Warren Buffet: The secret of the billionaire's success
Stocks plunge, banks implode, currencies teeter...Amid the wreckage of the world financial system, only one man stands tall. So what's Warren Buffett's secret? Sally Ann Lasson finds the answer in his incredible life story
Monday, 16 February 2009
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Sage advice: Warren Buffet has a philosophy for every part of life, not just arbitrage
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I first heard of Warren Buffett 10 years ago, in an article written by Dominic Lawson. At the time, I did know the difference between a repayment mortgage and an interest-only mortgage, but that was about the extent of my interest in financial affairs. Bankers and investors were people you gave a wide berth to at parties, on the grounds that they were certainly immoral and probably criminal. (Or both, as it turns out.) Anyway, there was an intriguing nugget in this article. It said that in spite of being richer than God, Buffett has always lived in the house that he bought for $31,500 in 1958. A Master of the Universe who does not live in a lateral duplex penthouse shrine to his own fabulous ego? What the hell was going on here?
The publication of the thousand-page official biography of Warren Buffett, The Snowball by Alice Schroeder, couldn't have come at a better time. It is surely the book of the moment, because a history of Warren Buffett is a history of high finance from the 1930s to the present day. To know Warren – and I think of him as Warren now – is to love him. He looks like George Burns, and he plays the ukulele; plus, he is not a crook. You just want to pick him up and take him home.
The hardback was published towards the end of last year. It is an extremely heavy book, very difficult to prop up in bed. You have to wedge it against a pillow to read one side, and then turn around and wedge it the other way to see the next page. It took me more than two months to finish, and I had to read many parts of it over and over again to make sure I'd understood everything correctly. I'd go to sleep thinking I'd finally cracked the finer points of arbitrage only to find out that, no, the next night it was all gone again. I took to underlining and writing notes and prompts. I also attempted to engage anyone I spoke to on the subject. And I mean anyone.
The whole secret of his success can be reduced to this: invest your money in good companies that you think are well run. Reinvest the profits in other good companies. Never borrow money. Do all this, and your money will compound in value. There. Sounds simple, doesn't it?
Nonetheless, it took someone special to make it all sound so simple in the first place. Warren's infatuation with numbers began very early in life, when he started to calculate the odds on which of his marbles would go down the plughole first, in a game of his own devising. His interests quickly spread to collecting – stamps, coins, bottle tops, licence-plate numbers – and, of course, reading.
He could memorise whole books of numbers, and when he was six he ran his own business selling chewing gum door to door. It wasn't long before he had diversified into Coca-Cola (a brand he would, many years later, own a large chunk of) and used golf balls, which he spent hours collecting. He often used to involve friends in these small enterprises, realising that because he was somewhat socially awkward and emotionally withdrawn himself, it was essential to network within a group of trusted peers. This would become the template of how he would always do business, and the foundation of the investment partnership that eventually become Berkshire Hathaway.
By the time he was 10, Warren had pretty much figured out what he was going to do with his life. He wanted money. "It could make me independent. Then I could do what I wanted with my life. And the biggest thing I wanted was to work for myself. The idea of doing what I wanted to do every day was important to me."
The funny thing is that what he wanted to do every day was always exactly the same. Unless travelling to board meetings on his private jet (the famously named Indefensible), his days always follow the same pattern: he drives one and a half miles from the house he bought in 1958 to the modest office he's always occupied in downtown Omaha, Nebraska, in the Midwest, and sits down at the desk that had belonged to his father Howard, at exactly 8.30am. He then spends his day trading and reading every single scrap of financial information he can acquire, including daily reports on the performance of each of the thousands of companies he owns; reports detailing everything down to how many pounds of Peanut Butter Hearts were sold by See's Candies the day before. He goes home at 5.30pm.
