Warren E. Buffett
1930–

Berkshire Hathaway Holdings, chairman and chief executive officer

Nationality: American.

Born: August 30, 1930, in Omaha, Nebraska.

Education: Attended University of Pennsylvania; University of Nebraska, BA, 1952; Columbia University, MA, 1953.

Family: Son of Howard Buffett (banker, investment broker, and four-term U.S. representative) and Leila Stahl (clerk, secretary, and homemaker); married Susan Thompson; children: three.

Career: Buffett Partnership, partner, 1956–1969; Berkshire Hathaway, 1969–, chairman and chief executive officer.

Address: Berkshire Hathaway, 1440 Kiewit Plaza, Omaha, Nebraska 68131; http://www.berkshirehathaway.com.

■ Warren E. Buffett was considered the second-wealthiest person in the United States in the early 2000s and the only one to have made his money through stock investing, as president and chief executive officer of Berkshire Hathaway Holdings, the most expensive and profitable listing on the New York Stock Exchange. Buffett, a deceptively shy and self-effacing man, sustained a reputation as the most astute investor in the United States for half of the twentieth century. He had become a genius at value investing and in the critical discernment of corporate talent and management. Conservative to a fault where money was concerned, he sustained a liberal, almost libertarian image in public life. Investors who followed his lead all became comfortably well off or even extraordinarily wealthy. His every investment was founded on an obligation to his investors to outperform every performance indicator.

LAYING THE FOUNDATION

Buffett created Berkshire Hathaway in 1969, after shutting down his 13-year-long partnership with a select group of seven

recruited investors (from among his family and friends). This group, formed in 1956, put in a total of $105,000, of which only $100 was Buffett's. By 1962 the group's capital had grown to more than $7 million, more than $1 million of which belonged to Buffett. He charged a fee of only 25 percent of profits above 6 percent, and he would forgo his fee if his performance did not exceed the return on government bonds, which yielded the same 6 percent.

Buffett alone had authority to make investments for the partnership, and he would answer no questions regarding them. New investments were allowed only once or twice annually, and he broadened his investor base as his profits grew, bringing in 90 more limited partners from throughout the nation at $100,000 each. (Laurence Tisch of Loews and CBS put in $300,000.) Buffett incorporated the group as Buffett Partnerships Limited and opened an office in Kiewit Plaza. This location would endure as the headquarters for what was to become Berkshire Hathaway, the most successful investment company in history. Within 10 years Buffett had assets of $44 million, of which nearly $7 million was his. In 1969 he determined that further suitable investments were unavailable and began to liquidate the partnership. By then the assets had grown to $104 million; Buffett's share came to more than $25 million. He had always said that someday he would be wealthy, but for Buffett this was only the beginning.

Buffett had become a master at arbitrage investing, taking large positions in stocks of companies that his research showed to be ripe for mergers, liquidations, or takeovers. He used margin borrowing to gain leverage, which helped him establish partnership positions that put him on corporate boards, where he could exercise influence. Undervalued companies were a specialty, as they proved vulnerable to large investments that enabled him to exert pressure for control. This was his key to gaining control of Berkshire Hathaway, which was to become the keystone of his rise to financial power.

He was joined in his enterprise in 1962 by Charles Munger, who became virtually an alter ego. Munger was possessed of a brilliant mind and a rapier wit and tongue, and the two became partners for over 40 years. During the years of the Buffett Partnership, they invested in a group of stagnant knitting mills that were slowly withering in New England. This was Berkshire Hathaway, which consisted of a struggling milling entity in the town of New Bedford, Massachusetts. Buffett examined the books of the company and began to discern greater value than was evident at first glance. The long history of the fabric industry in New England and the resolute men who had shaped it intrigued Buffett. He set about quietly purchasing blocks of shares as the stock began to slide. An internal fight between relatives over the future of the company played into his hands.

He visited the main plant in New Bedford and was shown the operations by Kenneth Chace. Chace was open and candid and shared with Buffett forty years' worth of corporate statements regarding the company. Buffett continued buying the stock both directly and through brokerage houses, and he saw in Chace a man who was virtually the model of the kind of business personality that interested him. Buffett invested in companies, but he always made sure that he was investing in the right kind of people. Chace was offered the presidency of the company as soon as Buffett took controlling interest. When he liquidated his original partnership, Buffett kept 29 percent of Berkshire, which would become the foundation of his new enterprise, the holding company Berkshire Hathaway.

THE BOY BECOMES THE MAN

When he was asked how he had discerned any value in his investments, Buffett said simply that he read thousands of annual reports and corporate statements. Value Line, Moody's, and Standard and Poor's were the core of his studies, followed by corporate publications. Buffett saw the library as the true basis of anyone's education; the fact that it was cheaper than the cost of attending college warmed his conservative heart even more. Buffett did not like to spend; he was a gatherer and a holder. His childhood was replete with stories of youthful enterprise, beginning at the age of six, when he bought six-packs of cola for 25 cents and then sold individual bottles for 5 cents each. He scoured golf courses for lost balls, which he then sold individually and by the dozen. When his father went to the U.S. Congress, Buffett took over several paper routes conveniently confined to large apartment houses. He kept careful records of all his customers, and when someone did not renew a subscription, he was quick to remind them and even to sell them a competing newspaper.

Buffett was grateful when his father, who had served four terms in the U.S. Congress, lost one of his campaigns, and the family left Washington, D.C. His father was a staunch conservative and a member of the John Birch Society, which was dedicated to combating liberal, socialist, or communist tendencies in society. His father always asked whether legislation "would add or subtract from human liberty." When he returned to Omaha, he put the young Warren to work in his brokerage office, chalking prices and quotations. With his mathematical mind, he enjoyed the job immensely, and the experience was to serve him well in his future career.

Back home in Omaha, Buffett used $1,200 saved from his paper routes to buy 40 acres of land, which he leased out to a farmer. He also developed a keen interest in horse racing. The statistics involved with weights, speed ratings, pace, past performance, and breeding variables intrigued him. He formed a partnership with a friend to print the "Stable Boy's Tip Sheet," sold at Ak-Sar-Ben racetrack. He and a partner also went into the pinball machine business, which generated a nice profit. His first venture into the stock market was at the age of 11, when he bought three shares each of Cities Service stock for his sister and himself at $38 and saw it drop to $27 and then climb to $40, at which point he sold, garnering a profit after costs of $5. The same stock then began to climb, reaching $200. This was a lesson to Buffett about staying in the market.

FOUNDATIONS OF LEARNING

While Buffett admired and loved his father, he tried to stay clear of his mother, who was given to rages that traumatized her children. To keep out of her way, Buffett spent more time in his father's offices. He was fascinated by numbers and money, especially how money could grow through compound interest. The notion of compounding interest never ceased to intrigue and delight him. He could compute and project interest rates off the top of his head in mid-conversation. His lifelong guiding credos were "Number One: Never Lose Money!" and "Number Two: Never Forget Number One!"

