Warren Buffett — Investor ExtraordinaireWarren Buffett is undoubtedly the most successful investor of all times. Volumes have been written about him and his investment style. We're going to take a brief biographical look at his life, his investment style, and the nuggets of advice he has for beginning investors.
Warren Buffett was born on August 30, 1930 in Omaha, Nebraska to Howard and Leila Buffett. Howard Buffett, a stock-broker who later ran successfully for Congress, was the most influential person in Warren Buffet's life. Buffett was an only son and the middle of three children. Buffett displayed a strong aptitude for money and business at a very early age. People who knew him then recall his amazing ability to calculate columns of numbers in his head quickly. When he was six, he bought 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. At age eleven 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. Buffett held his shares until they rebounded to $40. He promptly sold them happy at the whopping 48% return. But this was a mistake he would soon come to regret. Cities Service shot up to $200! This was his first major lesson in patience — a virtue he has become famous for today.
After he graduated from high school at 17, Buffett displayed a reluctance to go to college. He was already making around $5,000 per year delivering newspapers.... around $42,000 in today's value. At his father's insistence, he finally attended the University of Pennsylvania's Wharton Business School. A couple of years later he transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years with a B.S. in Economics. The next stop was Graduate School. Once again, Buffett resisted, but was persuaded. He applied to Harvard Business School only to be rejected for being too young. He then applied to and was accepted at Columbia University. This move would change his life forever. It was at Columbia that Buffett met Ben Graham — a professor at that time — whom Buffett came to idolize. In fact, Buffett was the only student ever who earned an A+ in one of Graham's classes.
After graduating with a Masters in Economics, Buffett was eager to begin his Wall Street career by working for Ben Graham. But both his father and Graham advised against it. So eager was Buffett to work for Graham that he offered his services for free. Graham turned him down Crushed, Buffett returned to Omaha to work at his father's brokerage firm. In 1952, Buffett married Susie Thompson, and a year later, they had their first child, also named Susie. Then, in 1954, Buffett was finally offered a job at Ben Graham's partnership. The Buffet's moved to New York. The same year, the Buffet's had their second child, Howard. Working with Ben Graham was a dream come true for Buffett. However, it wasn't long before differences between the thinking of these two men surfaced. Graham made investment choices based primarily on the numbers — the Financial Statements. Buffett, in addition to the financials, was keenly interested in what made a company superior to all its competitors. The company's management mattered a lot to Buffett, while Graham didn't really care who ran the company. Between 1950 and 1956, Warren Buffett built his personal capital up to $140,000 from a mere $9,800. In 1956, Graham decided to retire and folded up the partnership. The Buffett's moved back to Omaha.
On May 1, 1956, Warren Buffett created Buffett Associates Ltd., a partnership that included his sister, Doris, and his aunt, Alice, with $105,000 in capital. His contribution? A mere $100. By the end of the year, he was managing around $300,000 in capital. Buffett had bigger plans. Over the next three years he created more partnerships — seven by 1960. Buffet's performance during this time frame? An amazing 251.0% profit, while the Dow was up only 74.3%. Buffett was now a celebrity in his hometown. By 1962, the partnership had capital in excess of $7.2 million, $1 million of which was Buffett's personal stake (his earning structure was a quarter of the profits above 4%, no fees). Buffett was now officially a millionaire. He also had more than 90 limited partners across the United States. The partnerships were merged into a single entity called "Buffett Partnerships Ltd."
In 1962, Buffett discovered a textile manufacturing firm, Berkshire Hathaway. Buffett's partnerships began purchasing shares at $7.60 per share. Later, in 1965, when Buffett's partnerships aggressively began purchasing Berkshire, 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). In May 1969, Buffett informed his partners that he was "unable to find any bargains in the current market". Buffett spent the remainder of the year liquidating most of his portfolio. He made two exceptions — Berkshire and Diversified Retailing. The shares of Berkshire were distributed among the partners. Buffett's personal stake in Berkshire was 29%. On May 10, 1965, after accumulating 49% of the common stock, Buffett named himself Director. Next, he took control of Berkshire Hathaway at the board meeting and named a new president, Ken Chace, to run the company. In 1970, Buffett named himself Chairman of the Board of Berkshire Hathaway and for the first time, wrote the letter to the shareholders. By this time, Buffett had partnered with Charlie Munger, who had moved back to his native Omaha from California. These two intellectual equals began a friendship that still endures. The traditional Berkshire textile mill was in steady decline. Buffett, however, used it as a holding company to purchase several other companies over the years that did extremely well under him. His most prominent acquisitions included See's Candy, The Pampered Chef, National Indemnity Company, The Buffalo News, Nebraska Furniture Mart, NetJets, Borsheim's Fine Jewelry, Geico, Fruit of the Loom, and Dairy Queen. In addition, Berkshire owns sizable stake in The Washington Post Company, Burlington Northern Santa Fe Corp., American Express, Anheuser-Busch, The Coca-Cola Company, ISCAR International, and Procter & Gamble. |