He is a creature of habit in most respects. "I like eating the same thing over and over again. I could eat a ham sandwich every day for 50 days in a row." He eats his food in sequence, one item at a time, and does not like the individual elements of a meal to touch. His favourite foods are chocolate-chip ice cream, popcorn, hamburgers and Cherry Coke.
His work is his obsession, but his other big interest is bridge. He plays on the internet every night if he is at home, or with his regular partner and friend of many years, Sharon Osberg, a world champion. In 1993, they entered the mixed pairs at the World Bridge Championship and unexpectedly qualified for the finals. It was Warren's debut in a serious tournament and, finding it all rather stressful, he withdrew. Playing bridge is the only thing he knows how to do on his computer, which is funny, considering that his best friend and mini-me is Bill Gates.
It was love at first sight when Warren met Bill in 1991, and it wasn't a huge surprise when, in 2006, he announced that he would give most of his fortune to the Bill & Melinda Gates Foundation. After much consideration, he concluded that they were the only people who knew how to deal with such a fantastic amount of money – about $60bn. He was never going to bequeath it to his children (he has three) as he doesn't believe that to be a morally sound act, but he has been increasingly generous to them in recent years, when he appears to have mellowed on the subject. Interestingly, when his own father was dying in 1964, he had himself removed from the will to increase the share left to his two sisters. He felt that the amount – $180,000 – would be pretty easy for him to earn himself. And so it turned out.
So, what can we learn from the Sage of Omaha? Should we all be reprogramming our minds to work the Warren way? Well, we can try. After all, this Master of the Universe has a philosophy for every part of life, not just arbitrage. There are lessons to be learnt about, say, dieting...
On dieting
Warren diets by numbers – how else? He would sometimes limit himself to as little as 1,000 calories a day, but he's managed the budget however he liked. The central idea behind his strategy is to get the pain of dieting over with fast. "I reckon I can eat about a million calories a year and maintain my weight. I can spend those calories how I want." When his children were young, he'd write them cheques for $10,000, payable on a certain date if he weighed more than an agreed amount. They never got to cash those cheques. He preferred to lose weight rather than money.
On financial derivatives
"Derivatives are like sex," he said in 1998. "It's not who we're sleeping with, it's who they're sleeping with that's the problem." In 2002, he famously predicted that derivatives would destroy our financial institutions. Warren's predictions have been so accurate in recent years that he has been upgraded from the Sage to the Oracle of Omaha.
On success
Reassuringly, in these straitened times, even a multibillionaire like Warren knows that not everything comes down to money. "Basically, when you get to my age, you'll measure your success in life by how many of the people you want to love you actually do love you. If you get to my age in life and nobody thinks well of you, I don't care how big your bank balance is, your life is a disaster."
On love
Likewise, there are some things that all that filthy lucre won't get you: "The trouble with love is that you can't buy it. You can buy sex. You can buy testimonial dinners. You can buy pamphlets that say how wonderful you are. But the only way to get love is to be lovable. It's very irritating if you have a lot of money. You'd like to think you could write a cheque."
On 'the circle of competence'
Warren believes in operating within his own limitations in what he called the circle of competence. He has, in effect, drawn a line around himself and stays within the subjects on which he is an absolute expert. He has never bought technology stocks, for example, because he doesn't understand the business. This caused him to be written off in the 1990s dotcom boom, which he said wouldn't last (and which, of course, didn't). Only twice has he bought stock outside the US.
On positive thinking
Even the greatest achievers have to take the occasional step backwards. Even Warren. His message: don't get your less glorious moments out of proportion. "If you go from the first floor to the 100th floor of a building and then go back to the 98th, you'll feel worse than if you've just gone from the first to the second, you know. But you've got to fight that feeling, because you're still on the 98th floor."
On ideas
Light-bulb moments of genius aren't the only route to life-changing success. In fact, you're sometimes better off with a less impressive idea. "You can get in more trouble with a good idea than a bad idea," Warren's mentor Ben Graham taught him, "because you forget the good idea has limits."