Buffett entered the Wharton School of Business at the University of Pennsylvania in 1947 and, after two years, determined that the instructors knew less about finance than he did. He returned to Omaha and finished undergraduate work at the University of Nebraska. Buffett then applied to Harvard graduate school but was denied admission. In the meantime, he had read what was to become a classic, The Intelligent Investor, by Benjamin Graham. Graham taught at Columbia University, and Buffett determined to go there to study; he soon became a Graham disciple. Graham believed that profits could be generated through ownership of stocks that were undervalued on the market. His concept was that stocks of companies that were well managed, sound, and grounded in a belief in their product could and should prosper as investments. Buffett's penchant for research and analysis, joined with a dogged conservatism about money, made him a natural believer in the Graham principles. He sought a job in Graham's investment firm, Graham and Newman, but was rejected. Graham was Jewish and was dedicated to providing openings in finance to Jewish students, who had a limited presence in investment houses. So Buffett went back to Omaha to sell stocks for his father.

In 1952 he married Susan Thompson, a student and friend of Buffett's sister at Northwestern University. In the early days of their marriage, he attempted to run a gas station, which did not succeed. In 1954, however, Graham relented and hired Buffett. He stayed with the firm for two years and became immersed in the Graham formula for money management and investments. Then Graham retired and closed down his company, but by then Buffett had generated a net worth of $140,000 and a wealth of knowledge and confidence about value investing. At the age of 26, he returned to Omaha and set about forming his own company, the Buffett Partnership.

PHILOSOPHY

His experience, combined with a reputation for honesty, hard work, and an encyclopedic knowledge of securities and finance stood him in good stead. Buffett possessed an ability to fuse self-interest with a desire to have his investors do well. He did not believe in stock tips, preferring instead that investors do the work, as he did, to find a stock worthy of investment. He believed that all stewardship of funds demanded an accounting and that leaving money at rest was unconscionable when there were opportunities to put it to work.

His personal ethics and business acumen played out in private and in public. He once took umbrage when Boys Town of Omaha continued to plead poverty and exploit orphaned and homeless children to gain contributions, which Buffett found were simply hoarded by the home. He forced an exposé in the Omaha papers that compelled the home to change its practices. As a money manager, he insured that all investments made by Berkshire Hathaway returned cash to the headquarters in Omaha. He had a basic instinct about the capability of people and required only that they submit a monthly financial statement and, in the event of bad news, to report it immediately. His company moved to gain control of Borsheim Jewelry, Scott and Fetzer, Blue Chip Stamps, GEICO and General Reinsurance, Western Financial, the Omaha Sun Herald, See's Candies, the Omaha Furniture Mart, Executive Jet, and the Buffalo News as well as taking large stakes in Salomon Securities, Coca Cola, McDonald's, and International Bridge. He was always wary of getting a reputation as a liquidator or parasite bent on draining a company of its assets. Only the Buffalo News acquisition, through the auspices of Blue Chip Stamps, bore the heavy handprints of a take-no-prisoners capitalist assault.

Buffett and his personal newspaper agent from Omaha, Stanford Lipsey, sought to gain a monopoly on newspapers in the city of Buffalo. He made no secret that challenging the Buffalo Courier-Express 's right to control publication of a Sunday edition would inevitably cause that paper's demise. The Sunday edition was the lifeblood of the Courier, a morning paper. The Buffalo Evening News was constrained as an evening paper with no Sunday edition. The message Buffett gave to the unions at both papers was that their influence and numbers were to be severely curtailed and that their best interests would be served by agreeing to publication of a weekend edition by the Evening News. The unions understood their position, and the collapse of the Courier soon followed. Buffett, in his triumphant, though hardly his finest, hour, coldly told the existing unions, which had assumed they would be rewarded financially for their help, that the workforce made no worthy contribution to production of profits, given the solitary control of the market by the new Buffalo News.

ECONOMIC DISCIPLINE

Buffett's foremost strength was loyalty. He possessed an unyielding faith in his system, and his investors placed great faith in him in return. His admonition "Don't sell B-H stock!" was a watchword never to be taken lightly. His own children disappointed him by selling some of their stock when they could more easily have borrowed against it as collateral. He encouraged his investment partners to hold on to their stakes through good times and bad. Though he insisted on complete control over investment decisions, he also believed that business leaders had to provide an accounting to investors. He despised the practice of doling out options to executives and board members. To him, this was virtual charity. He also did not care for dividend distributions, which represented an inability of the managers to usefully devote the funds to the company's growth.

From his first investing experience in Cities Service to the creation of Berkshire Hathaway, Buffett stayed the course of his convictions. By the early 2000s, he and his wife controlled almost 39 percent of Berkshire Hathaway, some $40 billion in value. Wealth as a way to fund personal expenditures was insignificant to Buffett. It meant more to him to have the ability to buy without actually making a purchase. He continued to live in the house that he had bought for $31,500. He owned just one car, a Lincoln Continental. His only luxury was a personal jet; though he named it Indefensible, he justified having it by pointing out that commercial aircraft had become uncomfortable for him after he became well known.

In a speech at the Wharton School of Business (April 21, 1999), Buffett laid out four rules for investment: 1. Understand the business in which you are investing. Look for businesses within a circle of personal competence. 2. Look for sound, fundamental economics. Seek out companies that have a sustainable economic advantage, one he called "a castle with a moat around it," using Coca Cola as an example whose brand name has endured for generations and which could not be bought even for millions of dollars. 3. Find competent leadership. Honest, capable, hardworking leaders are needed to lead companies with a sustainable economic advantage. His instruction to Berkshire Hathaway managers was to "Widen the moat. That keeps the castle valuable." 4. Buy at the right price if you want an investment to pay off. He explained how he had gone through company after company in Moody's investment manuals, searching for those that had large cash values yet were selling at low percentages of that value.

SOCIAL CONCERNS

Buffett did not like to give money away, which meant that he was losing it. His tastes were simple; he ate hamburgers and drank cherry Coke, and he loved to use baseball metaphors in his talks about investing. He gave over $1 million dollars to keep minor league baseball in Omaha. He also helped Grinnell College in Iowa purchase (for $13 million) a public radio station. Two years later, to Buffett's dismay, the college sold it for $48 million dollars. His wife was prone to take up causes in poor neighborhoods and pushed him to donate to them. He did so reluctantly, and inevitably his better sense proved correct, as the money ended up being wasted, in his view. He also supported the formation of a liberal magazine in Washington that proceeded to fail. Abortion and birth control were two of his wife's special projects, as was the welfare of the homeless and street youths. The two formed a group called the Glide Foundation as a vehicle to channel money to that cause. In the early 2000s it seemed that a Buffett foundation would be the eventual beneficiary of his wealth, but Buffett preferred not to think about it.

See also entry on Berkshire Hathaway Inc. in International Directory of Company Histories.

sources for further information

Bianco, Anthony, "The Warren Buffett You Don't Know," BusinessWeek Online July 5, 1999, http://www.businessweek.com/1999/99_27/b3636001.htm.

Cohen, Laurie P., "Buffett Shows Tough Side to Salomon—and Gutfreund," Wall Street Journal, April 11, l988.

Graham, Benjamin, The Intelligent Investor, New York: Random House, 1949.

Hagstrom, Robert, Jr., The Warren Buffett Portfolio, New York: John Wiley & Sons, 1999.

Kilpatrick, Andrew, Of Permanent Value: The Story of Warren Buffett, Birmingham, Ala.: APKE, 1994.

Lewis, Michael, "The Temptation of Warren," New Republic, February 17, 1992, pp. 22–25.

Loomis, Carol J., "The Inside Story of Warren Buffett," Fortune, April 11, 1988, pp. 21–36.

