Warren Buffett Articles III
Tuesday, January 16, 2007
Here's another gem found in my closet.
Cheers!!!
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Warren's world
Warren Buffett, chairman of Berkshire Hathaway, is the most successful investor in history. He is worth US$35 billion. Yet he lives frugally and insists his children won't inherit a bean. In a rare interview at his headquarters in Omaha, Nebraska, he tells DOMINIC LAWSON: "It's dumb to let possessions rule you."
'He touched me,' gasped the middle-aged woman just after a grey-haired, grey-suited man passed her, heading for a door marked EXIT, closely pursued by a bevy of television camera crews. Her friends gathered round, anxious for any further revelations.
The event, held two Sundays ago, is a cocktail party for the shareholders of a company called Berkshire Hathaway on the day of its Annual General Meeting; the blur in grey is - or rather was - Berkshire's 72-year-old chairman, Warren Buffett; and the woman, despite her modest appearance, may well be a multi-millionaire, thanks to Mr Buffett. For Mr Buffett (pronounced as in tuffet) is the most successful investor the world has ever known, and those who have followed him have good reason to behave as though he were a faith healer.
In 1962 Mr Buffett bought into Berkshire Hathaway, a textile mill that made linings for gentlemen's suits, paying US$7.50 a share. Today, Berkshire trades at US$70,000 a share - if you can find anyone to sell - and Mr Buffett's 35 per cent stake is worth US$35 billion, making him the wealthiest man in the world after Bill Gates.
Over the past 40 years Buffett has built the concern into a vast holding company which employs 150,000 people in about 50 wholly-owned businesses, but which also has substantial shareholdings in such American corporate colossi as American Express, Coca-Cola and Gillette.
Buffett bought huge stakes at times when these great names were either unfashionable in financial circles or were in difficulties, or both, and has reaped commensurately huge rewards. By way of another example, Buffett bought 18 per cent of the Washington Post for US$11 million in 1973. That stake is now worth US$1.3 billion. The point is not just that Buffett buys low, but that - unlike other investors - he doesn't sell 'high'. In fact, he rarely sells at all. His nerve never fails, and nor does his faith in what he considers good businesses. Above all he has never sold a single share in Berkshire Hathaway. That faith, not surprisingly, is shared by most of Berkshire's thousands of investors.
The average holding period for a Berkshire investor (aside from Buffett, of course) is 15 years. By way of contrast, the average holding period for an investor in amazon.com is one week, in Microsoft six months and even in Wal-Mart, probably America's most successful company, a mere 18 months.
Perhaps this is not surprising, when you consider that Buffett, over the past 40 years, has produced an average annual compounded gain for Berkshire shareholders of almost 25 per cent, compared with 10 per cent by the main stockmarket indices, such as the Dow Jones. Compound growth on that scale does remarkable things.
The result is shareholders like Donald and Mildred Othmer, a childless couple from Omaha who died in their nineties a few years ago. In 1959 they had invested their US$50,000 savings in Berkshire Hathaway; in the late 1990s the Othmers, after a lifetime of decent obscurity, became posthumously famous by leaving US$750 million to charity.
Like the Othmers, Warren Buffett has spent his life in Omaha, Nebraska, and so it is to this windswept frontier city in the agricultural plains of the American heartland - exactly equidistant from New York and Los Angeles - that the thousands of Berkshire Hathaway shareholders (one might describe them as Donald and Mildred Othmer wannabes) make their annual pilgrimage to the company's AGM.
This is not because they expect to be able to touch the hem of Warren Buffett's robes, but because at the meeting, in Omaha's Civic Center, Buffett promises to answer questions from the floor - for six hours.
Spoof corporate film
The meeting begins, as seems to be traditional, with Warren Buffett playing and singing (with scant regard for key) on the ukelele. His voice is classic Midwestern, uncannily like Jimmy Stewart's, but higher-pitched. Then there is a short spoof corporate film based on The Wizard of Oz in which Buffett appears in drag as Dorothy. It might seem to some of the shareholders present that, since the Wizard of Oz came from Omaha, and Buffett is sometimes referred to as the Wizard of Omaha, that the Berkshire chairman is in the wrong role on screen.
