Free Warren Buffet Essays and Papers
Highlights from The Essays of Warren Buffett
The book ‘The Essays of Warren Buffett: Lessons for Corporate America’ is a must read for anyone who wants to learn how one of the most celebrated money managers of last century operates. I read the 3rd edition and am sharing my favourite parts from the book here.
Golden rules of Investing
- The most revolutionary investing ideas of the past thirty-five years were those called modern finance theory. This is an elaborate set of ideas that boil down to one simple and misleading practical implication: it is a waste of time to study individual investment opportunities. One of modern finance theory’s main tenets is modern portfolio theory. It says that you can eliminate the peculiar risk of any security by holding a diversified portfolio — that is, it formalizes the folk slogan “don’t put all your eggs in one basket.” The risk that is leftover is the only risk for which the investors would be compensated. This leftover risk can be measured by a simple mathematical term — called beta — that shows how volatile the security is compared to the market. Beta measures this volatility risk well for securities that trade on efficient markets, where information about publicly traded securities is swiftly and accurately incorporated into prices. In the modern finance story, efficient markets rule. Buffett thinks most markets are not purely efficient and that equating volatility with risk is a gross distortion.
- As to concentration of the portfolio, Buffett reminds us that Keynes, who was not only a brilliant economist but also an astute investor, believed that an investor should put fairly large sums into two or three businesses he knows something about and whose management is trustworthy.
Buffett jokes that calling someone who trades actively in the market an investor “is like calling someone who repeatedly engages in one-night stands a romantic.” Buffett instead thinks we should follow Mark Twain’s advice from Pudd’nhead Wilson “Put all your eggs in one basket — and watch that basket.”
- Buffet learned the art of investing from Ben Graham who in a number of classic works, including The Intelligent Investor, introduced a character who lives on Wall Street, Mr. Market. He is your hypothetical business partner who is daily willing to buy your interest in a business or sell you his at at prevailing market prices. He is moody and the more manic-depressive he is, the greater the spread between price and value, and therefore the greater the investment opportunities he offers. Buffett reintroduces Mr. Market, emphasizing how valuable Graham’s allegory of the overall market is for disciplined investment knitting. Another leading prudential legacy from Graham is his margin-of-safety principle. This principle holds that one should not make an investment in a security unless there is a sufficient basis for believing that the price being paid is substantially lower than the value being delivered.
- All true investing must be based on an assessment of the relationship between price and value. Strategies that do not employ this comparison of price and value do not amount to investing at all, but to speculation — the hope that price will rise, rather than the conviction that the price being paid is lower than the value being obtained.
- The circle of competence principle is the third leg of the Graham/Buffett stool of intelligent investing, along with Mr. Market and the margin of safety. This common sense rule instructs investors to consider investments only concerning businesses they are capable of understanding with a modicum of effort.
- Three suggestions for investors from Buffett: First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to. Finally, be suspicious of companies that trumpet earnings projections and growth expectations.
- What needs to be reported is data — whether GAAP, non-GAAP, or extra-GAAP — that helps financially-literate readers answer three key questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? and (3) How good a job are its managers doing, given the hand they have been dealt?
- On bonds: “The large numbers of corporations that failed in the early 1990s recession under crushing debt burdens to dispute academic research showing that higher interest rates on junk bonds more than compensated for their higher default rates.”
- On “fallen angels” — bonds that were initially of investment grade but that were downgraded when the issuers fell on bad times:
“A kind of bastardized fallen angel burst onto the investment scene in the 1980s — “junk bonds” that were far below investment-grade when issued. As the decade progressed, new offerings of manufactured junk became ever junkier and ultimately the predictable outcome occurred: Junk bonds lived up to their name. Thus, said the friendly salesmen, a diversified portfolio of junk bonds would produce greater net returns than would a portfolio of high-grade bonds. (Beware of past-performance “proofs” in finance: If history books were the key to riches, the Forbes 400 would consist of librarians). The manager of a fallen angel almost invariably yearned to regain investment-grade status and worked toward that goal. The junk-bond operator was usually an entirely different breed. Behaving much as a heroin user might, he devoted his energies not to finding a cure for his debt-ridden condition, but rather to finding another fix. Additionally, the fiduciary sensitivities of the executives managing the typical fallen angel were often, though not always, more finely developed than were those of the junk-bond-issuing financiopath.”
- Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering: Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these. Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.
If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.
- Bertrand Russell’s observation about life in general applies with unusual force in the financial world: “Most men would rather die than think. Many do.”
- “Value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. Intrinsic value is an estimate rather than a precise figure.”
- “You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education’s cost as its “book value.” If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job. For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn’t get his money’s worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.”
- “We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise — none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.”
- “People who expect to earn 10% annually from equities during this century — envisioning that 2% of that will come from dividends and 8% from price appreciation — are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. Think about it”
How Buffett and Charlie Munger run Berkshire
- Buffett and Berkshire avoid making predictions and tell their managers to do the same. They think it is a bad managerial habit that too often leads managers to make up their financial reports.
- Buffett just gives a simple set of commands to his CEOs: to run their business as if (1) they are its sole owner, (2) it is the only asset they hold, and (3) they can never sell or merge it for a hundred years. This enables Berkshire CEOs to manage with a long-term horizon ahead of them, something alien to the CEOs of public companies whose short-term oriented shareholders obsess with meeting the latest quarterly earnings estimate. Short-term results matter, of course, but the Berkshire approach avoids any pressure to achieve them at the expense of strengthening long-term competitive advantages.
- “When a problem exists, whether in personnel or in business operations, the time to act is now.”
- Unlike many CEOs, who desire their company’s stock to trade at the highest possible prices in the market, Buffett prefers Berkshire stock to trade at or around its intrinsic value — neither materially higher nor lower. Such linkage means that business results during one period will benefit the people who owned the company during that period.
