan Thompson. In 1953, Susan and Warren Buffett had their first child, Susan Alice Buffett. In 1954, Benjamin Graham offered Buffett a job at his partnership with a starting salary of $12,000 a year. Here, he worked closely with Walter Schloss. Graham, who was a tough man to work for, was adamant that a stock provide a wide margin of safety after weighting the trade-off between its price and intrinsic value. Graham’s demand that a stock be worth more than its price made sense to Buffett, but it also made him question whether the criteria were too stringent, causing them to miss out on some big winners that had more qualitative values. Susan and Warren Buffett had their second child, Howard Graham Buffett. In 1956, Benjamin Graham retired and closed his partnership. Buffett's personal savings were now over $140,000. Buffett returned home to Omaha and created Buffett Partnership Ltd., an investment partnership.
In 1957, Buffett had three partnerships operating the entire year. Buffett purchased a five-bedroom stucco house in Omaha, in which he still lives, for $31,500. In 1958, Susan and Warren Buffett had their third child, Peter Andrew Buffett. Buffett had five partnerships operating the entire year. In 1959, Buffett had six partnerships operating the entire year. Buffett was introduced to Charlie Munger. In 1960, Buffett had seven partnerships operating the entire year. The partnerships were: Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff, and Underwood. Buffett asked one of his partners, a doctor, to find ten other doctors who would be willing to invest $10,000 each in his partnership. Eventually, eleven doctors agreed to invest. In 1961, Buffett revealed that Sanborn Map Company accounted for 35% of the partnerships' assets. Buffett explained that in 1958, Sanborn sold at $45 per share when the value of the Sanborn investment portfolio was $65 per share. This meant buyers valued Sanborn at "minus $20" per share, and buyers were unwilling to pay more than 70 cents on the dollar for an investment portfolio with a map business thrown in for nothing. Buffett revealed that he earned a spot on the board of Sanborn.
Becoming a millionaire
In 1962, Buffett became a millionaire because Buffett's partnerships, 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. 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 one of Berkshire's mergers due to possible conflict of interest. Nothing ever came of it.
In 1977, Berkshire indirectly purchased the Buffalo Evening News for $32.5 million. Antitrust charges started. In 1979, Berkshire began to acquire stock in ABC. With the stock trading at $290 per share, Buffett's net worth neared $140 million. However, he lived solely on his salary of $50,000 per year. 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 1987, Berkshire Hathaway purchased 12% stake in Salomon Inc., making it the largest shareholder and Buffett the director. 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 1990, Scandals involving Maurice R. Greenberg and John Gutfreund (former CEO of Salomon Brothers) surfaced. 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. 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 2004, his wife, Susan, died. 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 that role. However, Simpson is only six years younger than Buffett. In 2008, Buffett became the richest man in the world, worth $62 billion according to Forbes, and $58 billion according to Yahoo. Bill Gates had been number 1 on the Forbes list for 13 consecutive years.
Personal life
Buffett married Susan 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, he married his never-married longtime-companion, Astrid Menks, who was then sixty years old. She had lived with him since his wife's departure in 1977 to San Francisco. 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 holiday cards to friends were signed "Warren, Susie and Astrid". 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.
He remains an avid player of the card game bridge, and has said that he spends twelve hours a week playing the game. 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. In 2006, he auctioned his 2001 Lincoln Town Car on eBay to raise money for Girls, Inc..
Warren Buffett works with Christopher Webber on an animated series with DiC Entertainment chief Andy Heyward. According to information presented by Buffett at the Berkshire Hathaway annual meeting on May 6, 2006, the series will feature Buffett and Munger in roles and the series will teach children healthy financial habits for life. Cartoon drawings of Buffett and Munger were displayed throughout the events during the weekend as well as in a special animated movie from Heyward, displayed before the meeting. Buffett has described himself as agnostic when it comes to religious beliefs. 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, a Cadillac DTS. In 2007, he auctioned a luncheon with himself that raised a final bid of $650,100 for a charity. Buffett's DNA report revealed that his paternal ancestors hail from northern Scandinavia, while his maternal ancestors most likely have roots in Iberia or Estonia. Despite widespread suggestions to the contrary, and the casual friendship which has developed between their families, Warren Buffett has no clear relation to the well-known singer Jimmy Buffett.
From a NY Times article: "I don't believe in dynastic wealth," Warren Buffett said, calling those who grow up in wealthy circumstances "members of the lucky sperm club." Buffett has written several times of his belief that, in a market economy, the rich earn outsized rewards for their talents. The following is taken from one of Buffett's articles: "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."