Lowenstein, Roger, Buffett: The Making of an American Capitalist, New York: Random House, 1995.

O'Laughlin, James, The Real Warren Buffett: Managing Capital, Leading People. London: Nicholas Brealey Publishing, 2003.

Olson, Chris, "Mrs B Uses Home to Eat and Sleep," Omaha World-Herald, October 28, 1984.

Pagel, Al, "Susie Sings for More than Her Supper," Omaha World-Herald April 17, 1977.

Pandya, Mikul, "Warren Buffett on Investing and Leadership: 'I'm Wired for This Game,'" Leadership Digest April 21, 1999, http://leadership.wharton.upenn.edu/digest/04-99.shtml.

Vick, Timothy, How to Pick Stocks like Warren Buffett: Profiting from the Bargain Hunting Strategies of the World's Greatest Value Investor, New York: McGraw-Hill, 2000.

—Jack J. Cardoso

Warren Buffett

Warren Buffett (born 1930) is America's most brilliant investor, compiling a year-after-year record of phenomenal returns for the shareholders of his holding company, Berkshire Hathaway, Inc.

For example, if someone had given him $10,000 to invest in 1956 he or she would be worth over $60 million by 1994. Buffett is one of the richest men in America, and he is a success story in the classic mold. As of 1995 Buffett, with a personal fortune of some $12 billion in Berkshire stock, was the second-wealthiest individual in America, right after his friend, Microsoft chairman Bill Gates.

Throughout it all Buffett has retained a seeming simplicity that goes along with his down-home, Midwestern roots. His associates, however, say his hayseed manner disguises a brilliant sophisticate. He shuns New York and Los Angeles, preferring to run his far-flung empire from modest offices in Omaha, Nebraska. The periodic insights into his success that he dispenses are usually witty and simple. However, each time Buffett—known in the financial world as the "Oracle of Omaha"—speaks, just about everyone, from the most accomplished professional prognosticator to the stock-playing hobbyist, pays attention.

Born in 1930 in Omaha, Nebraska, Buffett always "wanted to be very, very rich," as a Time article put it. The boy received an early, close-up look at the stock market: his father Howard was a broker, and young Warren, just nine years old, often visited the shop and charted stock performances. He chalked in stock prices on the big blackboard at his father's office, and at age 13 ran paper routes and published his own horse-racing tip sheet.

In 1942 Buffett's father was elected to the U.S. House of Representatives and the family moved to Fredricksburg, Virginia. Young Warren Buffett expanded his business interests by placing pinball machines in Washington, D.C. barbershops. At age 16, a prodigy in statistics and mathematics, he enrolled at the University of Pennsylvania. He stayed two years, moved to the University of Nebraska to finish up his degree, and emerged from college at age 20 with $9,800 in cash from his childhood businesses. Harvard Business School rejected him, but Columbia University's Graduate School of Business accepted his application.

Finds Niche

Columbia was a key turning point in Buffett's life, for it was there that he met Benjamin Graham, co-author with David Dodd of the landmark textbook Security Analysis. "I don't want to sound like a religious fanatic or anything, but it really did get me," Buffett was quoted as saying in the New York Times Magazine about Graham's writings.

Graham's philosophy has permeated most of Buffett's decision in the 40-plus years since they first met. Essentially, Graham's theory, called value investing, urges stock pickers to buy shares that are much cheaper than a company's net worth would indicate. That is, look for stocks that sell below their "intrinsic value," a measurement Graham calculated by subtracting a company's liabilities from its assets. Eventually, Graham theorized, the stock market will catch on to the true value of a company and its share price will rise; by that time, a savvy investor following Graham's principles already will be locked into the stock at a low price. It's a simple enough theory, but one that requires much research into companies to determine their net worth, their "book value," and other factors. It is research for which Buffett is eminently suited.

After graduate school, at his father's brokerage firm, Buffett would often travel to Lincoln, Nebraska and pore through company reports. As he told Forbes magazine, "I read from page to page. I didn't read brokers' reports or anything. I just looked at raw data. And I would get all excited about these things." Today, he conducts his business the same way. Buffett does not have a stock ticker in his office, nor a computer or calculator. According to numerous published reports, he spends about five to six hours each day reading annual reports and trade publications. Fortune magazine reported that in Omaha, Buffett "does what he pleases, leading an unhurried, unhassled, largely unscheduled life….He spends hours at a stretch in his office, reading, talking on the phone, and, in the December to March period, agonizing over his annual report, whose fame is one of the profound satisfactions in his life."

Buffett left Omaha and joined Graham's investment firm on Wall Street in 1954. There he was able to view his mentor's work first-hand. Over the next two years, Buffett got married, fathered two children, and made $140,000 by the time he was 25. Graham shut down his investment firm in 1956 and Buffett gladly left New York. When he returned to Omaha family members asked him for advice, so Buffett set up an investment partnership. As he told the New York Times Magazine, he said to his investors, "I'll run it like I run my own money, and I'll take part of the losses and part of the profits. And I won't tell you what I'm doing."

While he might have kept investors in the dark about his methods, Buffet's bottom-line returns were crystal clear: over the next 13 years Buffett Partnership Ltd. generated a 29.5 percent compounded annual return. He raised $105,000 from investors to start the partnership, and when he closed it 13 years later, the partnership was worth $105 million, and Buffett worth $25 million.

One of the investments along the way was Berkshire Hathaway, a textile manufacturer in Massachusetts. Buffett would create his multibillion-dollar empire around that business, although the textile company itself remains—in Buffett's opinion—one of the biggest investment mistakes he made. Sure, Berkshire Hathaway's stock price was cheap, satisfying a requirement of the Graham strategy. But the textile industry as a whole, and the company itself, was weak. In one of his much-anticipated annual reports, quoted in Fortune magazine, Buffett summed up part of his philosophy in the wake of that mistaken textile purchase: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." (He would shut down the textile mill in the mid-1980s.)

Buffett ended the lucrative partnership in 1969. As the New York Times Magazine reported, "The partnership's capital had grown so large that small investments were no longer reasonable, and he could find no big investments to his liking. In addition, the market was too speculative for his taste." He then focused on Berkshire Hathaway, buying up companies under its umbrella, investing "where and when he pleased," according to the Times.

Buffett's holdings, and his strategies, from the late 1960s on are clear. He first bought a series of insurance companies, which are considered excellent sources of cash. (People regularly pay insurance premiums; insurance companies usually pay claims on those insurance policies—if they have to pay them at all—years down the line. Therefore, there is usually a great amount of cash on hand for the company owners.) Buffett used that cash to buy a series of businesses, which have remained at the core of his investments.

His so-called "Sainted Seven Plus One" are sizeable, profitable companies that, according to the Wall Street Journal, "provide a steady stream of profits and capital to fund the investments that bring him renown." Among the eight core businesses are: the Buffalo News, World Books, Kirby vacuum cleaners, Fechheimer Brothers uniform company, and See's Candies. According to Money magazine, those businesses alone generated $173 million in cash in 1990, and the New York Times estimated in 1991 that their combined worth was approximately $1.6 billion. The cash generated by the eight companies is, in turn, invested in other corporations, which comprise the other core chunk of Berkshire Hathaway's holdings.

