Warren Buffett

Sarah Trotter

Warren Buffett

Introduction

Warren Buffett is one of the most successful businessmen in the world. He has invested successfully for over four decades and has beaten the stock market every year. Buffett’s total wealth surpassed the millions long ago and in 2008, he was worth $15 billion. His astronomical success can be considered wayward in itself, since the economy usually prevents businessmen from consistently performing well. At a closer glance into Buffett’s life, it is evident that Buffett’s wayward ways began in childhood, his investment style is wayward, and his average ways are wayward compared to the average businessman.

Early Childhood

Unlike most children, Buffett didn’t play sports besides ping pong or play normal games that children play. Buffett took an interest to investment and numbers at an early age and every game he played revolved around this interest. For example, he was able to recite the populations of any city in the almanac when his friend Bob Russell asked. He memorized any and all statistics that he could get his hands on and he loved any games that involved money, like Monopoly.

Buffett’s interest in numbers, money, and patterns led him to buy his first stock, Cities Service, at age 11. Buffett was so advanced in his understanding of investment that while other children his age were playing tag, he was interpreting investment patterns and buying stocks. Warren also went to the horse track with his friend Russell and created a system of tipping horse players. This proved to be successful and profitable, but they didn’t have a license, so it was closed down.

At age 13, Buffett was delivering almost 500 newspapers every morning in only 1 ½ hours. He had a complex but very efficient system for delivering papers. In apartment buildings, he would place half the newspapers on the 4th floor and half on the 8th floor, and then he would deliver them door to door. When it came time to collect the money from his customers, he would give the person at the front desk an envelope for the money instead of going door to door for payments. Buffett earned $175 per month for his newspaper route and he used some of this profit to buy farmland in Nebraska.

As a senior in high school, Buffett and his friend Donald Danly created a pinball machine business in which Buffett paid for the machines to be put into barbershops, while Danly repaired them when they broke. From this business, they were making $50 a week. Most teenagers would not think that running a pinball machine company is fun, but Buffett enjoyed it.

Investment

Buffett’s unique investing style is what really set him apart from the average investor and allowed him to be as successful as he is. Buffett mainly followed the Graham-Dodd theory for investment, which is security analysis. Security analysis is a style of investing in which the expected profit, interest, dividends, and assets are compared to the price for the security. For good investing, a “margin of safety” must be present between price and expected company value. In addition, Graham and Dodd also thought that having a variety of stocks was best for security reasons than having few stocks. The other popular investment theorists at the time were the Chicago theorists. These theorists believed that capital markets are efficient, so one can rely on the stock price as an indicator of the information on the shares. Therefore, the value of all stocks is straightforward and one cannot outsmart the capital market.
Although Buffett was a Graham-Dodd fan, he often deviated from their theory and used his own judgment on investment decisions. For example, even though he always thoroughly investigated a company before buying any stocks in it, he often made risky investments that always paid off in the long run. For example, when Buffett bought shares in Geico, the company was a small company that hadn’t had any success yet. This goes against the security analysis theory because instead “value investing”, or buying shares in a company that had cheap shares and expected growth, Buffett bought a cheap stock that wasn’t expected to see any growth yet. In the end, Buffett’s strategy worked and he profited, but it went against the careful and safe method of Graham and Dodd. Buffett’s Geico purchase was risky also because he sold most of his other shares in other companies when he bought Geico. Putting all his money into Geico was risky, but Buffett knew that he would not make as much money if he did not take a risk. Concentrating on a few companies and putting a great deal of money into them became the typical Buffett strategy and according to Charles R. Morris’s book The Sages, “Buffett preferred to concentrate on fewer companies that he really believed in, and to get a big enough position to have a say when he thought the business was going off track” (69). By making large investments in one company, Buffett had enough power in the company to help determine the company’s decisions when it started to slip. Lastly, Geico is an example of Buffett’s love for investing in insurance companies. Buffett likes to invest in insurance companies because they generate money upfront and this money can be used to invest in something else.

