Introduction
Warren Edward Buffett American Buiseness magnate, investor, and philanthropist, who is the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of US$88.9 billion as of December 2019, making him the fourth-wealthiest person in the world.
Warren Edward Buffett was born on August 30, 1930. The second oldest, he had two sisters and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head—a feat Warren still amazes business colleagues with today.
Education
In 1947, Warren Buffett graduated from high school when he was 17 years old. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans and urged his son to attend the Wharton Business School at the University of Pennsylvania.
Buffett only stayed two years, complaining that he knew more than his professors. He returned home to Omaha and transferred to the University of Nebraska-Lincoln. Despite working full-time, he managed to graduate in only three years.
Mentor Ben Graham
Ben Graham had become well known during the 1920s. At a time when the rest of the world was approaching the investment arena as if it were a giant game of roulette, Graham searched for stocks that were so inexpensive they were almost completely devoid of
risk. One of his best-known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers.
The stock was trading at $65 a share, but after studying the
balance sheet, Graham realized that the company had bond holdings worth $95 for every share. The
value investor tried to convince management to sell the portfolio, but they refused. Shortly thereafter, he waged a proxy war and secured a spot on the
Board of Directors. The company sold its
bonds and paid a
dividend in the amount of $70 per share.
When he was 40 years old, Ben Graham published "Security Analysis," one of the most notable works ever penned on the stock market. At the time, it was risky. (The
Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was around this time that Graham came up with the principle of "intrinsic" business value, a measure of a business's true worth that was completely and totally independent of the
stock price.
Using intrinsic value, investors could decide what a company was worth and make investment decisions accordingly. His subsequent book, "The Intelligent Investor," which Buffett celebrates as "the greatest book on investing ever written," introduced the world to
Mr. Market, an investment analogy.
Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one-year-old Warren Buffett. Reading an old edition of "Who's Who," Warren discovered his mentor was the chairman of a small, unknown insurance company named GEICO. He hopped a train to Washington, D.C. one Saturday morning to find the headquarters. When he got there, the doors were locked. Not to be stopped, Buffett relentlessly pounded on the door until a janitor came to open it for him. He asked if there was anyone in the building.
As luck (or fate) would have it, there was. It turns out that there was a man still working on the sixth floor. Warren was escorted up to meet him and immediately began asking him questions about the company and its business practices; a conversation that stretched on for four hours. The man was none other than Lorimer Davidson, the Financial Vice President. The experience would be something that stayed with Buffett for the rest of his life. He eventually acquired the entire GEICO company through his corporation, Berkshire Hathaway.
Flying through his graduate studies at Columbia, Buffett was the only student ever to earn an A+ in one of Graham's classes. However, both Graham and Buffett's father advised him not to work on Wall Street after he graduated.
Absolutely determined, Buffett offered to work for the Graham partnership for free. Ben turned him down. He preferred to hold his spots for Jews who were not hired at other firms at the time. Warren was crushed.
Returning Home
Returning home, he took a job at his father's brokerage house and began seeing a girl by the name of Susie Thompson. The relationship eventually turned serious, and in April of 1952, the two were married. They rented out a three-room apartment for $65 a month; it was run-down, and the young couple shared the space with a family of mice. It was here their daughter, also named Susie, was born. In order to save money, they made a bed for her in a dresser drawer.
During these initial years, Buffett's investments were predominately limited to a Texaco station and some
real estate, but neither were successful. It was also during this time he began teaching night classes at the University of Omaha.
Then, Graham called one day, inviting the young stockbroker to come to work for him. Buffett was finally given the opportunity he had long awaited.
Working for Ben Graham
Buffett and Susie moved into a house in the suburbs of New York. Buffett spent his days analyzing S&P reports, searching for investment opportunities. It was during this time that the differences between the Graham and Buffett philosophies began to emerge.
Buffett became interested in how a company worked—what made it superior to competitors. Graham simply wanted numbers, while Warren was more interested in a company's management as a major factor when deciding to invest. Graham looked only at the balance sheet and
income statement; he could care less about corporate leadership.
Between 1950 and 1956, Buffett built his personal capital up to $140,000 from a mere $9,800. With this war chest, he set his sights back on Omaha and began planning his next move.
