Warren Buffett

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Warren Edward Buffett
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Warren Edward Buffett

Warren Edward Buffett (born August 30, 1930) is a wealthy American investor and businessman. Nicknamed the "Oracle of Omaha", Buffett has amassed an enormous fortune from astute investments, particularly his company Berkshire Hathaway, of which he holds more than 31% as of 2005. With an estimated 2005 net worth of $40 billion, he is ranked by Forbes as the second-richest person in the world, behind Bill Gates.

Contents

Biography

Warren E. Buffett was born in Omaha, Nebraska on August 30, 1930. His father, Howard Buffett, was a stockbroker and member of Congress. Warren Buffett has two sisters, Doris and Bertie. His grandfather owned a grocery store in Omaha.

He attended the University of Nebraska (transferring there from the Wharton School at the University of Pennsylvania) and took a Master's degree in economics at Columbia Business School, studying under Benjamin Graham.

He went on to work for Graham at Graham-Newman where he followed Graham's value investing rules. He returned to Omaha in 1956 with no plan in mind, until someone asked Warren Buffett to manage investments for him. This was how Warren Buffett started his investment partnership, putting in his own money together with money from friends and family.

By 1969, he had returned an average of almost 30% a year, in a market where 7% to 11% is the norm and anything more is outstanding. Later, he dissolved all partnerships, and went on to acquire a textile firm, Berkshire Hathaway.

He married Susan Thompson in 1952. They separated in 1977 but remained married until her death in 2005. They had three children together. He currently lives with Astrid Menks.

Mr. Buffett has stated that virtually all of his fortune will pass to his Buffett Foundation. He is opposed in principle to the transfer of great fortunes from one generation to the next.

Timeline

1945:

Warren's first job came writing stock prices on a chalkboard at his father's brokerage. Later, Warren made $175 monthly delivering Washington Post newspapers. Buffett filed his first income tax return at age 13, deducting his bicycle as a work expense. At fourteen years old, he invested $1,200 of his savings into 40 acres (0.2 km²) of farmland.

1947:

In his senior year of high school, Warren and a friend purchased a used pinball machine at a cost of $25. Buffett began to think about the potential profit, and placed it in a nearby barber shop. Within months, he owned three machines in three different locations. The business was sold later in the year for $1,200 to a war veteran.

Warren had earned over $5,000 delivering newspapers.

His father suggested he should attend college, a suggestion Warren did not take well. Nevertheless, that year, he enrolled as a freshman at the Wharton School of Finance and Commerce in Pennsylvania. Buffett hated it, complaining he knew more than the teachers.

1949:

In 1949, he transferred to the University of Nebraska.

He is offered a job at J.C. Penney after college, but turned it down. He graduated from college in only three years by taking his last three credits over the summer. His savings had reached $9,800 by then.

1950:

Buffett applied for admission to Harvard Business School and was turned down. He eventually enrolled at Columbia after learning that Ben Graham and David Dodd, two well-known securities analysts, were professors at Columbia.

1951:

Warren discovered Ben Graham was on the Board of GEICO insurance at the time.

He took a train to Washington, D.C., and knocked on the door of its headquarters until a janitor allowed him in. After asking if anyone is working, he found a man on the sixth floor, who turns out to be the Financial Vice President of the company. They talked for hours while Warren questioned him on the business and insurance in general.

Buffett graduated and wanted to go to work on Wall Street. Both his father and Graham urge him not to. Warren offered to work for Ben Graham for free but Graham refused.

Warren returns home and begins dating Susan Thompson.

Buffett purchases a Texaco gas station as a side investment. It doesn't work out as well as he hopes. Meanwhile, he is working as a stockbroker.

Buffett takes a Dale Carnegie public speaking course. Using what he learns, he feels confident enough to teach a night class at the University of Nebraska, "Investment Principles". The average age of the students he teaches are more than twice his own (he was only 21 at the time).

1952:

Warren and Susan Thompson get married in April. They rent an apartment for $65 a month, and have their first child, named Susie.

1954:

Benjamin Graham calls Warren and offers him a job at his partnership. Buffett's starting salary is $12,000 a year.

1956:

Graham retires and folds up his partnership. Since leaving college six years earlier, Warren's personal savings have grown from $9,800 to over $140,000.