- Stock splits are another common action in corporate America that Buffett points out disserve owner interests. Stock splits have three consequences: they increase transaction costs by promoting high share turnover; they attract shareholders with short-term, market-oriented views who unduly focus on stock market prices; and, as a result of both of those effects, they lead to prices that depart materially from intrinsic business value.
- Intrinsic value: The discounted value of the cash that can be taken out of a business during its remaining life. Charlie and Berkshire are interested only in acquisitions that they believe will raise the per-share intrinsic value of Berkshire’s stock.
- According to Buffett: Useful financial statements must enable a user to answer three basic questions about a business: approximately how much a company is worth, its likely ability to meet its future obligations, and how good a job its managers are doing in operating the business. Charlie and Buffett think that it is both deceptive and dangerous for CEOs to predict growth rates for their companies.
- “At Berkshire, we try to be as logical about compensation as about capital allocation. For example, we compensate Ralph Schey based upon the results of Scott Fetzer rather than those of Berkshire. What could make more sense, since he’s responsible for one operation but not the other? A cash bonus or a stock option tied to the fortunes of Berkshire would provide totally capricious rewards to Ralph. He could, for example, be hitting home runs at Scott Fetzer while Charlie and I rang up
mistakes at Berkshire, thereby negating his efforts many times over. Conversely, why should option profits or bonuses be heaped upon Ralph if good things are occurring in other parts of Berkshire but Scott Fetzer is lagging?”
- “Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.”
- “It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price-one not reimbursable by the companies”
- “Audit committees should unequivocally put auditors on the spot, making them understand they will become liable for major monetary penalties if they don’t come forth with what they know or suspect.”
- On why Berkshire bought Washing Post Company: “We bought all of our [Washington Post Company (“WPC”)] holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see. Our advantage was our attitude, that we had learned from Ben Graham, that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.”
- “Whenever Charlie and I buy common stocks for Berkshire’s insurance companies (leaving aside arbitrage purchases, discussed) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts — not as market analysts, not as macroeconomic analysts, and not even as security analysts.”
- “Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
- The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate.
- Buffett then explains why he is happy when the stock market is stagnant or goes down: “ A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? This question answers itself. Similarly If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
- On arbitrage: “To evaluate arbitrage situations you must answer four questions: (1) How likely is it that the promised event will indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still better will transpire — a competing takeover bid, for example? and (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?
- The preceding discussion about arbitrage makes a small discussion of “efficient market theory” (EMT) also seem relevant. This doctrine became highly fashionable — indeed, almost holy scripture — in academic circles during the 1970s. Essentially, it said that analyzing stocks was useless because all public information about them was appropriately reflected in their prices. In other words, the market always knew everything. As a corollary, the professors who taught EMT said that someone throwing darts at the stock tables could select a stock portfolio having prospects just as good as one selected by the brightest, most hard-working security analyst. We continue to think that it is usually foolish to part with an interest in a business that is both understandable and durably wonderful. Business interests of that kind are simply too hard to replace. The strategy we’ve adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as “the possibility of loss or injury.” Academics, however, like to define investment “risk” differently, averring that it is the relative volatility of a stock or portfolio of stocks — that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the “beta” of a stock — that shows how volatile the security is compared to the market. Beta measures this volatility risk well for securities that trade on efficient markets, where information about publicly traded securities is swiftly and accurately incorporated into prices. In our opinion, the real risk an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake. Though this risk cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful. The primary factors bearing upon this evaluation are: (1) The certainty with which the long-term economic characteristics of the business can be evaluated; (2) The certainty with which management can be evaluated, both as to its ability to realise the full potential of the business and to wisely employ its cash flows; (3) The certainty with which management can be counted on to channel the reward from the business to the shareholders rather than to itself; (4) The purchase price of the business; (5) The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor’s purchasing-power return is reduced from his gross return.
- It is better to be approximately right than precisely wrong.
- “If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices — the businesses he understands best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: “Too much of a good thing can be wonderful.”
- “We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements.”
- “Our equity-investing strategy remains little changed from what it was when we said in the 1977 annual report: We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favourable long-term prospects; operated by honest and competent people; and (d) available at a very attractive price.” We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute “an attractive price” for “a very attractive price.”
- “Consciously paying more for a stock than its calculated value — in the hope that it can soon be sold for a still-higher price — should be labeled speculation (which is neither illegal, immoral nor — in our view — financially fattening). Growth benefits investors only when the business in point can invest at incremental returns that are enticing — in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.”
- Value investing typically connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield.
- “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite — that is, consistently employ ever-greater amounts of capital at very low rates of return.”
- “In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favour businesses and industries unlikely to experience major change.”
- If we have a strength, it is in recognising when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. A further related lesson: Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them.
- On Cigar butt investing philosophy which Buffett followed earlier in his career “If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.”
- Time is the friend of the wonderful business, the enemy of the mediocre. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realise a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost.
- On institutional imperative: “I learned over time that rationality wilts when institutional imperative comes into play. Example: (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialise to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated. Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided.”
- “After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.”
- “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.”
- “Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero.”
- On paying dividends: “Not a dime of cash has left Berkshire for dividends share repurchases during the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month.”
- “ Our net worth has increased from $48 million to $157 billion during the last four decades. No other corporation has come to building its financial strength in this unrelenting way. By being so cautious in respect to leverage, we penalise our returns by a minor amount. Having loads of liquidity, though, lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.”
On alternative investments
- “Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur.”
- “Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control. Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. For tax-paying investors, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. We primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.”
- “Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end. Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be $9.6 trillion. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? My own preference is investment in productive assets, whether businesses, farms, or real estate.”
- “Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system. Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values.”
- “Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie and me in this hapless group: When Berkshire purchased General Re in 1998, we knew we could not get our minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had never heard of). So we decided to close up shop. Though we were under no pressure and were operating in benign markets as we exited, it took us five years and more than $400 million in losses to largely complete minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had never heard of). So we decided to close up shop. Though we were under no pressure and were operating in benign markets as we exited, it took us five years and more than $400 million in losses to largely complete”
On owning a Bank
- “Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled — often on the heels of managerial assurances that all was well — investors understandably concluded that no bank’s numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings.