On May 1, 1956, Warren Buffett rounded up seven limited partners, which included his sister Doris and Aunt Alice, raising $105,000 in the process. He put in $100 himself to create the Buffett Associates, Ltd. Before the end of the year, he was managing around $300,000 in capital.
Buffett purchased a house for $31,500, affectionately nicknamed "Buffett's Folly," and managed his partnerships originally from one of the home's bedrooms, then later, a small office. By this time, his life had begun to take shape. He had three children, a beautiful wife, and a very successful business.
Over the course of the next five years, Buffett's partnerships racked up an impressive 251.0% profit, while the
Dow was up only 74.3%. A somewhat-celebrity in his hometown, Warren never gave stock tips despite constant requests from friends and strangers alike.
By 1962, the partnership had capital in excess of $7.2 million, of which $1 million was Buffett's personal stake. He didn't charge a fee for the partnership; he was entitled to one-fourth of the profits above 4%.
He also had more than 90 limited partners across the United States. In one decisive move, he melded the partnerships into a single entity called Buffett Partnerships Ltd., upped the minimum investment to $100,000, and opened an office in Kiewit Plaza on Farnam street.
In 1962, a man by the name of Charlie Munger moved back to his childhood home of Omaha from California. Though somewhat snobbish, Munger was brilliant in every sense of the word. He had attended Harvard Law School without a bachelor's degree. Introduced by mutual friends, Buffett and Munger were immediately drawn together, providing the roots for a friendship and business collaboration that would last for the next forty years.
Ten years after its founding, the Buffett Partnership assets rose more than 1,156%, compared to the Dow's 122.9%. Acting as lord over assets that had ballooned to $44 million dollars, Buffett and Susie's personal stake was $6,849,936. Mr. Buffett, as they say, had arrived.
Wisely enough, just as he was firmly establishing success, Buffett closed the partnership to new accounts. The Vietnam war raged full force on the other side of the world, and the stock market was being driven up by those who hadn't been around during the depression. The partnership pulled its biggest coup in 1968, recording a 59.0% gain in value and catapulting to over $104 million in assets.
The next year, Buffett went much further than closing the fund to new accounts; he liquidated the partnership. In May 1969, he informed his partners that he was "unable to find any bargains in the current market." Buffett spent the remainder of the year liquidating the portfolio, with the exception of two companies: Berkshire and Diversified Retailing.
The shares of Berkshire were distributed among the partners with a letter from Buffett informing them that he would, in some capacity, be involved in the business, but was under no obligation to them in the future. He didn't reveal his intention to hold onto his own stake in the company (he owned 29% of the Berkshire Hathaway stock).
Gaining Control of Berkshire Hathaway
Buffett's role at Berkshire Hathaway had actually been somewhat defined years earlier. On May 10, 1965, after accumulating 49% of the common stock, Warren named himself director. Terrible management had run the company nearly into the ground, and he was certain that with a bit of tweaking, it could be better managed.
Immediately, Mr. Buffett made Ken Chace president of the company, giving him complete autonomy over the organization. Although he refused to award
stock options on the basis that it was unfair to shareholders, Buffett agreed to cosign a loan for $18,000 for his new president to purchase 1,000 shares of the company's stock.
Two years later, in 1967, Warren asked National Indemnity's founder and controlling shareholder, Jack Ringwalt, to his office. Asked what he thought the company was worth, Ringwalt told Buffett the company was worth at least $50 per share, a $17 premium above its then-trading price of $33.
Buffett offered to buy the whole company on the spot: A move that cost him $8.6 million dollars. That same year, Berkshire paid out a dividend of 10 cents on its outstanding stock. It never happened again; Warren said he "must have been in the bathroom when the dividend was declared."
In 1970, Buffett named himself Chairman of the Board of Berkshire Hathaway and for the first time, wrote the
letter to the shareholders (Ken Chace had been responsible for the task in the past). That same year, the chairman's capital allocation began to display his prudence.
Textile profits were a pitiful $45,000, while insurance and banking each brought in $2.1 million and $2.6 million dollars. The paltry cash brought in from the struggling looms in New Bedford, Massachusetts had provided the stream of capital necessary to start building Berkshire Hathaway into what it has become today.