The 'Inner Scorecard'
There are two kinds of people in life, according to Warren: those who care what people think of them, and those who care how good they really are. Which are you? "The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always look at it this way. I say, 'Lookit. Would you rather be the world's greatest lover, but have everyone think you're the world's worst lover? Or would you rather be the world's worst lover but have everyone think you're the world's greatest lover?' Now, that's an interesting question."
On looking after yourself
Warren has never smoked or drunk alcohol. He is, at 78, extremely healthy. One of his homilies to college students is about imagining that a genie appears to you at 16 and offers you a car of your choice. There's only one catch; this is the last car you're ever going to get. "I would read the manual about five times. I would always keep it garaged. If there was the least little dent or scratch, I'd get it fixed right away because I wouldn't want it rusting. I would baby that car because it would have to last a lifetime. That's exactly the position you are in concerning your mind and body."
On culture
The Sage of Omaha has excluded culture from his life because it would interfere with his focus on business. For 30 years, he didn't notice a Picasso hanging in a bathroom at the house of his best friend Kay Graham, former publisher of The Washington Post, until it was pointed out to him.
Dealing with your deficiencies
Warren was very influenced by the book How To Win Friends and Influence People by Dale Carnegie, first published in the 1930s. The book lists 30 rules of behaviour. The first is: "Don't criticise, condemn, or complain." This idea riveted Warren, who hated criticism. In his early twenties, he signed up for a Dale Carnegie course in public speaking. "You can't believe what I was like if I had to give a talk. I was so terrified that I just couldn't do it. I would throw up. In fact, I arranged my life so that I never had to get up in front of anybody." The course was a success and Warren has been teaching, lecturing and explaining everything he can to anyone who will listen ever since. He seems to have viewed Berkshire Hathaway as a teaching tool right from its inception, and its annual shareholders' reports are pored over like tablets from Moses.
On politics
Although his father was a Republican Congressman, Warren is a life-long Democrat who supported Barack Obama. He rails against what he insists is an inequitable tax system whereby he pays a lower rate of tax than his secretary.
On career selection
Find something you are passionate about. Only work with people you like. If you go to work every morning with your stomach churning, you're in the wrong business.
On golf
The love of golf is another thing he has in common with Bill Gates. Warren attended the Gates's wedding on New Year's Day in 1994, which was held on the 12th tee of the Four Seasons golf course in Hawaii.
On the 'bathtub memory'
Warren never dwelled on anything unpleasant. He came to think of his memory as functioning like a bathtub. The tub filled with ideas and experiences and matters that interested him. When he had no more use for the information, whoosh – the plug popped up, and the memory drained away. Painful memories were the first to be flushed, along with anything that might detract him from his goal: to become a millionaire.
On the rules of investment
Rule No 1: don't lose money. Rule No 2: don't forget Rule No 1. Rule No 3: don't get into debt.
And finally...
In case you have any doubt as to the wisdom of any of these points, it is worth one last reminder that Warren is indeed a man worth listening to. (You may need to ask your financial adviser to explain the finer points of the following tale. And if he or she doesn't understand it either, you may need a new financial adviser.)
Long-Term Capital Management was the largest hedge-fund start-up in history when it launched in 1994. Warren was approached to invest in it, but declined – he didn't think it had the margin of safety within which he liked to operate, although the highest loss LTCM contemplated was 20 per cent of its assets.
The fund was astonishingly successful and amassed $7bn of capital in just three years. The investors specialised in buying risky positions in such large amounts that they couldn't fail. Or they thought they couldn't. But then Russia defaulted on its rouble debt in 1998, and the Dow dropped in a global margin call, with investors panicking and selling. Soon, LTCM was forced into leveraging the leverage that was already leveraged. Finally, the Federal Reserve was forced into taking the unprecedented step of bailing out a private investment firm.
So, yes, Warren was right. The risk was there after all. It's a sorry story worth checking out, as it provides a model of our current situation. The moral of the story? Warren would never have gotten us into this mess.