Our purchase of one-tenth of the bank may be thought of as roughly equivalent to our buying 100% of a $5 billion bank with identical financial characteristics. Wells Fargo is big — it has $56 billion in assets — and has been earning more than 20% on equity and 1.25% on assets. Of course, ownership of a bank — or about any other business — is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic — the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market’s major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank’s loans — not just its real estate loans — were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even. A year like that — which we consider only a low-level possibility, not a likelihood — would not distress us.”
On owning an Airline
- “The day of reckoning for these airlines could be delayed by infusions of capital (such as ours into USAir), but eventually a fundamental rule of economics prevailed: In an unregulated commodity business, a company must lower its costs to competitive levels or face extinction. When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: “There’s really nothing to it. Start as a billionaire and then buy an airline.” Unwilling to accept Branson’s proposition on faith, your Chairman decided in 1989 to test it by investing $358 million in a 9¼% preferred stock of USAir. I liked and admired Ed Colodny, the company’s then-CEO, and I still do. But my analysis of USAir’s business was both superficial and wrong. I was so beguiled by the company’s long history of profitable operations, and by the protection that ownership of a senior security seemingly offered me, that I overlooked the crucial point: USAir’s revenues would increasingly feel the effects of an unregulated, fiercely competitive market whereas its cost structure was a holdover from the days when regulation protected profits. These costs, if left unchecked, portended disaster, however reassuring the airline’s past record might be. Since our purchase, the economics of the airline industry have deteriorated at an alarming pace, accelerated by the kamikaze pricing tactics of certain carriers. The trouble this pricing has produced for all carriers illustrates an important truth: In a business selling a commodity-type product, it’s impossible to be a lot smarter than your dumbest competitor.”
On stock repurchases
- “We will never make purchases with the intention of stemming a decline in Berkshire’s price. Charlie and I favour repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. We have witnessed at a material discount to the company’s intrinsic business value, conservatively calculated. Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years. Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.
The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.”
On splitting Berkshire stock
- “Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers.”
- “A hyperactive stock market is the pickpocket of enterprise.
For example, consider a typical company earning, say, 12% on equity. Assume a very high turnover rate in its shares of 100% per year. If a purchase and sale of the stock trades at book value, the owners of our hypothetical company will pay, in aggregate, 2% of the company’s net worth annually for the privilege of transferring ownership. This activity does nothing for the earnings of the business, and means that 1/6 of them are lost to the owners through the “frictional” cost of transfer. Consequently, our stock consistently trades in a price range that is sensibly related to intrinsic value.”
- On issuing Class B common stock later: “We made two good-sized offerings through Salomon [during 1996], both with interesting aspects. The first was our sale in May of 517,500 shares of Class B Common, which generated net proceeds of $565 million. As I have told you before, we made this sale in response to the threatened
creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely non repeatable, record to entice naive small investors and would have charged these innocents high fees and commissions. The trusts would have meanwhile indiscriminately poured the proceeds of their offerings into a supply of Berkshire shares that is fixed and limited. The likely result: a speculative bubble in our stock.”
Why Buffet hates to part with Berkshire stock
- “Our problem has been that we own a truly marvelous collection of businesses, which means that trading away a portion of them for something new almost never makes sense. If we issue shares in a merger, we reduce your ownership in all of our businesses — partly-owned companies such as Coca-Cola, Gillette and American Express, and all of our terrific operating companies as well.”
- “The oracle Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth
two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush — and the maximum number of the birds you now possess that should be offered for it.”
- “Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.
- “Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally. The company could, of course, distribute the money to shareholders by way of dividends or share repurchases. But often the CEO asks a strategic planning staff,
consultants or investment bankers whether an acquisition or two might make sense. That’s like asking your interior decorator whether you need a $50,000 rug. We believe most deals do damage to the shareholders of the acquiring company. In any case, why potential buyers even look at projections prepared by sellers baffles me. Charlie and I never give them a glance, We would love to see an intermediary earn its fee by thinking of us — and therefore repeat here what we’re looking for: (1) Large purchases, (2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations), (3) Businesses earning good returns on equity while employing little or no debt, (4) Management in place (we can’t supply it), (5) Simple businesses (if there’s lots of technology, we won’t understand it), (6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).”
- “Berkshire is another kind of buyer — a rather unusual one. We buy to keep, but we don’t have, and don’t expect to have, operating people in our parent organisation. All of the businesses we own are run autonomously to an extraordinary degree. The areas I get involved in are capital allocation and selection and compensation of the top man. Other personnel decisions, operating strategies, etc. are his bailiwick.”
Note: I ignored highlights from a few chapters related to Accounting. Not being an accounting nerd, I had a hard time grasping all the concepts. I also mostly focussed on stocks and bonds and ignored other money instruments.
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The Life Of Warren Buffett History Essay
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Warren Edward Buffett (born August 30, 1930) is a U.S. investor, and philanthropist. He is one of the most eminent investors in chronicle, the basic shareholder and chief executive officer of Berkshire Hathaway and in 2008 was ordered by Forbes as the 2nd most robust person in the world on an approximated net worth of around $62 billion.
Buffett is often called the "Oracle of Omaha" or the "Sage of Omaha’ and is noted for his adhesiveness to the value investing philosophy and for his own frugalness in spite of his huge riches.
Buffett is also a famed altruist, having engaged to impart 85 percentage of his fate to the Gates cornerstone. He as well assists as a appendage of the board of trustees at Grinnell College.
In 1999, Buffett personified described as the greatest money manager of the twentieth century in a surveil by the Carson Group, leading Peter Lynch and John Templeton. In 2007, he was enrolled amongst Time’s 100 virtually influencial people on the Earth.