But the unstated point is this: the Wizard of Oz is Wall Street, all noise and nonsense. Dorothy tells the plain-spoken truth. And above all, Buffett has never minded looking ridiculous, especially when he is buying shares.
On the day before this self-satirising tour de force I went to see Warren Buffett in his lair. This was less easy than I had imagined, not so much because there are no direct flights from London to Nebraska, but because even in Omaha the taxi driver at first had no idea where Berkshire Hathaway's office was.
Once there, I understood why: the headquarters of one of the world's biggest conglomerates is part of one floor of a small rented building, with absolutely nothing on the outside to indicate Berkshire Hathaway's presence, still less Warren Buffett's.
But as I emerge on the 14th floor, I hear a man's voice calling out: 'Dominic! I'm over here!'
In a small room off a narrow corridor, Buffett is standing with his arm raised in greeting. His grey suit is creased, his shoes look as though they could do with a clean, and his hair - and eyebrows - seem to have a life of their own.
The world's most profitable investor has all the appearance, in short, of an absent-minded professor. But as soon as Buffett speaks that impression is dispelled. The words almost explode from him with a pulsing energy. At the moment this energy is being targeted chiefly at the excesses of corporate America and Wall Street. Buffett has the rage of a man vindicated.
In the late 1990s he stood aloof as the rest of American business binged on the dotcom and telecoms boom. While Berkshire Hathaway shares were shunned by Wall Street as 'the Old Economy', Buffett earned ridicule by proclaiming that he 'would never invest in something I don't understand' and 'I've never seen an electron'.
On the very day that the markets hit their peak in 2000, Buffett released a statement warning of exactly the sort of accounting practices which were later to claim the world's biggest bankruptcy at the energy company Enron. One of Enron's greatest failings was its excessive use of so-called derivatives, in which, typically, a company speculates that it will be able to supply a commodity at a particular price on a particular day in the future.
Great Depression experience
As we sit down Buffett urges me to believe that 'banks could suffer the same fate as some energy companies' as a result of their involvement in speculation of exactly this sort. Could he be more specific? 'I am talking about major banks . . . (Federal Reserve) Chairman Greenspan says that this is a way of shedding risk for these companies but the truth is that it's concentrating risks . . . It could get back to the days when you had runs on banks, when the good banks got pulled down by the bad banks.'
Buffett knows whereof he speaks: a year after his birth, 1931, the annus horribilis of the Great Depression, his father lost his job and his savings when the bank he worked for was closed. According to Buffett's biographer, Roger Lowenstein, Buffett's mother would skip meals in order to ensure that her family had enough to eat. Buffett, claims Lowenstein, 'emerged from those first hard years with an absolute drive to become very, very rich. He thought about it before he was five years old. And from that time on, he scarcely stopped thinking about it.'
The most interesting thing about Warren Buffett, however, is that while he has become very, very, very rich, he insists on denying both himself and his family the privileges and perks that riches traditionally bring. He still lives in the same five-bedroom house that he bought for US$31,500 in 1958 when his wife Susie was expecting their third child. When his daughter, also Susie, grew up and asked Buffett for a loan of US$30,000 to help buy a new kitchen - she knew him well enough not to ask for money outright - he turned her down, allegedly saying: 'Why not go to the bank and take out a loan like everyone else?'
It was not just a matter of Buffett's steely principles, however. You see, the funny thing is, the world's second richest man has never had much money to spend. Look at it this way: the owner/manager of a company has only three ways in which he can raise funds (apart from borrowing against its assets, a Buffett no-no). He can sell some of his shares. Buffett has never sold a share in Berkshire Hathaway, and says he never will. He can pay himself a dividend on the shares.
