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Dear shareholders: Why Buffett still matters
August 21, 2009, Friday
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WARREN Buffett's rock star status is evident from the fact that each year tens of thousands of fans from all over the world travel to Omaha, Nebraska, to listen to him speak at his company Berkshire Hathaway's shareholder meeting.
For many at this event, which Buffett calls the "Woodstock for Capitalists," it is an annual ritual of paying homage to the man who made them money through Berkshire's stock and from his investing and business insights.
Little wonder that Alice Schroeder's insightful biography titled "The Snowball: Warren Buffett and the Business of Life," has proved popular among readers. She seeks to explain how Buffett became one of the world's richest men and why he is admired for his business ethics and for uniquely pledging most of his money to philanthropy.
Buffett's annual letters to shareholders (See Warren Buffett's Letters to Berkshire Shareholders on www.berkshirehathaway.com) are widely read. The letters analyze good and bad businesses, give examples of managers who treat customers and employees fairly while also making good profits, and expose accounting tricks that fool many investors.
Some letters have noted that executives should be paid bonuses only if their company's long-term performance is better than that of industry peers; others have warned of looming disasters - such as the red flag he raised about derivatives morphing into "weapons of mass financial destruction."
During the subprime mortgage crisis that led to the global financial collapse, one of Buffett's letters pointed out that rich people like him should be made to pay a higher tax rate than wage earners like his secretary.
Buffett's most important act has been to donate much of his wealth to the Gates Foundation, to be spent over 20 years mainly on health care and education. As he states: "The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society."
Unlike most other capitalists, Buffett believes that children should not inherit money just because of the lottery of their birth. He says children should be left "enough money so that they feel they could do anything, but not so much that they could do nothing."
By the late 1970s, according to an earlier biography, Buffett had spent US$15.4 million to buy 46 percent of Berkshire, including 3 percent for his wife Susan, paying an average US$32.45 per share. (See Roger Lowenstein's "Buffett: The Making of an American Capitalist.")
With Berkshire stock recently around US$87,200, Buffett has grown his wealth nearly 3,000-fold in some 30 years. This massive capital accumulation is based on an investment discipline he learned from Benjamin Graham.
Buffett's approach to investment involves using seventh-grade math and common sense to analyze a company's underlying economics; buying a business not a stock; ignoring the fluctuations of the stock market; and, most importantly, maintaining a margin of safety.
After initially attending business school at Wharton, Buffett got his MBA degree from Columbia University in 1951 so that he could study under Graham. Buffett modified Graham's process of holding a widely diversified portfolio of statistically cheap stocks, and made concentrated investments in a few easy to understand, stable, growing businesses run by good, shareholder-friendly managers.
Buffett's three rules of portfolio management are: 1) Don't lose money; 2) Don't forget rule one and 3) Don't go into debt. His focus, an intellect which is a perpetual learning machine, rationality, confidence and an ambition from childhood to become rich are identified by Schroeder and others as personal traits that drove his success.
Moreover, he attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success.
Buffett freely acknowledges making several errors. The biggest was his purchase of Dexter Shoes for US$433 million in 1993, and then compounding the error by paying with 1.6 percent of Berkshire stock, effectively costing shareholders more than US$2.2 billion at the current stock price.
Also, following years of losses, Buffett liquidated Berkshire's original textile operations in 1985. While the textile business provided the capital for entry into the insurance business - "the cornerstone of Berkshire," as Buffett puts it - the employees who lost their jobs got minimal severance compensation.
Obviously Buffett's successes are far more numerous than his failures. In the stock market, notes Schroeder, his strategy has been strict adherence to Graham's main principle of margin of safety.
In frothy bull markets, Buffett is fearful while others are greedy, taking profits on some holdings and piling up the cash generated by Berkshire's businesses.
Then, during severe stock market or industry declines, he is greedy when others are fearful, buying good businesses at attractive prices.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
For many at this event, which Buffett calls the "Woodstock for Capitalists," it is an annual ritual of paying homage to the man who made them money through Berkshire's stock and from his investing and business insights.
Little wonder that Alice Schroeder's insightful biography titled "The Snowball: Warren Buffett and the Business of Life," has proved popular among readers. She seeks to explain how Buffett became one of the world's richest men and why he is admired for his business ethics and for uniquely pledging most of his money to philanthropy.
Buffett's annual letters to shareholders (See Warren Buffett's Letters to Berkshire Shareholders on www.berkshirehathaway.com) are widely read. The letters analyze good and bad businesses, give examples of managers who treat customers and employees fairly while also making good profits, and expose accounting tricks that fool many investors.
Some letters have noted that executives should be paid bonuses only if their company's long-term performance is better than that of industry peers; others have warned of looming disasters - such as the red flag he raised about derivatives morphing into "weapons of mass financial destruction."
During the subprime mortgage crisis that led to the global financial collapse, one of Buffett's letters pointed out that rich people like him should be made to pay a higher tax rate than wage earners like his secretary.
Buffett's most important act has been to donate much of his wealth to the Gates Foundation, to be spent over 20 years mainly on health care and education. As he states: "The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society."
Unlike most other capitalists, Buffett believes that children should not inherit money just because of the lottery of their birth. He says children should be left "enough money so that they feel they could do anything, but not so much that they could do nothing."
By the late 1970s, according to an earlier biography, Buffett had spent US$15.4 million to buy 46 percent of Berkshire, including 3 percent for his wife Susan, paying an average US$32.45 per share. (See Roger Lowenstein's "Buffett: The Making of an American Capitalist.")
With Berkshire stock recently around US$87,200, Buffett has grown his wealth nearly 3,000-fold in some 30 years. This massive capital accumulation is based on an investment discipline he learned from Benjamin Graham.
Buffett's approach to investment involves using seventh-grade math and common sense to analyze a company's underlying economics; buying a business not a stock; ignoring the fluctuations of the stock market; and, most importantly, maintaining a margin of safety.
After initially attending business school at Wharton, Buffett got his MBA degree from Columbia University in 1951 so that he could study under Graham. Buffett modified Graham's process of holding a widely diversified portfolio of statistically cheap stocks, and made concentrated investments in a few easy to understand, stable, growing businesses run by good, shareholder-friendly managers.
Buffett's three rules of portfolio management are: 1) Don't lose money; 2) Don't forget rule one and 3) Don't go into debt. His focus, an intellect which is a perpetual learning machine, rationality, confidence and an ambition from childhood to become rich are identified by Schroeder and others as personal traits that drove his success.
Moreover, he attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success.
Buffett freely acknowledges making several errors. The biggest was his purchase of Dexter Shoes for US$433 million in 1993, and then compounding the error by paying with 1.6 percent of Berkshire stock, effectively costing shareholders more than US$2.2 billion at the current stock price.
Also, following years of losses, Buffett liquidated Berkshire's original textile operations in 1985. While the textile business provided the capital for entry into the insurance business - "the cornerstone of Berkshire," as Buffett puts it - the employees who lost their jobs got minimal severance compensation.
Obviously Buffett's successes are far more numerous than his failures. In the stock market, notes Schroeder, his strategy has been strict adherence to Graham's main principle of margin of safety.
In frothy bull markets, Buffett is fearful while others are greedy, taking profits on some holdings and piling up the cash generated by Berkshire's businesses.
Then, during severe stock market or industry declines, he is greedy when others are fearful, buying good businesses at attractive prices.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
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