All of the companies in which Buffett invested are businesses he understands, underlining one of Buffett's main rules: "Stick to what you know." Forbes once quoted him as explaining why he had not invested in the immensely profitable computer company, Microsoft: "Bill Gates is a good friend, and I think he may be the smartest guy I ever met. But I don't know what those little things do."

Instead Buffett bought into what the New York Times Magazine called his "permanent holdings": The Washington Post, Geico (an insurance company), Capital Cities/ ABC, and Coca Cola. He bought $45 million of Geico stock, which by 1989, according to the New York Times, was worth $1.4 billion. His $10.6 million investment in the Washington Post group of publications ballooned to an investment worth $486 million 16 years later. When he purchased seven percent of Coca Cola for $1 billion in 1988, some said he had bought too high, too late. But Buffett predicted Coke's expansion into foreign markets and thought the company could grow. It did, more than doubling his investment.

Investments in the big, brand-name companies is an example of how Buffett's buying strategy has evolved from the teachings of his mentor, Graham. Buffett became interested in what he called "franchise" businesses, or companies that are well-managed, with an established product line, and which are not subject to low-cost competition. His strategy changed because the market changed. The companies that Graham liked—companies trading far below their actual value—are rarer.

White Knight

Also in the 1980s, Buffett engaged in a series of transactions that are available only to someone with enormous wealth. He stepped in as a so-called "white knight" to help companies fend off hostile takeovers by other corporations. Buffett's strategy works like this: a company, such as Gillette, faces a takeover and needs an infusion of cash. Buffett invests in the company's "preferred stock." According to the Wall Street Journal, the preferred stock options are "not available to other investors. Typically [Buffett] gets preferred stock bearing a healthy dividend—assuring a modest return no matter what happens—and the ability to convert to common stock if the company's fortunes rise." In the case of Gillette, Buffett invested $600 million in 1989, and in converting the stock two years later, received 11 percent of the company, which was worth, at the time, $1.05 billion.

In 1991 Buffett stepped in as interim chairman of Solomon Brothers brokerage firm after that it was accused of making false bids at Treasury auctions. Buffett, who had invested $700 million of Berkshire Hathaway cash in Solomon Brothers, was its largest shareholder. He is credited with streamlining the company and, over his six-month tenure as interim chairman, helping to rebuild its reputation after the scandal.

But the shareholders are not complaining. Berkshire Hathaway stock was trading for $12 a share in 1965. As of December, 1994, a single share of the investment company was the most expensive traded on the New York Stock Exchange: it cost $19,900 a share. Buffett owns over 40 percent of Berkshire Hathaway, which accounts for his $8.3 billion net worth. (Incidentally, Buffett does his own taxes.) And in August 1995, Buffett brokered a spectacular deal when his Berkshire Hathaway arranged the $19 billion purchase of Cap Cities/ABC by the Walt Disney Company. While the brokerage already had a $345 million in investments, this one merger raised the value to $2.3 billion.

Those not fortunate enough to own Berkshire Hathaway often mimic Buffett's buys. Fortune reported that when the general public learns Buffett has bought a particular stock, the public also buys the stock, running up the price. That led the magazine to quip: "Now there are two ways to make a killing in the stock market. The first, goes the old saw, is to shoot your broker. The second, it seems, is to shadow Warren Buffett."

The strategy doesn't always work, as a 1995 Money article warned. "Awe-inspiring though Buffett's record is, he's had a few clunkers. The $322 million investment he made last spring in Salomon common stock is down roughly 26%, and an albeit tiny (for him) $38.7 million stake in [an aircraft leasing company] has plummeted 68% since 1990." Prior to that, Buffett had bought Disney low and sold it later for a small profit; but that company rose spectacularly after Buffett's sale. He bought a $358-million chunk of USAir only to see the investment sour. (He was later quoted in Fortune as telling a group of business students at Columbia, "Don't invest in airlines.") In his 1989 annual report, quoted in Fortune, Buffett candidly wrote, "It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge."

Aside from his business acumen and opinions, many people are interested in Buffett himself, asking: What's a billionaire like? He does not give frequent interviews, preferring to let his corporate report speak for him. He lives in the same Omaha home he bought in 1958 for $31,500. He lives in that home with his girlfriend and former housekeeper, Astrid Menks, 17 years his junior. His wife of 40-plus years lives in California and is friends with his girlfriend. (Mrs. Buffett is the second largest shareholder of Berkshire Hathaway and is slated to take over the company after Buffett's death.)

One of his few extravagances is his corporate jet, and playing bridge by computer with friends from around the country. According to the Wall Street Journal, he wears rumpled suits, although very expensive Italian ones, and drinks about five cherry Cokes a day. He says he is an agnostic. As Roger Lowenstein related in his unauthorized biography Buffett: The Making of an American Capitalist, the investor once promised his young daughter a $10,000 check if he didn't lose a certain number of pounds by a certain date. He lost the weight, and kept the cash.

"He is a standard bearer for long-term investing, the perfect antidote to the get-rich-quick schemers of Wall Street," the Wall Street Journal said of Buffett. Forbes opined that "He has not the psychological need for the constant wheeling and dealing, buying and selling that afflicts so many successful business and financial people." His philosophy—as well as his enormous wealth—allows him to be pickier and choosier. As he stated in his 1989 annual report, "We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person."

Which leads to the obvious question he is often asked: How do you succeed in the stock market? Throughout the years Buffett has offered bits of advice, such as: 1) If you buy into a great business, stick with it no matter how high the stock price goes; 2) avoid staggering debt; 3) think long term and don't hop in and out of the market; 4) in a bidding war between companies, buy stock in the side you think will lose; 5) easy does it (meaning, avoid businesses with big problems), and 6) concentrate on a small number of stocks.

Buffett has already made preparations for his money when he dies. He intends to set up a philanthropic foundation which, given the 23 percent annual rate of return he has averaged throughout his career, could generate a multibillion-dollar legacy to put the Ford and Rockefeller foundations to shame. He wants the fund's trustees to focus on halting population growth and nuclear proliferation. His three children will not make out that well; Buffett has said he plans to leave them "only" about $5 million apiece. He was quoted in Esquire as saying, "I think kids should have enough money to be able to do what they want to do, to learn what they want to do, but not enough money to do nothing."

Further Reading

Lowenstein, Roger, Buffett: The Making of an American Capitalist (unauthorized biography), Random House, 1995.

Business Week, May 10, 1993, p. 30; July 18, 1994, p. 46.

Economist, May 23, 1992, p. 86.

Esquire, October 1988, p. 103.

Forbes, March 19, 1990, p. 92; October 18, 1993, p. 40, p. 112.

Fortune, April 11, 1988, p. 26; April 9, 1990, p. 95; January 11, 1993, p. 101; November 29, 1993, p. 10; April 18, 1994, p. 14; July 25, 1994, p. 17.

Money, November 1990, p. 72; August 1991, p. 70; April 1995, p. 106.

New York Times, March 26, 1992, p. D1.

New York Times Magazine, April 1, 1990, part 2, p. 16.

Time, August 21, 1995.

U.S. News & World Report, June 20, 1994, p. 58.

Wall Street Journal, November 8, 1991, p. A1. □

Buffett, Warren

(1930-)
Berkshire Hathaway Inc.