The Buffett family returns home to Omaha. On May 1st, Warren creates Buffett Associates, Ltd. Seven family members and friends put in a total of $105,000. Buffett himself invests only $100.

Over the course of the year, Buffett creates two additional partnerships, eventually bringing the number under his management to three.

1957:

Buffett adds two more partnerships to his collection. He is now managing five investment partnerships from his home.

With Susan about to have her third child, Warren purchases a five-bedroom, stucco house on Farnam Street for $31,500. He has lived there ever since.

1958:

The third year of the partnership completed, Buffett doubles the partner's money.

1959:

Warren is introduced to Charlie Munger, the man who will eventually become the Vice Chairman of Berkshire Hathaway, and an integral part of the company's success. The two get along immediately.

1960:

Warren asks one of his partners, a doctor, to find ten other doctors who will be willing to invest $10,000 each into his partnership. Eventually, eleven doctors agreed to invest.

1961:

With the partnerships now worth millions, Buffett made his first $1 million dollar investment in a windmill manufacturing company.

1962:

Buffett returns to New York with Susie for a few weeks to raise capital from his old acquaintances. During the trip, he picks up a few partners and several hundred thousand dollars. The Buffett Partnership, which had begun with $105,000, by this time is worth $7.2 million. Warren and Susie personally own over $1 million of the assets.

Buffett merges all of the partnerships into one entity known simply as Buffett Partnerships, Ltd. The operations are moved to Kiewit Plaza, a functional but less-than-grand office, (where they remain to this day). The minimum investment is raised from $25,000 to $100,000.

Buffett consults Munger on Dempster, the windmill manufacturing company. Munger recommends Harry Bottle to Warren; a move that would turn out to be very profitable. Bottle cut costs, laid off workers, and caused the company to generate cash.

Warren discovers a textile manufacturing firm, Berkshire Hathaway, that is selling for under $8 per share. He begins to buy the stock.

1963:

Buffett sells Dempster for three times the amount he invested. The almost worthless company had built a portfolio of stocks worth over $2 million alone during the time of Buffett's investment. The Buffett partnerships becomes the largest shareholder of Berkshire Hathaway.

1964:

Due to a fraud scandal, American Express shares fall to $35. While the world is selling the stock, Buffett begins to buy shares en masse.

1965:

Warren's father, Howard, dies. Buffett begins to purchase shares in Walt Disney Co. after meeting with Walt personally. Warren invested $4 million [which was equal to around 5% of the company]. The American Express shares are selling for more than double the price Warren paid for the them. Buffett arranges a business coup - taking control of Berkshire Hathaway at the board meeting and naming a new President, Ken Chace, to run the company.

1966:

Warren's personal investment in the partnership reaches $6,849,936.

1967:

Berkshire pays out its first and only dividend of 10 cents. In October, Warren writes to his partners and tells them he finds no bargains in the roaring stock market of the '60s. His partnership is now worth $65 million. Buffett is worth, personally, more than $10 million. He briefly considers leaving investing and pursuing other interests. American Express hits over $180 per share, making the partnership $20 million in profit on a $13 million investment. Berkshire Hathaway acquires National Indemnity Insurance at Buffett's direction. It pays $8.6 million.

1968:

The Buffett Partnership earns more than $40 million, bringing the total value to $104 million.

1969:

Following his most successful year, Buffett closes the partnership and liquidates its assets to his partners. Among the assets paid out are shares of Berkshire Hathaway. Warren's personal stake now stands at $25 million. He is only 39 years old.

1970:

The Buffett Partnership is now completely dissolved and divested of its assets. Warren now owns 29% of the stock outstanding in Berkshire Hathaway. He names himself chairman and begins writing the annual letter to shareholders. Berkshire Hathaway makes $45,000 from textile operations, and $4.7 million in insurance, banking, and investments. Warren's side investments are making more than the actual company itself.

1971:

Warren, at his wife's request, purchases a $150,000 summer home at Laguna Beach.

1973:

Stock prices begin to drop; Warren is euphoric. At his direction, Berkshire borrows money by issuing notes at 8%. Berkshire begins to acquire stock in the Washington Post Company.

1974:

Due to falling stock prices, the value of Berkshire's stock portfolio began to fall. Warren's personal wealth was cut by over 50%. The U.S. Securities and Exchange Commission opens a formal investigation into Warren Buffett and one of Berkshire's mergers. Nothing ever comes of it.