Warren Buffett was born in Omaha, Nebraska. His father name is Howard Buffett and having 2 siblings. He worked at his grandpa’s grocery store. In 1943, Buffett registered his 1st income tax return, deducing his pedal and watch as an exercise disbursement for $35 for his employment as paper deliveryman. Later on his father was elected to United States Congress, Buffett was schooled at Woodrow Wilson High School , Washington. In 1945, in his fledgeling year of high school, Buffett and a acquaintance expended $25 to buy a secondhand pinball game machine, which they placed in a barber workshop. Within weeks, they possessed 3 game machines in different emplacements.
Buffett first entered at The Wharton School, University of Pennsylvania, (1947-49) where he united the Alpha Sigma Phi brotherhood. His father and uncles were Alpha Sigma Phi brothers from the chapter in Nebraska. In 1951, he changed to the University of Nebraska where he underwent a B.S. in Economics.
Buffett then enrolled at Columbia Business School subsequently memorising that Benjamin Graham, (the generator of The Intelligent Investor), and David Dodd, 2 long-familiar financial analyst*, tutored there. In 1951, he then underwent a M.S. in Economics from Columbia University.
In Buffett’s personal articulates:
I’m 15 percent Fisher and 85 percent Benjamin Graham.
The primary theme of investing is to consider stocks as business, utilise the market’s variations to your welfare, and look for a safety margin. That is what Benjamin Graham educated us. A century from today they’ll even be the fundaments of investing.
BENJAMIN GRAHAM – BUFFETT’S MENTOR
During the period of 1920’s, Ben Graham had become renowned. He looked for for stocks that comprised so low-priced they were almost entirely pregnant of risk, at a time when the rest of the world was approaching the investment field as a tremendous game of roulette. The Northern Pipe Line, an oil transportation company carried off by the Rockefellers was among his best known calls. The value investors tried to convince management to trade the portfolio, but they denied because Graham accomplished that the company had bond holdings worth $95 per share which was traded at $65 per share. Shortly thereafter, he engaged a adoptive warfare and procured a spot on the Board of Directors (BOD). The company gave a dividend in the amount of $70 per share and sold-out its bonds.
At the age of 40, Security Analysis, among the greatest works ever composed on the stock market was pubished by Ben Graham. At that time, it was dangerous; endowing in equities had become a prank (The Dow Jones had struck from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was about this time that Graham arrived up with the rule of "intrinsic" business value – a touchstone of a business’s genuine worth that was wholly and entirely independent of the stock price. Utilising intrinsic value, investors could be in the position to determine what a company was worth and could be capable to take investment decisions consequently. His succeeding book, The Intelligent Investor, which Warren observes as "the greatest book on investing ever written", enclosed the world to Mr. Market – the best investment doctrine of analogy in history. Through his simple yet profound investment principles, Ben Graham turned an idyllic anatomy to the 21 year old, Warren Buffett.
From 1951-54, Buffett was hired at Buffett-Falk & Co., Omaha as an Investiture Salesman. From 1954-1956, he was hired at Graham-Newman Corp., New York as a financial analyst. From 1956-1969, he worked with Buffett Partnership, Ltd., Omaha as a superior general Partner and from 1970 onwards till Present at Berkshire Hathaway Inc, Omaha as its Chairman, Chief Executive Officer.
In 1951, Buffett Warren observed his mentor was the Chairman of a small, nameless insurance company named GEICO insurance. Taking a power train to Washington. on a Saturday, he tapped on the door of GEICO’s central office until a janitor permitted him in. At that place, he encountered Lorimer Davidson, Geico’s Vice President, and the both talked about the insurance business concern for hours. Davidson would eventually become Buffett’s womb-to-tomb friend and an everlasting charm and later on recollect that he discovered Buffett to be a "Prodigious man" after only fifteen minutes. Buffett calibrated from Columbia and desired to work at Wall Street, however both, his father and Ben Graham pressed him not to. He volunteered to work out for Graham free of charge, but Graham declined.
Buffett turned back to Omaha and worked as a stockbroker while acquiring a Dale Carnegie public speaking course. Utilising what he acquired, he sensed surefooted adequate to teach an "Investment Principles & Rules" night class at the University of Nebraska. The moderate age of his pupils was more than twice his personal. During this time he purchased a Sinclair Texaco gas station too as a side investment. Nevertheless, this didn’t boot out to be an eminent business jeopardize.
In 1952, Buffett wedded Susan Thompson and the following year they gave birth their 1st baby, Susan Alice Buffett. In 1954, Buffett received a job at Benjamin Graham’s partnership, which he always dreamed. His initiating remuneration was $12,000 a year (more or less $97,000 conformed to 2008 dollars). There he worked intimately with Walter Schloss. Graham was a bully man to work for. He was inexorable that stocks allow a ample safety margin after weighting the trade-off between their monetary value and their intrinsic value. The debate added up to Buffett simply he queried whether the standards were too demanding and induced the company to drop down on big successes that had more qualitative values. That same year the Buffetts birthed their 2nd baby, Howard Graham Buffett.
In 1956, Benjamin Graham adjourned and shut down his partnership. At this time Buffett’s own savings comprised over $174,000 and he commenced Buffett Partnership Ltd., an investment partnership in Omaha.
In 1957, Buffett had three partnerships manoeuvering the whole year. He bought a five-bedroom stucco mansion in Omaha, where he even dwells, for $31,500. In 1958, the Buffett’s 3rd baby, Peter Andrew Buffett , was born. Buffett controlled five partnerships the whole year. In 1959, the company raised to six partnerships running the full year and Buffett was acquainted to Charlie Munger. By 1960, Buffett had seven partnerships manoeuvering: Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff and Underwood. He asked one of his partners, a physician, to ascertain ten other physicians willing and able to invest $10,000 each in his partnership. Eventually eleven agreed. In 1961, Buffett unconcealed that Sanborn Map Company reported for 35% of the partnership’s pluses. He explicated that in 1958 Sanborn stock traded at only $45 per share when the value of the Sanborn investment portfolio was $65 per share. This implied that vendees valued Sanborn stock at "minus $20" per share and were involuntary to bear more than 70 cents on the dollar for an investment portfolio with a map business injected for nothing. This gained him a spot on the board of Sanborn.