Overview

Warren Buffett is regarded as one of America's most brilliant investors and was one of its richest men in the late twentieth century. Though he rarely grants interviews, there are scores of books, articles, and websites devoted to his investment strategies. His own insights are revealed in his annual shareholder's letter and meeting of Berkshire–Hathaway, where he is chairman and CEO. The subject of a cult of personality among satisfied investors, Buffett has been variously dubbed "St. Warren," the "Oracle of Omaha," and the "Corn–Fed Capitalist" among other nicknames. Despite his vast fortune, he's remained somewhat of a midwestern folk hero, lunching on hamburgers, wearing rumpled suits, and living in the same house in Omaha, Nebraska, that he bought in 1958 for $31,500. Outside his business concerns, Buffett has professed interest in funding a foundation devoted to halting population growth worldwide and to reduce nuclear proliferation.

Personal Life

Warren Edward Buffett was born in Omaha, Nebraska, on August 30, 1930, the son of Howard Homan and Leila (Stahl) Buffett. His father was a stockbroker who was later elected to the U.S. House of Representatives. Buffett, quoted in a 1995 Time article, said he had always "wanted to be very, very rich." As a boy, he was often taken by his father to his workplace, where he had an opportunity to learn the stock market business at a very early age. Before he was even a teenager, Buffett was doing such routine duties at his father's office as chalking in stock prices on the main blackboard and charting the performance of various stocks. In 1942, when Buffett was 12 years old, he and his parents moved to Fredericksburg, Virginia, where they lived while his father served in Congress.

By the age of 16, Buffett was clearly a prodigy in the area of mathematics and statistics. He enrolled at the University of Pennsylvania, where he focused on mathematics and statistics and then moved to the University of Nebraska to finish his degree. He graduated at age 20 with a bachelor's degree and then entered Columbia University's graduate school of business, where he obtained a master's degree in business.

Buffett, who was once described by New York Times writer David Barboza as "a kind of Will Rogers character with John D. Rockefeller's bank account," lives a relatively unassuming life. He separated from his wife, Susan, in 1977 but maintains an amicable relationship with her and has no plans for a divorce. He is a good friend of Bill Gates, whose personal fortune is the only one in the world exceeding Buffett's own.

Buffett lives in Omaha with his girlfriend and former housekeeper, Astrid Menks. Though Buffett rarely gives interviews, he enjoys hosting an annual Berkshire Hathaway investors' meeting in his hometown. His wife lives in California, but as the second largest shareholder of Berkshire Hathaway, she may maintain control of the business if Buffett predeceases her.

Career Details

Buffett has claimed that his career started when his father exposed him to the stock market business as a child and taught him the basics of investing. He has declared that the great turning point in his life and career came when he met his mentor in business, Benjamin Graham. In 1954, after having worked at his father's brokerage business in Omaha, Buffett joined Graham's Wall Street investment firm, Graham–Newman Corporation. Buffett was already a genius at mathematics and statistical analysis when he met Graham, but Graham had a theory about the investment market that Buffett has used during most of his career. The Graham theory involved what Graham called "value investing." The core idea was that people picking stocks to invest in should buy shares of stock that are valued cheaper than the company's worth on paper, in conventional auditing terms.

It was a simple theory, but it required diligence and ambition to practice. Buffett's mathematical and statistical talent plus ambition enabled him to excel at finding out what companies were undervalued. He had to ignore everything published about a company, including its annual reports, go back to the "raw data" of the company, and make his own patient analysis, starting from scratch. Buffett personally analyzed every stock in which he invested and has consistently avoided markets he did not understand or knew little about.

During this period, Buffett married Susan Thompson, fathered two of his three children, and earned $140,000 in New York before he was 25. In 1956, when Graham shut down his firm on Wall Street, Buffett left New York, returned to Omaha, raised $105,000, and started an investment partnership. By the time Buffett ended the partnership in 1969, it had grown at an annual compounded rate of 29.5 percent and had a value of $105 million.

Buffett next turned his focus to Berkshire Hathaway, a struggling textile mill in Massachusetts, and bought several additional companies. Although he closed the textile manufacturing business in the mid–1980s, Buffett kept the name for his holding company, and he continued to head the company into the early twenty–first century. During the 1980s, Buffet also developed what became known as the "white knight" strategy of investing, by which he saved certain businesses from being bought out by competitors. He would infuse the company with the money it needed to fend off takeovers but allowed its existing management to continue running the business. Buffett demanded in return that his investment pay off well. He arranged to get a preferred stock that always carried a healthy dividend, whether the company did well or not. Though Buffett took the rather old–fashioned approach of investing in companies associated with everyday products, such as Coca–Cola, Gillette, and See's Candy, his conservative strategy made him exceptionally wealthy.

One of Buffett's most dramatic successes was his brief stint as chairman of the investment firm Salomon Inc., one of the world's largest investment services. Through Berkshire he had acquired a 12 percent minority interest in the firm in 1987—one of his white knight investments. In 1991 it was revealed that senior staff had engaged in illegal trading of government securities, and there was an apparent attempt to cover up the scandal once Salomon management learned of it. In addition, it grew evident that the company's finances were perilously dependent on a heavy debt load.

The resulting management shake–up brought in Buffett, already a director at Salomon, as the firm's chairman. Simultaneously, Salomon was on the brink of bankruptcy because the U.S. Treasury Department penalized it with a ban on participating in federal securities auctions. The same day the crippling ban was announced, Buffett pleaded successfully with authorities at the Treasury and the Federal Reserve to reverse the ban. This critical victory saved Salomon from financial collapse; and both Buffett's management decisions and his high esteem in the investment world quickly stabilized Salomon's market position, which was heading into a free fall until he stepped in. Though he withdrew as chairman less than a year later, Buffett reduced Salomon's debt and, more important, helped restore confidence in Salomon. His investment in Salomon paid off in 1997 when the firm was sold to the Travelers Group for $9 billion. Of that amount, Berkshire Hathaway's share was worth about $1.9 billion, more than twice his initial investment a decade earlier.

Since about the mid–1990s, Buffett has concentrated on the reinsurance business. His single biggest purchase came in 1998, when Berkshire spent $22 billion to acquire General Re Corporation, a company providing reinsurance for catastrophes such as earthquakes, floods, and hurricanes. This move, according to industry analysts, basically transformed Berkshire from a closed–end fund to a real holding company. Between 1996 and 1999, Berkshire's assets increased four–fold, from $29.9 billion to $124 billion.

Another change in focus for Buffett was real estate investment trusts (REITs), publicly traded companies that own properties like shopping malls and apartment complexes. In 1999 he disclosed expenditures of $50 million for shares in four REITs. Much of this sum came from Buffett's personal funds. In addition, however, he continues to look for big acquisitions for Berkshire. Business Week has reported that Buffett would like to find a $10 to $15 billion acquisition for the company.

Buffett's emphasis on value investing has proved immensely profitable. By 1999, class A shares of Berkshire Hathaway were priced at $77,000 per share, and class B shares sold for about $2,500 per share. Buffett's personal worth in 1999 was estimated at $36 billion.

Chronology: Warren Buffett

1930: Born.

1950: Received B.A. in math and statistics from University of Pennsylvania.

1952: Obtained M.B.A. at Columbia University.

1952: Apprenticed at his father's brokerage in Omaha.

1954: Joined Benjamin Graham's investment firm on Wall Street.

1956: Established Buffett Partnership Ltd. in Omaha.

1965: Gained control of Berkshire Hathaway Company.

1969: Dissolved successful partnership.