A year or so later, Warren Buffett was offered the chance to buy a company by the name of See's Candy. The gourmet chocolate maker sold its own brand of candies to its customers at a premium to regular confectionary treats. The balance sheet reflected what Californians already knew: They were more than willing to pay a bit extra for the special See's taste.
The businessman decided Berkshire would be willing to purchase the company for $25 million in cash. See's owners were holding out for $30 million, but soon conceded. It was the biggest investment Berkshire or Buffett had ever made.
Following several investments and an SEC investigation, Buffett began to see Berkshire Hathaway's net worth climb. From 1965 to 1975, the company's
book value rose from $20 per share to around $95. It was also during this period that Warren made his final purchases of Berkshire stock. (When the partnership dolled out the shares, he owned 29%.)
Years later, he had invested more than $15.4 million dollars into the company at an average cost of $32.45 per share.) This brought his ownership to over 43% of the stock, with Susie holding another 3%. His entire fortune was placed into Berkshire. With no personal holdings, the company had become his sole investment vehicle.
In 1976, Buffett once again became involved with GEICO. The company had recently reported amazingly high losses, and its stock was pummeled down to $2 per share. He wisely realized that the basic business was still intact; most of the problems were caused by an inept management team.
Over the next few years, Berkshire built up its position in this ailing insurer and reaped millions in profits. Graham, who still held his fortune in the company, died in in September of the same year, shortly before the turnaround. Years later, the insurance giant would become a fully owned subsidiary of Berkshire.
Changes in Warren Buffett's Personal Life
It was shortly thereafter one of the most profound and upsetting events in Buffett's life took place. At forty-five, Susan Buffett left her husband. Although she remained married to Warren, the humanitarian and singer secured an apartment in San Francisco and, insisting she wanted to live on her own, moved there.
Warren was absolutely devastated; throughout his life, Susie had been "the sunshine and rain in [his] garden." The two remained close, speaking every day, taking their annual two-week-long New York trip, and meeting the kids at their California beach house for Christmas get-togethers.
The transition was hard for the businessman, but he eventually grew somewhat accustomed to the new arrangement. Susie called several women in the Omaha area and insisted they go to dinner and a movie with her husband; eventually, she set Warren up with Astrid Menks, a waitress. Within the year, she moved in with Buffett, all with Susie's blessing.
Two Nickels to Rub Together
By the late '70s, his reputation had grown to the point that the rumor Buffett was buying a stock was enough to shoot its price up 10%. Berkshire Hathaway's stock was trading at more than $290 a share, and Buffett's personal wealth was almost $140 million. The irony was that he never sold a single share of his company, meaning his entire available cash was the $50,000 salary he received. During this time, he made a comment to a broker, "Everything I got is tied up in Berkshire. I'd like a few nickels outside."
This prompted Warren to start investing for his personal life. According to Roger Lowenstein's book, "Buffett," Warren was far more speculative with his own investments than he was with Berkshire's. At one point he bought copper futures, which were unadulterated speculation. In a short time, he had made $3 million dollars. When prompted to invest in real estate by a friend, he responded: "Why should I buy
real estate when the stock market is so easy?"
Berkshire Hathaway Announces Charitable Giving Program
Later, Buffett once again showed his tendency of bucking the popular trend. In 1981, the decade of greed, Berkshire announced a new charity plan which was thought up by Munger and approved by Buffett. The plan called for each shareholder to designate charities which would receive $2 for each Berkshire share the stockholder owned.
This was in response to a common practice on Wall Street of the CEO choosing who received the company's hand-outs (often they would go to the executive's schools, churches, and organizations). The plan was a huge success and over the years the amount was upped for each share. Eventually, the Berkshire shareholders were giving millions of dollars away each year, all to their own causes.
The program was eventually discontinued after associates at one of Berkshire's subsidiaries, The Pampered Chef, experienced discrimination because of the controversial pro-choice charities Buffett chose to allocate his prorated portion of the charitable contribution pool. Another important event around this time was the stock price, which hit $750 per share in 1982. Most of the gains could be attributed to Berkshire's stock portfolio, which was valued at more than $1.3 billion dollars.