WAY TO RICHES
In 1962, Buffett turned a millionaire, because of his partnerships, which in January 1962 had a surplus of $7,178,500, of which over $1,025,000 belonged to Buffett. Buffett integrated all partnerships into one partnership. Buffett divulged a textile fabricating business firm named Berkshire Hathaway. Buffett’s partnerships started buying shares at $7.60 per share. In 1965, when Buffett’s partnerships aggressively started buying Berkshire, they paid $14.86 per share while the company had working capital of $19 per share. This didn’t include the evaluation of fixed assets (factory, machinery and equipment etc.). Buffett took charge of Berkshire Hathaway at the board meeting and appointed a new president, Ken Chace, to feed the company. In 1966, Buffett closed the partnership to fresh income. Buffett published in his letter: unless it seems that conditions have changed (under some considerations added capital would better final result) or unless new partners can contribute some asset to the partnership other than simply working capital, I think not to admit more additional partners to BPL.
In his second letter, Buffett declared his foremost investment in a private business concern – Hochschild, Kohn and Co, a privately owned Baltimore emporium. In 1967, Berkshire disbursed its initiatory and exclusive dividend of 10 cents. In 1969, observing his most eminent year, Buffett neutralised the partnership and shifted their assets to his partners. Among the assets, disbursed were shares of Berkshire Hathaway. In 1970, as chairman of Berkshire Hathaway, Buffett commenced publishing his now-famous yearly letters to stockholders.
However, he survived solely on his salary of $50,000 per year, and his external investment revenue. In 1979, Berkshire commenced the year dealing at $775 per share, and finished at $1,310. Buffett’s income reached $620 million, ranking him on the Forbes 400 for the first time.
In 2006, Buffett declared in June that he step by step would impart 85% of his Berkshire retentions to five foundations in annual gifts of stock, starting in July 2006. The largest share would go to the Bill and Melinda Gates Foundation.
In 2007, in a letter to shareholders, Buffett declared that he was seeking a younger successor, or possibly successors, to execute his investment business. Buffett had antecedently picked out Lou Simpson, who runs investments at Geico, to meet that role. However, Simpson is only six years younger than Buffett.
In 2008, Buffett became the wealthiest man in the world dethroning Bill Gates, worth $62 billion reported by Forbes, and $58 billion reported by Yahoo. Bill Gates had been first on the Forbes list for 13 successive years. On March 11 2009, Bill Gates regained number one of the list according to Forbes magazine, with Buffett second. Their values have dropped to $40 billion and $37 billion respectively, which is probably an outcome of the 2008/2009 economical downswing.
In 1973, Berkshire commenced to gain stock in the Washington Post Company. Buffett became close acquaintances with Katharine Graham, who disciplined the company and its flagship newsprint, and became a member of its directorate.
In 1974, the SEC opened up a schematic investigation into Warren Buffett and Berkshire’s attainment of WESCO, referable possible engagement of interest. No accusations were brought.
In 1977, Berkshire indirectly bought the Buffalo Evening News for $32.5 million. Fair charges began, inspired by its competitor, the Buffalo Courier-Express. Both compositions lost income, till the Courier-Express folded in 1982.
In 1979, Berkshire started to acquire stock in ABC. On March 18, Capital Cities’ declared $3.5 billion. Leverage of ABC stormed the media industry, as ABC was approximately four times larger than Capital Cities was at that time. Warren Buffett, Chairman Berkshire Hathaway, served finance the deal in return for a 25 percent stake in the merged company. The newly merged company, titled Capital Cities/ABC (or CapCities/ABC), was pressured to trade away a few stations due to FCC ownership conventions. Also, the two companies possessed several radio stations in the equivalent markets.
In 1987, Berkshire Hathaway bought 12% stake in Salomon Inc., making it the greatest shareholder and Buffett the director. In 1990, a outrage involving John Gutfreund (former CEO of Salomon Brothers) rose up. A knave trader, Paul Mozer, was passing on bids in excess of what was permitted by the Treasury rules. When this was ascertained and brought to the aid of Gutfreund, he didn’t immediately debar the knave trader. In August 1991, Gutfreund leftover the company. Buffett turned CEO of Salomon until the crisis surpassed. On September 4 1991, he evidenced before Congress.
In 1988, Buffett commenced purchasing stock in Coca-Cola Company, finally buying up to 7 percent of the company for $1.02 billion. It would come out to be one of Berkshire’s most profitable investments, and one which it still controls. In 2002, Buffett entered in $11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his overall gain on these contracts was over $2 billion.
In 1998, he took on General Re, (in an infrequent move, for stock). In 2002, Buffett got interested with Maurice R. Greenberg at AIG, with General Re providing reinsurance. On March 15, 2005, AIG’s board forced Greenberg to leave office from his post as Chairman and CEO under the shadow of unfavorable judgment from Eliot Spitzer, attorney general of the state of New York. On February 9, 2006, AIG and the New York State Attorney General’s office agreed to a settlement in which AIG would pay a fine of $1.6 billion.
In 2009, Warren Buffett endowed $2.6 billion as a part of Swiss Re’s raising equity capital. Berkshire Hathaway already possesses a 3% stake, with rights to possess more than 20%.
LATE 2000’S RECESSION
Buffett encounter criticism during the -subprime crisis of 2007-2008, component of the late 2000s recession, that he had apportioned capital too early leading in suboptimal deals. "Buy American. I am." To quote Warren Buffett’s popular opinion piece published in the New York Times.
Buffett has called the 2007’s downswing in the financial sector "poetic justice".
Buffett’s Berkshire Hathaway met a 77% drop in earnings during Q3 2008 and many of his new deals look to be running into heavy mark-to-market losses.