1991: Became interim chairman of Salomon Brothers brokerage firm.

2001: Net worth estimated at $32.3 billion.

In November 2001, Buffett's Berkshire–Hathaway was nearing a deal with creditors of Fruit of the Loom to buy the apparel maker out of bankruptcy for about $840 million. Fruit of the Loom, a 130–year–old Chicago company known for its namesake underwear, filed for Chapter 11 protection in December 1999 hampered by heavy debt and manufacturing and inventory problems. Berkshire has been negotiating to buy the apparel giant which, at the time of bankruptcy filing, claimed one–third of the U.S. market for men and boys underwear.

Social and Economic Impact

Warren Buffett's investments have held significant sway over a number of large U.S. companies and even whole industries. He has built up a major position in the insurance industry, which accounted for about two–thirds of Berkshire's 1997 revenues, by purchasing such companies as GEICO Corporation and General Re. Other fully owned subsidiaries include the H. H. Brown Shoe Company, International Dairy Queen, and See's Candies. Buffett has also purchased long–standing minority stakes in American Express, Coca–Cola, the Washington Post, and Gillette. In a surprise 1998 move, however, Buffett invested heavily in silver—capturing over a third of the world market—because he thought it was undervalued. This was an uncharacteristic choice for Buffett because commodity investments are usually regarded as more speculative and short–lived than his conservative long–term approach deems appropriate.

At the close of the twentieth century, Buffett was well known as a billionaire capitalist who made his own fortune. He is famous for such eccentricities as wearing rumpled suits and drinking five Cherry Cokes a day. He has declared himself an agnostic and has arranged that after his death his money will endow the Buffett Foundation, which he established in the mid 1960s and which is managed by Buffett's former son–in–law, Allen Greenberg. The foundation disbursed about $11 to $12 million annually in the late 1990s for programs oriented to halting population growth worldwide and fighting nuclear proliferation. Analysts believe that, when the foundation receives its full endowment after Buffett's death, it will be the largest philanthropy in the world.

Buffett has said, in the entrepreneurial spirit, that he intends to leave his three children just $5 million apiece out of his more than $36 billion. He explained this decision in a 1988 interview with Esquire: "I think kids should have enough money to be able to do what they want to do, to learn what they want to do, but not enough money to do nothing."

In Berkshire Hathaway's 1989 annual report, Buffett wrote: "We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." In applying the investment strategy he developed with Graham, Buffett has always done his own company analyses. He is known by this hands–on style, and is perhaps the only billionaire who has always figured his own income taxes.

As Buffett put it in a Business Week article in 1999, "Berkshire is my painting, so it should look the way I want it to when it's done . . . Berkshire is the company I wanted to create. It's not the company Alfred P. Sloan wanted to create. It fits me. I run it with our investors and managers in mind, but it is designed to fit me."

According to financial advisor Tom Wolf, Buffett once told Berkshire Hathaway shareholders that if he were teaching a class on security analysis, he might ask his students to determine a value for Internet stocks that had no earnings but sold at high price–to–earnings ratios. And if any of the students did, he would fail them.

While tech issues continued to plummet in 2001 to new lows, Berkshire's stock was setting a series of new highs. That year, Berkshire was comfortably cushioned from short–term pressures by its insurance businesses, which accounted for roughly half of its profits. That year, Buffett reportedly sent a newsletter to shareholders stating, "We have embraced the twenty–first century by entering such cutting–edge industries as brick, carpet, insulation and paint. Try to control your excitement."

Buffett has been one of the most successful capitalists of the twentieth century. Using his analytical skills, he has invested in other people's ideas, inventions, and organizations, and through them has amassed great personal wealth. In 1991 a Wall Street Journal reporter described Buffett as "a standard bearer for long–term investing, the perfect antidote to the get–rich–quick schemers of Wall Street."

Sources of Information

Contact at: Berkshire Hathaway Inc.
1440 Kiewit Plz.
Omaha, NE 68131
Business Phone: (402)346–1400
URL: http://www.berkshirehathaway.com

Bibliography

Barboza, David. "A Capitalist Hero Keeps on Pitching: The Corny Charm of Buffettpalooza." New York Times, 29 May 1999.

"Berkshire Nears Deal on Fruit of the Loom." The Wall Street Journal, 2 November 2001.

"Brilliant Careers." Salon.com, 31 August 1999.

"Charity, the Buffett Way." Business Week, 25 October 1999.

"The Charts Have Been Turned Upside Down." 123Jump, May 17, 2001.

"Chasing Warren Buffett Via the Web." The Street.com, 5 May 2001.

Marsh, Virginia. "Business Leaders: Entrepreneurs Win High Admiration." The Financial Times. 7 December 1999.

Oppel, Richard A. "The Markets: Market Place; Investors Show More Interest in REIT Stocks." New York Times, 30 April 1999.

"The Oracle Strikes Back." The Economist (US), 17 March 2001.

Setton, Dolly, and Robert Lenzner. "The Berkshire Bunch." Forbes, 12 October 1998.

Silverman, Gary, and Andrew Osterland. "Buffett's $22 Billion Hedge." Business Week, 6 July 1998.

"Warren Buffett." CyberInvestment.com, 2001.

"Warren the Buffett You Don't Know." Business Week, 5 July 1999.

Wolf, Tom. "Wolf On Equities." FWN Select, 8 June 2001.

Buffett, Warren

(1930-)
Berkshire Hathaway Inc.

Overview

Warren Buffett is regarded as one of America's most brilliant investors and was one of its richest men in the late twentieth century. The subject of a cult of personality among satisfied investors, Buffett has been variously dubbed "St. Warren," the "Wizard of Omaha," and the "Corn-Fed Capitalist," among other nicknames. Despite his vast fortune, he is often seen wearing a rumpled suit and lives in Omaha, Nebraska, in the same house he bought in 1958 for $31,500. Outside of his business concerns, Buffett has professed interest in funding a foundation devoted to halting population growth worldwide and to reducing nuclear proliferation.

Personal Life

Warren Edward Buffett was born in Omaha, Nebraska, on August 30, 1930, the son of Howard Homan and Leila (Stahl) Buffett. His father was a stockbroker who was later elected to the U.S. House of Representatives. Buffett, quoted in a 1995 Time article, said he had always "wanted to be very, very rich." As a boy, he was often taken by his father to his workplace, where he had an opportunity to learn the stock market business at a very early age. Before he was even a teenager Buffett was doing such routine duties at his father's office as chalking in stock prices on the main blackboard in the office and charting the performance of various stocks. In 1942, when Buffett was 12 years old, he and his parents moved to Fredericksburg, Virginia, where they lived while his father served in Congress.

By the age of 16, Buffett was clearly a prodigy in the area of mathematics and statistics. He enrolled at the University of Pennsylvania, where he focused on mathematics and statistics, and then moved to the University of Nebraska to finish his degree. He graduated at age 20 with a bachelor's degree, then entered Columbia University's graduate school of business, where he obtained a master's degree in business.

Career Details

Buffett has claimed that his career started when his father exposed him to the stock market business as a child and taught him the basics of investing. He has declared that the great turning point in his life and career came when he met his mentor in business, Benjamin Graham. In 1954, after having worked at his father's brokerage business in Omaha, Buffett joined Graham's Wall Street investment firm, Graham-Newman Corporation. Buffett was already a genius at mathematics and statistical analysis when he met Graham, but Graham had a theory about the investment market that Buffett has used during most of his career. The Graham theory involved what Graham called "value investing." The core idea was that people picking stocks to invest in should buy shares of stock that are valued cheaper than the company's worth on paper, in conventional auditing terms.