Because of Buffett’s unique and wayward approach to investing, it may seem strange that he believes in the Graham-Dodd theory, but it does make sense because both Buffett and Graham and Dodd believe that investment theories should be disregarded. The best investment strategy is to keep it as simple as possible and be realistic. Looking at numbers and patterns within a company is the best ways to determine whether or not to invest in a company.

In the following video, Ajit Jain explains why he wouldn’t work for anyone other than Warren Buffett. Jain attributes Buffett’s success as a C.E.O. to his rational thinking and reasonable expectations.

Average Buffett

Despite his billionaire status and popularity, Buffett has maintained an average life. Most billionaires spend without a second thought, but Buffett doesn’t believe in frivolous spending. Buffett still lives in the house that he bought when he first got married and he doesn’t spend more money than he has to. Even though he may be frugal, Buffett is not stingy. He doesn’t mind paying his taxes and he believes that the rich like him should pay more taxes. Unlike many rich people, Buffett cares about the lower classes and believes that the tax burden should be put more heavily on the rich than the middle class and the poor. Also, Buffett looks and talks like the average person. He does not try to act sophisticated and educated, unlike other investors and businessmen. At the annual Berkshire Hathaway stockholder convention, investors are invited to ask Buffett questions about the company and his intentions for the future. These investors always tried to stump Buffett by asking complicated questions, but Buffett, “translated the questions into plain English and answered them in ways Average Joes and Janes would understand” (Cepuch, 9). Buffett’s photographic memory allowed him to memorize and retain all this information, but he does not show off like other investors.

Pretty Good for Government Work

By WARREN E. BUFFETT
Omaha

Dear Uncle Sam,

My mother told me to send thank-you notes promptly. I’ve been remiss.

Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door….

You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly.

That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world.

So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through — and the world would look far different now if you had not.

Your grateful nephew,
Warren

The above excerpted article, written by Warren Buffett himself, shows how Buffett makes difficult and complicated economic issues easy for the common person to understand. He is not concerned about showing off with big words or complicated concepts; he simply wants to address an economic problem in a way that will make sense to the average American. This article also shows how Buffett is confident in the effectiveness of the government.

Stop Coddling the Super-Rich

By WARREN E. BUFFETT
Omaha

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors…

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot…

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering…

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

Stop Coddling the Super Rich is also an article written by Warren Buffett that explains why the rich need to be taxed more and the lower classes need to be taxed less. In typical Buffett fashion, Buffett uses plain logic and reasoning to explain why the rich need to be taxed more.

In the video above, Buffett discusses the importance of Philanthropy. Despite being a billionaire, Buffett still cares about the needs of the lower classes and is willing to help.

Suggested Readings:

Charles R. Morris, The Sages (New York: Public Affairs, 2009).
Mary O’Sullivan, Contests for Corporate Control (New York: Oxford University Press, 2000).
Randy Cepuch, A Weekend with Warren Buffett (New York: Thunder’s Mouth Press, 2007).
Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Random House Trade Paperbacks, 2008).
WarrenBuffettBlog, How He is Different, May 4, 2011. http://www.youtube.com/watch?v=h8q7XqKu7to&list=UUmCdlO-o9Kxb-hoEKfh4w-Q&index=50
Warren E. Buffett, Pretty Good for Government Work (The New York Times, 2010). http://www.nytimes.com/2010/11/17/opinion/17buffett.html
Warren E. Buffett, Stop Coddling the Super Rich (The New York Times, 2011). http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=0
WarrenBuffettBlog, The Future of Philanthropy, May 23, 2010. http://www.youtube.com/watch?v=HlrmDmEwfzg&list=UUmCdlO-o9Kxb-hoEKfh4w-Q&index=33&feature=plcp

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This entry was posted by sarahtrotter2012.

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