Berkshire Hathaway gained 10% perpetual preference shares of Goldman Sachs .Some of Buffett’s exponent puts that he wrote (sold) are presently running around $6.73 billion mark-to-market losses. The scale of the expected loss inspired the SEC to demand that Berkshire produce, "a more robust revealing" of components accustomed assess the contracts.
Buffett also helped Dow Chemical pay for its $18.8 billion takeover of Rohm & Haas. He, thus, turned the only largest shareholder in the enlarged group with his Berkshire Hathaway, which offered $3 billion, emphasising his helpful role during the prevailing crisis in debt and equity markets.
In October 2008, the media rumoured that Warren Buffett had harmonised to buy General Electric(GE) preferred stock. The process admitted extraordinary incentives: he accepted an option to buy 3 billion General Electric at $22.25 in the incoming five years, and also accepted a 10% dividend (due within three years). In February 2009, Warren Buffett sold piece of Procter & Gamble Co, and Johnson & Johnson shares from his portfolio.
In addition to traces of anachronism, queries have been elevated as to the wisdom in keeping some of Berkshire’s major retentions, including The Coca-Cola Company (NYSE:KO) which peaked at $86 in 1998. Buffett talked over the troubles of acknowledging when to sell in the company’s 2004 annual report: "That may appear comfortable to do when one looks through an always-clean, rear-view mirror. Unluckily, however, it’s the windscreen through which investors must peer, and that glass is invariably fogged.". In March 2009, Buffett expressed in a cable television interview that the economy had "fallen off a cliff… Not only has the economy slowed down a lot, but people have really changed their habits like I haven’t seen." Additionally, Buffett awes we may revisit a 1970s level of ostentation, which led to a painful stagflation that lasted many years.
Buffett married Susan Thompson in 1952. They had 3 kids, Susie, Howard, and Peter. In 1977, the couple started inhabiting separately, though they stayed married until her death in July 2004. Their daughter Susie lives in Omaha and does philanthropic work through the Susan A Buffett Foundation and is a national board member of Girls, Inc. In 2006, on his seventy-sixth birthday, he wedded his never-married longtime-companion, Astrid Menks, who was then sixty years old. From 1977, since his wife’s departure, She had lived with him to San Francisco. It was Susan Buffett who set for the two to meet before she left Omaha to engage her singing career. All three were close and vacation cards to friends were signed "Warren, Susie and Astrid". Susan Buffett briefly talked over this relationship in an interview on the Charlie Rose Show shortly earlier her death, in a rare glimpse into Buffett’s personal life. In 2006, His annual earnings was about $100,000, which is little as compared to senior executive remuneration in comparable companions.In 2007, and 2008, he earned a total compensation of $175,000, which enclosed a basic wage of just $100,000. He dwells in the same house in the central Dundee vicinity of Omaha that he purchased in 1958 for $31,500, today assessed at around $700,000 (though he too does have a $4 million home in Laguna Beach, California). In 1989, after having spent almost 10 million dollars of Berkshire’s funds on a private jet, Buffett sheepishly named it "The Indefensible." This act constituted a break from his past conviction of wasteful purchases by early CEOs and his account of practising more public conveyance.
He stays a desirous player of the card game bridge, which he acquired from Sharon Osberg, and plays with her and Bill Gates. He passes twelve hours a week playing the game. In 2006, he sponsored a bridge match for the Buffett Cup. Shapely on the Ryder Cup in golf, declared straightaway ahead it, and in the same city, a squad of 12 bridge players from the United States took on 12 Europeans in the event.
Warren Buffett acted with Christopher Webber on an animated series with head Andy Heyward, of DiC Entertainment,and then A Squared Entertainment. The series characteristics Buffett and Munger, and instructs children healthy financial habits for life.
Buffett was elevated Presbyterian but has since represented himself as agnostic as it strikes religious beliefs. In December 2006, it was accounted that Buffett doesn’t carry a cellphone, does not have a computer at his desk, and driveways his personal automobile, a Cadillac DTS.
Mr Warren Buffet wears off tailor-made suits from the Chinese label Trands, before he used to wear Ermenegildo Zegna.
Buffett’s DNA report disclosed that his paternal roots hail from northern Scandinavia, while his maternal roots most likely have roots in Iberia or Estonia. Despite general propositions to the contrary, and the casual friendly relationship which has formed between their families, Warren Buffett has no clear reference to the well-known vocalist Jimmy Buffett.
In addition to, other political contributions across the years, Buffett has officially certified and made campaign contributions to Barack Obama’s presidential campaign. On July 2, 2008, Buffett attended a $28,500 per plate fundraiser for Obama’s campaign in Chicago hosted by Obama’s National Finance Chair, Penny Pritzker and her husband, as well as Obama advisor Valerie Jarrett. Buffett supported Obama for president, and suggested that John McCain’s aspects on social justice comprised so far from his own that McCain would need a "lobotomy" for Buffett to alter his indorsement.During the second 2008 U.S. presidential debate, nominees John McCain and Barack Obama, later on being asked first by presidential debate intermediator Tom Brokaw, both referred Buffett as a potential future Secretary of the Treasury. Later, in the third and concluding presidential debate, Obama mentioned Buffett as a potential economic consultant. Buffett was also finance consultant to California Republican Governor Arnold Schwarzenegger on his 2003 election crusade.
Warren Buffett’s compositions include his annual reports and various articles.
He admonished about the harmful effects of inflation:
"The arithmetic makes it plain that pomposity is a far more annihilating tax than anything that has been acted out by our general assembly. The inflation tax has a tremendous ability to merely wipe out capital. It creates no divergence to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest money during a period of zero inflation, or pays no income taxes during years of 5 percent inflation."