It was a simple theory, but required diligence and ambition to practice. Buffett's mathematical and statistical talent plus ambition enabled him to excel at finding out what companies were undervalued. He had to ignore everything published about a company, including its annual reports, go back to the "raw data" of the company, and make his own patient analysis, starting from scratch. He personally analyzed every stock in which he invested, and has consistently avoided markets he did not understand or knew little about.

During this period Buffett married Susan Thompson, fathered two of his three children, and earned $140,000 in New York before he was 25. In 1956, when Graham shut down his firm on Wall Street, Buffett left New York, returned to Omaha, raised $105,000, and started an investment partnership. By the time Buffett ended the partnership in 1969, it had grown at an annual compounded rate of 29.5 percent and had a value of $105 million.

Buffett next turned his focus to Berkshire Hathaway, a Massachusetts textile mill, and bought several additional companies. Although he closed the textile manufacturing business in the mid-1980s, Buffett kept the name for the holding company he continued to head in the late 1990s. During the 1980s Buffet also developed what became known as the "white knight" strategy of investing, where he saved certain businesses from being bought out by competitors. He stepped in to save the business by infusing it with the money it needed to fend off takeovers, but he also demanded in return that his investment pay off well. He arranged to get a preferred stock that always carried a healthy dividend, whether the company did well or not. Buffett made a great deal of money by pursuing this strategy.

By this point in his career, Buffett had become a multi-billionaire and a kind of celebrity because he was so talented at making money. Many have sought his advice, but he has given interviews only rarely. His lifestyle remained immensely modest, especially for a man known to be one of the richest men in America. In the mid-1990s he still lived at the Omaha home he had bought in 1958 for $31,500, with his girlfriend and former housekeeper, Astrid Menks, 17 years younger than Buffett. His wife, from whom Buffett had long been separated, lived in California; but, if she outlives Buffett, she will take over the Buffett company after his death, since she is the second-largest shareholder of Berkshire Hathaway.

One of Buffett's most dramatic successes was his brief stint as chairman of the investment firm Salomon Inc., one of the world's largest investment services. Through Berkshire he had acquired a 12 percent minority interest in the firm in 1987—one of his white knight investments. In 1991 it was revealed that senior staff had engaged in illegal trading of government securities, and there was an apparent attempt to cover up the scandal once Salomon management learned of it. In addition, it grew evident that the company's finances were perilously dependent on a heavy debt load.

The resulting management shake-up brought in Buffett, already a director at Salomon, as the firm's chairman. Simultaneously, Salomon was on the brink of bankruptcy because the U.S. Treasury Department penalized it with a ban on participating in federal securities auctions. The same day the crippling ban was announced, Buffett pleaded successfully with authorities at the Treasury and the Federal Reserve to reverse the ban. This critical victory saved Salomon from financial collapse; and both Buffett's management decisions and his high esteem in the investment world quickly stabilized Salomon's market position, which was heading into a free fall until he stepped in. Though he withdrew as chairman less than a year later, Buffett reduced Salomon's debt and, more importantly, helped restore confidence in Salomon. His investment in Salomon paid off in 1997 when the firm was sold to the Travelers Group for $9 billion. Of that amount, Berkshire Hathaway's share was worth about $1.9 billion, more than twice his initial investment a decade earlier.

Though he has been described as a quiet person with a Midwestern simplicity, Buffett is recognized as a brilliant and sophisticated personality. He has consciously shunned New York and Los Angeles, and yet every time the famous "Oracle of Omaha" has spoken, it is reported that everyone in the financial world listens to him.

Social and Economic Impact

Warren Buffett's investments have held significant sway over a number of large U.S. companies and even whole industries. He has built up a major position in the insurance industry, which accounted for about two-thirds of Berkshire's 1997 revenues, by purchasing such companies as GEICO Corporation and General Re. Other fully owned subsidiaries include the H.H. Brown Shoe Company, International Dairy Queen, and See's Candies. Buffett has also purchased long-standing minority stakes in American Express, Coca-Cola, the Washington Post, and Gillette. In a surprise 1998 move, however, Buffett invested heavily in silver—capturing over a third of the world market—because he thought it was undervalued. This was an uncharacteristic choice for Buffett because commodity investments are usually regarded as more speculative and short-lived than his conservative long-term approach deems appropriate.

At the close of the twentieth century, Buffett was well known as a billionaire capitalist who made his own fortune. He is famous for such eccentricities as wearing rumpled suits and drinking five Cherry Cokes a day. He has declared himself an agnostic, and has arranged that after his death his money is to be used to establish a philanthropic foundation that will work to halt population growth worldwide and to fight nuclear proliferation.

Buffett has also said, in the entrepreneurial spirit, that he intends to leave his three children just $5 million apiece out of his more than $10 billion. He explained this decision in a 1988 interview with Esquire: "I think kids should have enough money to be able to do what they want to do, to learn what they want to do, but not enough money to do nothing."

In Berkshire Hathaway's 1989 annual report, Buffett wrote: "We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person." In applying the investment strategy he developed with Graham, Buffett has always done his own company analyses. He is known by this hands-on style, and is perhaps the only billionaire who has always figured his own income taxes.

Chronology: Warren Buffett

1930: Born in Omaha, Nebraska.

1954: Joined Benjamin Graham's investment firm on Wall Street.

1956: Established Buffett Partnership Ltd. in Omaha.

1969: Dissolved successful partnership.

1991: Became interim chairman of Salomon Brothers brokerage firm.

1998: Net worth estimated at $23 billion.

Buffett has been one of the most successful capitalists of the twentieth century. Using his analytical skills, he has invested in other people's ideas, inventions, and organizations, and through them has amassed great personal wealth. In 1991 a Wall Street Journal reporter described Buffett as "a standard bearer for long-term investing, the perfect antidote to the get-rich-quick schemers of Wall Street."

Sources of Information

Contact at: Berkshire Hathaway Inc.
1440 Kiewit Plz.
Omaha, NE 68131
Business Phone: (402)346-1400
URL: http://www.berkshirehathaway.com

Bibliography

Loomis, Carol J. "Buffett's Wild Ride at Salomon." Fortune, 27 October 1997.

Lowenstein, Roger. Buffett: The Making of an American Capitalist. New York: Random House, 1995.

Silverman, Gary, and Andrew Osterland. "Buffett's $22 Billion Hedge." Business Week, 6 July 1998.

BUFFETT, WARREN

An extremely high-profile investor with rare job qualifications in the late 1990s—expansive patience and discomfort with technology, despite his close friendship with Microsoft mogul Bill Gates—Warren Buffett's investment success in the final decades of the 20th century knew no peer or rival. Worth about $30 billion, Buffett is one of the world's richest men, second in the United States only to Gates, and one of the very few of his class to attain such fortune solely on the strength of stock investments. The chairman of Omaha, Nebraska-based Berkshire Hathaway, Buffett has been known to refer to his annual stockholders' meeting as a "Woodstock weekend for capitalists." Accordingly, the event draws investors from around the world who flock to hear his sermon. Buffett's awe-inspiring success and cult-like status spawned a potpourri of investment-related Web sites, magazine stories, and books, many offering advice on how to "invest like Warren Buffett." The fawning, sometimes almost worshipful attitude of some of Buffett's followers earned him the affectionate nickname, the "Sage of Omaha."