Views on taxes

Estate Tax

Buffett told The New York Times that the estate tax played a "critical role" in promoting economic growth, by helping create a society in which success is based on merit rather than inheritance. Repealing the estate tax, he said, would be equivalent to "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."

Dividend Tax

When the United States Senate planned for dividends to be 50 percent tax free in 2003, then 100 percent tax free in 2004 through 2006, Warren Buffett wrote an opinion piece in the Washington Post saying it would "further tilt the tax scales toward the rich".

Instead of the Senate's tax cut plan, Buffett proposed that it provide tax reductions to those who need and will spend the money in the form of a Social Security tax "holiday" or a tax rebate to lower-income people.

Buffett posed a hypothetical situation in which Berkshire Hathaway, which does not currently pay a dividend, paid $1 billion in dividends next year.

His 31 percent ownership would give him an additional $310 million in income (tax free). This would reduce his tax rate from about 30 percent to 3 percent, while his office secretary would still have a tax rate of about 30 percent.

"The 3 percent overall federal tax rate I would pay -- if a Berkshire dividend were to be tax free -- seems a bit light," Buffett wrote.

"Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets," Buffett added.

Property Tax

Warren Buffett used his own properties to illustrate an example.

His home in Omaha, Nebraska is valued at about $500,000 and recent annual property tax was $14,401.

His home in Laguna Beach, California is valued at $4.0 million and recent annual property tax was $2,264.

Buffett said in the Wall Street Journal interview that taxes on his Nebraska home grew by $1,920 this year, while those on the California home rose by only $23, thanks to limitations on increases in property tax established by Proposition 13.

"In effect, it makes no sense," Buffett told the Wall Street Journal, in reference to large differences in tax assessments by region.

Other Views

Buffett believes that much of the problem with the economies of the United States and other industrialized countries in recent years results from the proliferation of persons and organizations who produce nothing directly but are compensated based on the volume of business which they transact.

Buffett feels that most stock trades are recommended and made primarily to benefit the brokers rather than the investors and has stated that he feels that the world would benefit if each person had a lifetime maximum number of stock trades (e.g. ten or twenty trades).

He states that he sees his fellow Berkshire Hathaway investors as partners and hopes that they take their investment likewise, as a long-term or lifelong investment; he discourages those with a short-term view from investing in Berkshire Hathaway.

He prefers Berkshire Hathaway shareholders actually to take physical possession of their share certificates rather than allowing their shares to be held by a brokerage firm in "street name".

Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Investments

Among the companies he invested in during his tenure as managing partner of the Buffett Partnership was Berkshire Hathaway, a New Bedford textile company. Buffett eventually liquidated the textile business but kept the name and turned the shell of the company into an investment business. He used the cash flow from the textile business to make acquisitions in the insurance field, which generated a steady cash flow for even further investments.

Buffett customarily focuses his investments in companies with good long-term growth potential. Identifying such companies is the difficult part. More value is generated by the companies he owns than his stock market investments, such as Coca-Cola, that attract more attention.

Buffett famously avoids high tech companies, not because they are inherently less desirable, but because he prefers businesses he understands.

Buffett has always been attracted to insurance companies because they generate substantial float deriving from their insurance premiums. These companies provide a source of funds that he then allocates to Berkshire Hathaway's subsidiaries and uses to acquire new companies. Berkshire owns GEICO, a provider of various types of property (primarily car) insurance, and General Re, notable for being slightly more adventurous in entering markets such as reinsurance and the nascent life settlement market.

Buffett is still living in the same house in suburban Omaha that he paid $31,500 for in the 1950s. He is famous for being frugal in both investing and in his personal life.

In addition to being a major investor in Coca-Cola, he is also a fan of their products. In his 1991 letter to shareholders, Buffett says that he drinks five cans of Cherry Coke a day.

Warren Buffett has not yet named any clear successors to run Berkshire Hathaway. He has disclosed that a letter to Berkshire's board of directors exists—only to be opened after his death. It likely suggests his role as CEO be split in two—with one executive handling the operations of the company and the other executive in charge of its various investments. During the annual shareholders meetings in 2002, 2003, and 2004, he dropped hints as to which two persons will take over both roles.

External links

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Bio

Books

Interview

  • Warren Buffett Interview - "Warren Buffett on the Stock Market" with Carol Loomis of Fortune Magazine on December 6, 2001.
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