Politics
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 Mr. Obama's campaign in Chicago hosted by Mr. Obama's National Finance Chair, Penny Pritzker and her husband, as well as Obama advisor Valerie Jarrett. 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. Later, in the third and final presidential debate, Obama mentioned Buffett as a potential economic advisor. Buffett was also finance advisor to California Republican Governor Arnold Schwarzenegger during his 2003 election campaign.
Writings
Warren Buffett's writings include his annual reports and various articles. In his article "The Superinvestors of Graham-and-Doddsville", Buffett condemned the academic position that the market was efficient and that beating the S&P 500 was "pure chance" by highlighting 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.), Bill Ruane (Sequoia Fund, Inc.), Charles Munger (Buffett's own business partner at Berkshire), Rick Guerin (Pacific Partners, Ltd.), and Stan Perlmeter (Perlmeter Investments)
Philanthropy
In June 2006, Buffett gave approximately 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation (worth approximately USD 30.7 billion as of 23rd June 2006) making it the largest charitable donation in history and Buffett one of the leaders in the philanthrocapitalism revolution. The foundation will receive 5% of the total donation on an annualised basis each July, beginning in 2006. 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.
He also announced plans to contribute additional Berkshire stock valued at approximately $6.7 billion to the Susan Thompson Buffett Foundation and to other foundations headed by his three children. This is a significant shift from previous statements Buffett has made, having stated that most of his fortune would pass to his Buffett Foundation. The bulk of the estate of his wife, valued at $2.6 billion, went to that foundation when she died in 2004.
His children will not inherit a significant proportion of his wealth. These actions are consistent with statements he has made in the past indicating his opposition to the transfer of great fortunes from one generation to the next. 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".
The following quotation from 1988, respectively, highlights Warren Buffett's thoughts on his wealth and why he long planned to re-allocate it:
On 27th June 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.
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.
Business
Public stances
Buffett emphasized the non-productive aspect of gold 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." Buffett stated that he only paid 19% of his income for 2006 ($48.1 million) in total federal taxes, while his employees paid 33% of theirs, despite making much less money. Buffett believes that the U.S. dollar will lose value in the long run. He views the United States' expanding trade deficit as an alarming trend that will devalue the U.S. dollar and U.S. assets. As a result it is putting a larger portion of ownership of U.S. assets in the hands of foreigners. This 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 make acquisitions of companies which derive a substantial portion of their revenues from outside the United States. Buffett invested in PetroChina Company Limited and in a rare move, posted a commentary on Berkshire Hathaway's website stating why he would not divest from the company despite calls from some activists to do so. (He did, however, sell this stake, apparently for purely financial reasons.) Buffett believes that the world is nearing its maximum capacity of oil production and that gradually depleted oil fields could reduce the amount produced. Buffett believes government should not be in the business of gambling, believing it to be a tax on ignorance.
Buffett's speeches are known for mixing business discussions with 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". 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 literary quotes ranging from the Bible to Mae West, as well as Midwestern advice, and numerous jokes. Various websites extol Buffett's virtues while others decry Buffett’s business models or dismiss his investment advice and decisions. 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". In 2007, Buffett testified before the Senate and urged them to preserve the estate tax so as to avoid a plutocracy. Buffett has endorsed Barack 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. Buffett has called the 2007—present downturn in the financial sector "poetic justice". 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."
Buffett and coal
In 2007, Buffett's PacifiCorp, a subsidiary of his MidAmerican Energy Company, cancelled 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 snowpack," 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."
Late 2000s recession
While Buffett's record of achieving an above 20% compounding annual return for the last 40 years places Buffett as arguably the most successful investor ever,
Buffett ran into criticism 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's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his recent deals appear to be running into large mark-to-market losses. Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs at $123 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. 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.
In October 2008, the media reported that Warren Buffett had agreed to buy General Electric (GE) stock, when it was trading in the mid 20s of dollar. 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 May, for example, it had declined to a 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.
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. 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." 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."
Books about Warren 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. Buffett said that his own personal favorite is a collection of his essays called The Essays of Warren Buffett, which he described as "a coherent rearrangement of ideas from my annual report letters" as edited by Larry Cunningham.
Best-selling or otherwise notable books about Buffett include the following:
- Robert Hagstrom, The Warren Buffett Way. (As of 2008, the bestselling book about Buffett.)
- Alice Schroeder, The Snowball: Warren Buffett and the Business of Life. (Written with Buffett's cooperation.)
- Mary Buffett and David Clark, Buffettology and four subsequent books. (Combined sales of more than 1.5 million copies.)
- Janet Lowe, Warren Buffett Speaks: Wit and Wisdom from the Word's Greatest Investor.
- John Train, The Midas Touch: The Strategies That Have Made Warren Buffett 'America's Preeminent Investor'.
- Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett. (The longest of the books about Buffett, with 330 chapters, 1,874 pages and 1,400 photos, weighing 10.2 pounds.)
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