In his article "The Superinvestors of Graham-and-Doddsville", Buffett controverted the scholarly Efficient-market hypothesis, that baffling the S&P 500 was "pure chance", by spotlighting a number of pupils of the Graham and Dodd value adorning school of thought. In addition to himself, Buffett named Walter J. Schloss, Tom Knapp, Ed Anderson (Tweedy, Brown Inc.), Bill Ruane (Sequoia Fund, Inc.), Charles Munger (Buffett’s own business partner at Berkshire), Rick Guerin (Pacific Partners, Ltd.), and Stan Perlmeter (Perlmeter Investments).
In his November, 1999 Fortune article, he admonished of investors’ delusive anticipations:
" Let me summarise what I’ve been saying about the stock market: I think it’s very hard to come up with a compelling case that equities will over the next 17 years perform anything like–anything like–they’ve performed in the past 17. If I had to pick the likeliest return, from appreciation and dividends combined, that investors in aggregate–repeat, aggregate–would earn in a world of constant interest rates, 2% inflation, and those ever injurious frictional costs, it would be 6%."
The following quotation from 1988, respectively, highlights Warren Buffett’s thoughts on his wealth and why he long planned to reapportion it:
" I don’t have a trouble with guiltiness about money. The way I see it is that my money represents an tremendous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I desired to, I could hire 10,000 people to do nothing but paint my impression everyday for the rest of my lifespan. And the GNP would go up. But the utility of the product would be zero, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give literally all of those lay claim checks to brotherly love when my wife and I die."
From a NY Times article:
"I don’t believe in dynastic wealthiness," Warren Buffett said, calling those who raise up in affluent circumstances "members of the lucky sperm club."
Buffett has written numerous times of his opinion that, in a free enterprise, the plentiful gain oversized advantages for their talents:
" A market economy creates some lopsided yields to participants. The right talent of vocal chords, anatomical structure, physical strength, or mental powers can produce tremendous piles of claim checks on upcoming national output. Right choice of roots likewise can outcome in lifetime issues of such tickets upon birth. If zero actual investment returns disported a little greater part of the national output from specified stockholders to equally desirable and diligent citizens missing jackpot-producing talents, it would appear improbable to baffle such an abuse to an equitable world as to risk Divine intercession."
His children won’t come into an important proportion of his wealth. These activities are uniform with affirmations he has made in the past suggesting his opposition to the transfer of outstanding fortunes from one genesis to the next. Buffett once remarked, "I would like to give my kids just sufficient so that they’d experience that they could do anything, but not such that they’d experience like doing nothing".
In 2006, he auctioned his 2001 Lincoln Town Caron eBay to hike money for Girls, Inc.
In 2007, he auctioned off a luncheon with himself that brought up a final bid of $650,100 for a charity.
In 2006, he declared a program to bring out his luck to charity, with 83% of it going to the Bill & Melinda Gates Foundation. In June 2006, Buffett devoted approximately 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation, valuable approximately US$30.7 billion as of 23 June 2006, building it the greatest charitable contribution in history and Buffett among the leaders in the philanthrocapitalism revolution. The foundation will have 5% of the total contribution on an annualised basis each July, commencing in 2006. Buffett also joined the directorate of the Gates Foundation, although he doesn’t program to be actively engaged in the foundation’s investment.
This is a substantial shift from previous affirmations Buffett has made, having expressed that most of his fortune would surpass to his Buffett Foundation. In 2004, the majority of the estate of his wife, prized at $2.6 billion, went to that foundation when she died.
He also committed $50-million to the Nuclear Threat Initiative, in Washington, where he has assisted as an consultant since 2002.
On 27 June 2008, Zhao Danyang, a general manager at Pure Heart China Growth Investment Fund, succeeded the 2008 5-day online "Power Lunch with Warren Buffett" charity auction with a bid of $2,110,100. Auction continues benefit the San Francisco Glide Foundation.
Buffett’s deliveries are recognised for merging business discussions humorously. Every year, Buffett presides over Berkshire Hathaway’s yearly stockholder assembling in the Qwest Center in Omaha, Nebraska, an issue eviscerating over 20,000 visitors from both United States and abroad, giving it the nickname "Woodstock of Capitalism". Berkshire’s yearly articles and letters to stockholders, prepared by Buffett, frequently experience coverage by the financial media. Buffett’s compositions are recognised for carrying well-written quotations laying out from the Bible to Mae West. as well as Midwestern advice, and several jokes. Various websites proclaim Buffett’s merits while others objurgate Buffett’s business models or dismiss his investment advice and decisions.
WARREN BUFFETT AS A LEADER
What he does understand is business. At 5 Years old, he started earning income. At only 6 years old, Buffett bought 6-packs of Coke from his grandpa’s grocery store for 25 cents and resold all of the bottles for a nickel, pocketing a 5 cent income. While other children of his age were enjoying hopscotch and jacks, Warren was earning income. Five years later, Buffett underwent his step into the world of high finance. At 11 years old, he bought 3 shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Just after his buying of the stock, it fell down to just over $27 per share. A scared but spirited Warren held his shares until they rebounded to $40. He quickly sold them – an error he would shortly come to regret. Cities Service stroke up to $200. The experience taught him one of the basic lessons of investing: Patience is a Virtue. As he commenced on his investment career, he had invested among others in businesses in textiles and newspapers. He knew the newspaper business from experience: he was a paper boy as a adolescent. When he was investing in these businesses, the related industries were in great downslope or integration. The textile business is an industry unexhausted from the industrial revolution. As fabricating moved to inexpensive labor countries, American textile manufacturers contracted. In the 19 th century, Newspapers growth industry, competing with television and radio for news were consolidating from a rivalrous market of numerous newspapers to one major "monopoly" newspaper in major towns. Wall Street wasn’t fascinated in putting in these business concerns, so these were value bargains that pulled in Buffet. By investing in these businesses, Buffet got discounted assets and cash flows which he could utilise to invest in other businesses.