But Buffett, consumed by the compulsion to accumulate capital for Berkshire shareholders, never pays or takes a dividend. Which leaves only salary, as an employee. And Warren Buffett's salary is US$100,000 a year. The late Sir James Goldsmith, a plutocrat with a somewhat different attitude to wealth and its uses, once said: 'I don't understand people like Warren Buffett, who pride themselves on living in their first house and driving a used Chevy to work, despite being billionaires.' When I put this to Buffett he laughed. 'It's true I've never sold a house in my life. You should have a look at it. It's about a mile-and-a-half from here, on the same road.' (Later I take him up on the invitation. The pleasant-looking family home is nicely perched about 200 yards from a multi-lane highway, with a yellow flashing traffic-calming signal outside.) 'I knew Jimmy. He was not so much colourful as Technicolor. But I think the whole point of working in business is it's something you love, not to get a whole lot of money so you can have your own golf course or whatever. To me that's silly. But that's his business. I would not trade what I do in life with anybody in the world, and if I lived in a three-bedroom apartment and I got to do what I do every day and I had no bank account whatsoever, I wouldn't even think about changing.'
But surely, I asked, there must be times when he's visited the homes and seen some of the toys of his super-rich friends and thought, 'I'd like one of those.' Buffett shook his head. 'I'm living better than they are. I don't want to make them unhappy, but it's dumb to let possessions rule you. Besides, the idea that I would want some house with 50 rooms, what would I do with them? It would be a diversion from what I enjoy. I like playing bridge. I don't like being a greens-keeper. If you want to be a greens-keeper or a house-keeper or the captain of a boat, you have to think about these things if you own them. And besides, all my friends have boats, so I can just go right up there if I want. I'm not missing anything. I know people who are very rich and have their names on buildings. But nobody loves them, not even their family, and not the people who live in their buildings.'
Big on freedom
This declaration - expressed with obvious sincerity - prompted me to ask Buffett why, in that case, he had been so determined from a very young age to be rich. 'I wanted to have enough money so that I could do what I wanted to do, and by the time I was 30, I did. But I always wanted to be free to do what I liked to do. When I was a kid I enjoyed delivering papers. I still enjoy delivering papers. I go out with my grandson to deliver papers. I like to throw papers. But one of the things I liked about delivering papers was that I could think about things I wanted to think about while I delivered papers.'
Buffett's attachment to his first job is not mere sentimentality. Omaha legend has it that the investment seedcorn that ultimately created his business behemoth came from his delivery rounds as a teenager. 'Yup, that's right. I saved about US$10,000 by the time I was 21, and most of that was from delivering newspapers - about US$6,000. If you'd told me that I'd have to deliver papers all my life, it would have been OK with me. I like doing what I do now better, even, but just being able to paint on your own canvas, that's the ultimate luxury, that and having people around you that make you feel good instead of causing your stomach to churn. I don't want anyone around me that causes my stomach to churn and I hope I'm not causing theirs to churn. That's luxury in life.
'Every now and then I have to fire somebody and I hate that. I'd pay a lot of money never to have to fire another person in my life. It's the only part of my job I don't like.'
On paper such sentiments may appear trite, but Buffett almost resonates with passion as he utters them, and it is certainly true that he runs Berkshire Hathaway with the lightest of touches - the company's head office has only 16 employees, including Buffett - leaving his managers free to do as they wish, without any interference from what he laughingly calls 'world headquarters'. All he asks is that the businesses send all their surplus cash to him - a figure which is now running at an astounding US$100 million a week.
It is obvious that Buffett's mixture of high intelligence and prodigious energy was always going to carry him far. But he insisted to me that the main reason for his success was that, at the age of 19, when he was at the University of Nebraska, he bought a book by Ben Graham called The Intelligent Investor. Graham's theory was that investors should insist on a big gap between what they paid for a stock and what they thought the business was intrinsically worth - Graham called this the 'margin of safety'.
But the corollary was that no matter how much the stock price subsequently fell, you should hold on to the shares - indeed the more the price fell, the more you should buy. Graham's view was that the stock market, in the short term, was merely 'a voting machine' which told the investor nothing about what he called 'intrinsic value'.
'That book was my Ten Commandments,' Buffett told me, 53 years on. 'It gave me the framework for thinking about business and investments, and I haven't changed it. Having the right framework is the important thing. There are all kinds of people with high IQs in the investment business and most of them flame out. They don't do that well over time because they don't have a base from which to operate. Everything we do around here is rational. We make mistakes, but we operate rationally and that will take you a long way.'