A standard story within the investment world perhaps best illustrates the reasoning behind the Buffett legend: if one invested just $10,000 into Berkshire Hathaway in 1965, when Buffett first assumed control, by the end of the century one would have turned that initial investment into $50 million. By way of comparison, if the same investor had sunk that $10,000 into the Standard & Poor's 500 stock index in 1965, by the end of 1999 it would have been worth less than $500,000. Thus it's easy to see why so much of the investment world strains to hear every word and scrutinize every move of Warren Buffett.

Equally famous as his astronomical investment success was his notorious sourness toward the new economy and dot-com mania. Buffett and his legions of followers are well known for eschewing the trendy and faddish in stock investment. Buffett in large part built his reputation by attracting like-minded investors, who were in it for the long term rather than for quick speculative profits. His method ignores macroeconomic trends and Wall-Street tips and wisdom, focusing instead on companies that boast significant market share and growth potential, but with low earnings and depressed valuation. In short, he looks for solid, strong companies that will put together sound earnings over the long term. The naysayers who view this strategy as quaint, or as a fossil of a bygone age in an era of tip-and rumor-based day trading, more often than not end up coming to see his moves as conventional market wisdom.

While his favored established firms' stocks tumbled in the late 1990s, the dot-com mania swept the markets, producing a surge of new investment hot-shots and poking holes in the aura of mystique that surrounded the Buffett legend. By 2000, however, dot-coms were in trouble, and once gain Buffett came out ahead of the pack. The question of whether or when the Internet players will build themselves into the kind of companies that Buffett, or the thousands upon thousands of would-be Buffetts, would choose as their investment vehicles remains to be seen.

THE SAGE'S STORY

Born in Omaha in 1933, Warren Edward Buffett showed a very early affinity for remembering and calculating numbers. According to a profile in the online magazine Salon, the young Buffett was marking the board at his father's brokerage and purchasing his first stock at age 11. Within three years, Buffett used his paper route savings to dive into real estate, purchasing 40 acres of farmland and leasing it to a tenant farmer.

He came across the highly regarded investment tome The Intelligent Investor, by Benjamin Graham, as a senior at the University of Nebraska, and was strongly influenced by the investment principles therein. Graham was a famous skeptic of Wall Street trends, encouraging so-called value investors to seek out "cigar butts"—those firms that Wall Street had all but abandoned but which could still be lit up for a few good puffs of stock activity. Buffett's first investment success came in 1951, when he threw $10,282 into the auto insurance firm Geico. Just a year later, he pulled out for $15,259. In 1952, the 21-year-old Buffett began offering his own classes on investing, selling his course via an advertisement in a local Omaha newspaper.

After a few years working and studying with Graham, Buffett began to feel constrained by the former's strict rules of value investment. Instead of picking up nearly lifeless companies cheaply, Buffett began to experiment with buying stocks of still vigorous but undervalued companies. In 1956 Buffett began an investment partnership on the seed money provided by himself, his sister, his neighbor, and his lawyer. The following year, a local couple who had attended his class invested $100,000 into the partnership. Buffett's earliest believers, known as the Berkshire Bunch, amassed enormous fortunes over the years by putting money behind the young investment guru's ideas. In Omaha alone, according to Forbes, more than 30 families accumulated at least $100 million in Berkshire Hathaway stock.

In 1962, Buffett began purchasing shares of Berkshire Hathaway, a struggling textile manufacturer in New Bedford, Massachusetts. Three years later he controlled the entire company. Berkshire's book value per share registered nearly 25 percent compound annual gains through the rest of the century, according to Credit Suisse First Boston Corp. By the end of the 1960s, finding good bargains few and far between, Buffett dissolved the investment partnership, returning his investors' money. From this point, he concentrated on Berkshire, which at first functioned primarily as a textile company with a small investment operation. Before long, however, investments were Berkshire's bread and butter and Buffett returned to his practice of picking up depressed companies. There were many such firms by the early and mid-1970s, after the 1960s stock rally gave out and inflation set in, making cheap stocks plentiful.

Buffett's bold moves and foresight helped him weather the tough economic climate of the late 1970s, and despite the tremendous market crash in 1987, Berkshire finished that year in much better shape than the year before. His head-scratching investments in companies such as Coca-Cola proved ingenious, with their brand-name recognition and untapped international potential. By 1993, Berkshire's $8.3 billion placed it at the very top of the Forbes 100 list.

Once viewed basically as an investment fund, acquisitions of insurance firms, such as Geico and General Reinsurance, through the 1990s transformed Berkshire Hathaway primarily into an insurance company in which the investment portfolio happened to be managed by one of the world's most famous investors. By the end of the 1990s, insurance accounted for more than 70 percent of Berkshire's revenues. Buffett came to believe that his company's greatest strength lay in purchasing companies outright rather than simply picking established stocks at the right stages of their valuations.

Buffett's attraction to the insurance industry was fairly logical. Since policyholders pay their premiums up front, while the firms pay out claims later, the company can be used as a strong investment catalyst. With a constant stream of revenue coming in, the insurers have a gap of time in which they have a good deal of money to invest before the claims are actually paid. This was Berkshire's strength, using the premium money to invest in Buffett's favored brands of under-valued stock.

His methods of investing and strategizing were extremely out of fashion and against the grain in the dot-com explosion of the late 1990s. The year 1999 saw Buffett's first down year in a decade, with Berkshire's per-share book value under-performing the S&P 500 index for the first time in 20 years. At the time, the judgmental pronounced his insistence on investing in firmly established, proven businesses out of date for the much-heralded, dot-com-heavy new economy. In 2000, however, Buffett appeared to have the last laugh, as reality weighed down the dot-com mania and the high-tech stock bubble burst. Buffett's portfolio, meanwhile, bounced back as investors ran to established companies, and once again pundits and analysts were praising the far-sighted wisdom of Buffett.

Buffett is a committed stickler for rigorous balance-sheet scrutiny, teasing out the elements that will produce long-term profitability. While he eyes technology stocks with a degree of skepticism, Internet stocks, at least as of the early 2000s, were almost completely off the menu for Buffett. Given his commitment to balance sheets and sound predictability, it's not difficult to ascertain why. Buffett refuses to throw money into a company unless he actually can visualize the company's numbers a decade or so down the road. With regards to the Internet, Buffett admits his vision is extremely cloudy at best.

FURTHER READING:

Atlas, Riva. "Warren Buffetted." Institutional Investor. January, 2000.

Bary, Andrew. "What's Wrong, Warren?" Barron's. December 27, 1999.

"For the Buffett Faithful, Time Paid Off." Forbes. October 12, 1998.

Kadleck, Daniel. "Berkshire's Buffett-ing." Time. October 25, 1999.

Kanter, Larry. "Salon Brilliant Careers: Warren Buffett." Salon.com . August 31, 1999. Available from www.salon.com people.

Kover, Amy. "Warren Buffett: Revivalist." Fortune. May 29, 2000.

Lenzer, Robert. "The Berkshire Bunch." Forbes. October 12, 1998.

SEE ALSO: Gates, William (Bill); Volatility