Who Is: Warren Buffett

Photo Credit: Matt Koppenheffer

Photo Credit: Matt Koppenheffer

With a fortune valued at more than US$65 billion, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) CEO Warren Buffett is not only one of the wealthiest people in the world, but also arguably the world’s most closely watched investor.

Warren Buffett was born in 1930 in Omaha, Nebraska, to a Republican congressman. Buffett set up several small enterprises while still in his teens — an entrepreneurial streak that made him seem destined for business success.

While studying for a Masters degree in economics at Columbia University, he received an A+ grade from his mentor, Ben Graham. Graham is widely seen as the father of value investing, and that relationship helped propel Buffett into a career in investing.

Investment style
There are many elements to Buffett’s style, but they can be summarized as buying understandable businesses at a price that includes a margin of safety, and then ideally holding them forever. In practice, of course, it’s not quite that simple.

One aspect of Buffett’s style that is perfectly clear is that he does not “play the stock market”; he buys businesses. He would not consider buying a share unless he was prepared to buy the entire company. Buffett buys with the intention of holding for extended periods and has said, “I buy on the assumption that they could close the market tomorrow and not reopen it for five years.”

This approach contrasts the often shorter investment horizon of Ben Graham. And although Buffett said that his “favorite time frame for holding a stock is forever,” he has sold long before “forever.” This includes, for example, Berkshire’s one-time stake in Fannie Mae.

The businesses Buffett buys tend to be simple and easily defensible. Coca-Cola (NYSE: KO) is a typical example. Regarding Coke’s competitive advantage, Buffett has said: “If you gave me $100 billion and said, ‘Take away the soft drink leadership of Coca-Cola in the world,’ I’d give it back to you and say it can’t be done.” Similarly with chewing gum maker Wrigley’s: “I don’t think the Internet is going to change how people chew gum.

In common with Graham, Buffett is a big believer in having a “margin of safety” in his investments — that is, downside protection against unforeseen changes. In 2008, Berkshire Hathaway invested billions in Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE), but even with a 10% yield on the preferred shares, Buffett wouldn’t have done the deal without an additional kicker in the form of warrants. As Buffett has remarked, “I put a heavy weight on certainty. It’s not risky if you buy securities at a fraction of what they’re worth.”

While small private investors won’t have the opportunity to make investments like Buffett’s in Goldman and GE, the margin-of-safety concept is still important. Foolish investors can find margin of safety in their own investing by buying shares only when the market prices those shares below their intrinsic value.

Part of his strategy to achieve advantageous purchase prices is to take a contrarian position, and buy whatever is so out of favor that it has been mispriced by the market. This approach served him well at the turn of the millennium as he avoided the boom and bust of the technology bubble. More recently, he was able to notch significant investing wins through financial-crisis-era investments in banks like Goldman Sachs, Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC).

Buffett lives modestly in a house he bought 50 years ago, and has criticised the extravagance of many in the corporate world.

The vast majority of his personal wealth will be donated to charity, and, in particular, to the foundation established by his friend and fellow Berkshire board member, Bill Gates.

Buffett the investor does not always match up with the media caricature of Buffett as a simple, hamburger-munching, Cherry-Coke-drinking, dispenser of folksy wisdom. Buffett has a good track record of “doing well by doing good,” but make no mistake about it: He’s a sharp, shrewd businessman who doesn’t mess around when it comes to money.

The magnitude of Buffett’s success, along with the often-idiosyncratic way he achieved his successes, ensures that Buffett will be a subject of study for investors for decades to come.