Buffett's comparison of the Ten Commandments with a book about making money may seem bizarre, but he has always seen capitalism as a fundamentally virtuous activity and reacts with the fury of an old-time preacher when he sees its values being perverted - as he does now with the stock-option-fuelled salaries of America's CEOs: the take-home pay of the average US chief executive is now around US$7 million a year.
Buffett's attack on this phenomenon, at Berkshire's AGM two weeks ago, made headlines not just in America but also over here (London), although Buffett told me that he regards British business as less culpable.
As Buffett sees it, the problem is that the directors who comprise the compensation committees of public companies are 'woeful and lamentable' in protecting the interests of the shareholders they are meant to represent.
'Chief executives talk about 'diversity' but they don't care whether they've got men or women on the board, any of that kinda stuff. They just care about their comp (compensation). It's a very uneven balance. Usually in any negotiation people on both sides are dealing with something very real to them. On executive compensation, the CEO, the compensation is very real to him, but to the comp committee, to the directors, it's play money. There's never been such a transfer of wealth in our history. And it's obscene.'
At which point I couldn't resist asking Warren Buffett what he planned to do with his own extraordinary wealth - US$35 billion and counting. 'One hundred per cent of my stock will go to my wife, if I die first, but on the death of the last of the two of us - and maybe sooner - it will all go to a foundation. That will be it.'
Giant charitable foundation
This might sound like bad news for Buffett's three children Howard (a photographer), Peter (a musician) and Susie (a housewife). But at the shareholders' meeting the day after I met him, Buffett was typically forthright in his reasoning: 'There's no reason why future generations of little Buffetts should command society just because they came from the right womb. Where's the justice in that?' As 15,000 Berkshire Hathaway shareholders applauded, Buffett guffawed: 'My children are here! Are they applauding too?'
It is an extraordinary thing that will be created, however: the biggest charitable foundation in history, dwarfing even the Ford and Rockefeller foundations. To put it in perspective, the interest on the money, if invested in fixed-interest securities, would dispense about 1 billion (S$2.8 billion) a year. But, I asked Buffett, why don't you give vast sums to good causes during your lifetime, as your friend Bill Gates is doing? 'Bill is giving away about US$1 billion a year and I admire what he's doing enormously. But I have felt that the money would compound at a very good rate and there will always be plenty of problems in society and this is a chance to do something huge. If I had given all my money away 20 years ago, I would have given away US$20 million or so and it would have been all over.'
Remarkably, however, Buffett seems to be leaving no specific instructions as to who or what exactly should benefit from his foundation after he is gone. 'I have written the trustees - there are a very few of them, mostly women - a 10-page letter, and it says that their judgment above ground will be better than my judgment six feet under, so I'm counting on them to do intelligent things, but what I want them to do is very big things that don't have a natural funding constituency. Causes which the government pays for, or if the people do it for emotional reasons - those things, forget about it. I tell the trustees that if they give a million dollars here and a million dollars there I'm gonna come back and haunt 'em because I want them to try very difficult, very big things. I tell them that in philanthropy - unlike in business, where I'm looking for easy things to do - in philanthropy, by definition the important problems are those which have already resisted both intellect and money. The trustees have a totally blank canvas with these general instructions about what I hope they will paint. It's up to them to paint it.'
When I pressed Buffett for some sort of example, at least, of what he meant, he said: 'I would regard it as a failure if they gave to some major universities, because they have an alumni base and government funding. But 75 years ago Rockefeller gave significant sums of money to black colleges and they did not have people who were rich to give them money. He stepped up with something that was important. That's the sort of thing which makes sense to me.'
As our interview came to an end and Buffett prepared to leave the building, he said: 'Stay and have a look around if you like.' So I did. There is no computer screen in Buffett's little office, nor even a calculator that I could see. (So I now believe the legend that the world's most skilled corporate acquisitor doesn't use a calculator: 'If I don't understand a number in my head, I don't understand it,' he once said.)
There were just a few scraps of paper on the desk with scribbles on them. That, and what looked like a pile of dollar bills. I touched it, for luck. But it turned out to be a little joke sculpture, made of wood. Well, it wouldn't be like Warren Buffett to leave any real money lying around.
Posted on the Telegraph. 2003
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