One biased and negative perspective of Buffet would be as a scavenger of American business: acquiring fat on the misfortunes of asset rich, but impassive, turning down, and tedious businesses. However, in realism, he stands by businesses in which he invests, he makes sure that the business is a benevolent business. He normally buys businesses and seldom deals them. For instance, GEICO Insurance is among his core properties, he has controlled GEICO most of his investment vocation. When he brought in Berkshire Hathaway, it was a textile business, asset rich and with a stabilise cash flow. But Wall Street considered the textile industry as a worsening business. Berkshire did finally get out of the business of textiles, but it owned among the last textile manufactory in America. If one purchased a share of Berkshire Hathaway just about the time Buffet did, approximately $8, and held it to today, its worth is about ten thousand times its value in 1965, over $80,000.
Buffet was progressive in the domain of efficaciously utilising capital. Before the crowd, Buffet realised the businesses of insurance and reinsurance as having great value of cash flow. Berkshire’s golden business is reinsurance. Reinsurance is the wholesale end of the insurance business, involving large sources of comparatively quick assets. Buffet knew what to do with that cash pool and how to invest it.
In the early 1980’s the insurance companies cut costs on premiums to keep market share. They wanted to reveal constant increase for the market idols. On the other hand, Buffet realised that writing policies for any kind of chance wasn’t judicious. He just wrote policies that added up to him. He acknowledged that finally, losses would force underwriters to recede and premiums would hike. in 1985, When the insurance market reversed, the industry was having terrible losses and several companies bring down the reporting they proposed. The insurance companies created a miserly market with their hesitation to issue policies, partly because their reserves were at an wane. Buffet came forward to the plate, boot with cash, he was set to publish big policies, at his own terms and conditions, offcourse.
Investments in securities are probably to interest this type, especially investments in blue chips securities. ISTJs [Inspector Guardians] are not probably to take chances either with their personal or other’s money.
Efficient and effective use of capital have been Buffet’s countersigns all his life.
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." is his policy.
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Warren Buffett Shares the Secrets to Wealth in America
I have good news. First, most American children are going to live far better than their parents did. Second, large gains in the living standards of Americans will continue for many generations to come.
Some years back, people generally agreed with my optimism. Today, however, pollsters find that most Americans are pessimistic about their children’s future. Politicians, business leaders and the press constantly tell us that our economic machine is sputtering. Their evidence: GDP growth of only 2% or so in recent years.
Before we shed tears over that figure, let’s do a little math, recognizing that GDP per capita is what counts. If, for example, the U.S. population were to grow 3% annually while GDP grew 2%, prospects would indeed be bleak for our children.
But that’s not the case. We can be confident that births minus deaths will add no more than 0.5% yearly to America’s population. Immigration is more difficult to predict. I believe 1 million people annually is a reasonable estimate, an influx that will add 0.3% annually to population growth.
In total, therefore, you can expect America’s population to increase about 0.8% a year. Under that assumption, gains of 2% in real GDP–that is, without nominal gains produced by inflation–will annually deliver 1.2% growth in per capita GDP.
This pace no doubt sounds paltry. But over time, it works wonders. In 25 years–a single generation–1.2% annual growth boosts our current $59,000 of GDP per capita to $79,000. This $20,000 increase guarantees a far better life for our children.
In America, it should be noted, there’s nothing unusual about that sort of gain, magnificent though it will be. Just look at what has happened in my lifetime.
I was born in 1930, when the symbol of American wealth was John D. Rockefeller Sr. Today my upper-middle-class neighbors enjoy options in travel, entertainment, medicine and education that were simply not available to Rockefeller and his family. With all of his riches, John D. couldn’t buy the pleasures and conveniences we now take for granted.
Two words explain this miracle: innovation and productivity. Conversely, were today’s Americans doing the same things in the same ways as they did in 1776, we would be leading the same sort of lives as our forebears.
Replicating those early days would require that 80% or so of today’s workers be employed on farms simply to provide the food and cotton we need. So why does it take only 2% of today’s workers to do this job? Give the credit to those who brought us tractors, planters, cotton gins, combines, fertilizer, irrigation and a host of other productivity improvements.
To all this good news there is, of course, an important offset: in our 241 years, the progress that I’ve described has disrupted and displaced almost all of our country’s labor force. If that level of upheaval had been foreseen–which it clearly wasn’t–strong worker opposition would surely have formed and possibly doomed innovation. How, Americans would have asked, could all these unemployed farmers find work?
We know today that the staggering productivity gains in farming were a blessing. They freed nearly 80% of the nation’s workforce to redeploy their efforts into new industries that have changed our way of life.
You can describe these develop-ments as productivity gains or disruptions. Whatever the label, they explain why we now have our amazing $59,000 of GDP per capita.
This game of economic miracles is in its early innings. Americans will benefit from far more and better “stuff” in the future. The challenge will be to have this bounty deliver a better life to the disrupted as well as to the disrupters. And on this matter, many Americans are justifiably worried.
Let’s think again about 1930. Imagine someone then predicting that real per capita GDP would increase sixfold during my lifetime. My parents would have immediately dismissed such a gain as impossible. If somehow, though, they could have imagined it actually transpiring, they would concurrently have predicted something close to universal prosperity.
Instead, another invention of the ensuing decades, the Forbes 400, paints a far different picture. Between the first computation in 1982 and today, the wealth of the 400 increased 29-fold–from $93 billion to $2.7 trillion–while many millions of hardworking citizens remained stuck on an economic treadmill. During this period, the tsunami of wealth didn’t trickle down. It surged upward.
In 1776, America set off to unleash human potential by combining market economics, the rule of law and equality of opportunity. This foundation was an act of genius that in only 241 years converted our original villages and prairies into $96 trillion of wealth.
The market system, however, has also left many people hopelessly behind, particularly as it has become ever more specialized. These devastating side effects can be ameliorated: a rich family takes care of all its children, not just those with talents valued by the marketplace.
In the years of growth that certainly lie ahead, I have no doubt that America can both deliver riches to many and a decent life to all. We must not settle for less.
Buffett is the CEO and chairman of Berkshire Hathaway
This appears in the January 15, 2018 issue of TIME.
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