Major Purchases
For all the fine businesses Berkshire had managed collect, one of the best was about to come under its stable. In 1983, Warren Buffett walked into Nebraska Furniture Mart, the multimillion-dollar furniture retailer built from scratch by Rose Blumpkin. Speaking to Mrs. B, as local residents called her, Buffett asked if she would be interested in selling the store to Berkshire Hathaway.
Blumpkin's answer was a simple "yes," to which she added she would part for "$60 million". The deal was sealed on a handshake and a one-page contract was drawn up. The Russian-born immigrant merely folded the check without looking at it when she received it days later.
Scott & Fetzer was another great addition to the Berkshire family. The company itself had been the target of a hostile takeover when an LPO was launched by Ralph Schey, the chairman. The year was 1984, and Ivan Boesky soon launched a counteroffer for $60 a share (the original tender offer stood at $50 a share—$5 above market value).
The maker of Kirby vacuum cleaners and World Book encyclopedia, S&F was panicking. Buffett, who had owned a quarter of a million shares, dropped a message to the company asking them to call if they were interested in a merger. The phone rang almost immediately. Berkshire offered $60 per share in cold, hard, cash.
When the deal was wrapped up less than a week later, Berkshire Hathaway had a new $315 million dollar cash-generating powerhouse to add to its collection. The small stream of cash that was taken out of the struggling textile mill had built one of the most powerful companies in the world. Far more impressive things were to be done in the coming decade. Berkshire would see its share price climb from $2,600 to as high as $80,000 in the 1990s.
In 1986, Buffett bought a used Falcon aircraft for $850,000. As he had become increasingly recognizable, it was no longer comfortable for him to fly commercially. The idea of the luxury was a lifestyle that was hard for him to accept, but he loved the jet immensely. The passion for jets eventually, in part, led him to purchase Executive Jet in the 90s.
The 80s went on with Berkshire increasing in value as if on cue, the only bump in the road being the crash of 1987. Warren, who wasn't upset about the market
correction, calmly checked the price of his company and went back to work. It was representative of how he viewed stocks and businesses in general. This was one of Mr. Market's temporary aberrations. One-fourth of Berkshire's
market cap was wiped out. Unfazed, Warren plowed on.
Buffett and Coke
A year later, in 1988, he started buying up Coca-Cola stock like an addict. His old neighbor, who became the president of Coca-Cola, noticed someone was loading up on shares and became concerned. After researching the transactions, he noticed the trades were being placed from the Midwest.
He immediately thought of Buffett, whom he called. Warren confessed to being the culprit and requested they don't speak of it until he was legally required to disclose his holdings at the 5% threshold. Within a few months, Berkshire owned 7% of the company, or $1.02 billion dollars worth of the stock. Within three years, Buffett's Coca-Cola stock would be worth more than the entire value of Berkshire when he made the investment.
Money and Reputation On the Line During the Solomon Scandal
By 1989, Berkshire Hathaway was trading at $8,000 a share. Buffett was now, personally, worth more than $3.8 billion dollars. Within the next ten years, he would be worth ten times that amount. Before that would happen, there were much darker times ahead, including being involved in a scandal called The Solomon Scandal.
Buffet at the Turn of the Millennium
During the remainder of the 1990s, the stock catapulted as high as $80,000 per share. Even with this astronomical feat, as the dot-com frenzy began to take hold, Warren Buffett was accused of "losing his touch." In 1999, when Berkshire reported a net increase of 0.5% per share, several newspapers ran stories about the demise of the "Oracle of Omaha."
Confident that the technology bubble would burst, Warren Buffett continued to do what he did best: Allocate capital to great businesses that were selling below intrinsic value. His efforts were rewarded. When the markets finally did come to their senses, Warren Buffett was once again a star. Berkshire's stock recovered to its previous levels after falling to around $45,000 per share, and the man from Omaha was once again seen as an investment icon.
Family
Parent(s)
Howard Buffett
Leila Stahl Buffe
Children
Susan Alice Buffett
Howard Graham Buffett
Peter Buff
Relatives
Howard Warren Buffett (grandson)
Roberta Buffett (sister)
Doris Buffett (sister)
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