Berkshire Hathaway: His empire in numbers
$62bn
Warren Buffett's net worth, making him the world's richest man.
$100,000
The salary paid to Buffett, one of the lowest-paid CEOs of a large company in America.
1962
The year Buffett began buying stock in Berkshire Hathaway, which began as a textile manufacturing company in 1839. By 1967, Buffett, now controlling the business, had moved into insurance and other investments. By 1985, BH had ceased its textiles operations.
58 million
The number of shares in Tesco bought by Buffett in 2006, making him a top shareholder.
$89,000
The current value of Berkshire Hathaway's shares, listed on the New York Stock Exchange; they peaked at $148,000 in 2008.
32,000
The number of people who attended the BH AGM in 2008. Held in Omaha, Nebraska, it is known as "the Woodstock of capitalism".
13
Age at which Buffett filed his first tax return, deducting $35 for his bicycle (he had a newspaper round).
3bn
In Swiss francs, the fresh capital Berkshire Hathaway injected into the insurer Swiss Re last week. In 2008, Buffett invested $5bn in Goldman Sachs and $3bn in General Electric.
19%
The stake, worth just over £2bn, that Buffett holds in Wrigley, the chewing-gum maker.
$13.73
The value to which Harley-Davidson shares soared when Buffett bought a $300m tranche of debt in the company this month.
$32
The price of a Berkshire Hathaway branded men's polo shirt in 'Espresso brown', sold on the company website.
Sources: ft.com; Forbes
They did it their way: Wisdom of the self-made moguls
Steve Jobs is the co-founder of Apple, the computer manufacturer whose revenues topped $32bn in 2008, and digital animation studio Pixar, whose last movie 'Wall-E' has grossed $533,692,120 worldwide.
"Don't be trapped by dogma, which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become."
John Paul Getty (1892-1976) was the oil magnate named the richest living American by 'Fortune' magazine in 1957. His net worth was approximately $50bn at his death. This is the first of his "10 secrets of success" from his book 'How To Be Rich'.
"The man who wants to go into business for himself should choose a field which he knows and understands. Obviously, he can't know everything there is to know from the very beginning, but he should not start until he has acquired a good, solid working knowledge of the business."
John D Rockefeller (1839-1937), founder of Standard Oil, revolutionised the oil industry and became the model for modern philanthropy. His estimated net worth at his death was more than $300bn.
"A friendship founded on business is a good deal better than a business founded on friendship."
Richard Branson founded Virgin Enterprises, which now encompasses more than 350 companies. He has an estimated net worth of $4.4bn.
"Business opportunities are like buses: there's always another one coming."
Russell Simmons founded Def Jam records in 1984. Def Jam artists include LL Cool J, Beastie Boys, Public Enemy and Jay-Z. Universal bought out Simmons in 1998 for a reported $100m.
"I've been blessed to find people who are smarter than I am, and they help me to execute the vision I have."
Sam Walton (1918-1992) founded the department store chain Wal-Mart, which, according to the 2008 Fortune Global 500, is the world's largest public corporation, with annual revenues of more than $400bn.
"High expectations are the key to everything."
Martha Stewart, TV host and founder of the Omnimedia business empire. In 2003, she was convicted of securities fraud and sentenced to five months in prison. Her net worth was, none the less, estimated at $638m in 2007.
"I think it's very important that whatever you're trying to make or sell or teach has to be basically good. A bad product and you know what? You won't be here in 10 years."
Harvey Firestone (1868-1938) was the founder of the Firestone Tire & Rubber Company, whose international success was a boon to the entire US economy during the 20th century.
"Capital isn't that important in business. Experience isn't that important. You can get both of these things. What is important is ideas."
Shipping magnate Aristotle Onassis (1906-1975) left Greece for Argentina at the age of 17 with just $63. He had made his first million within two years.
"After a certain point money is meaningless. It ceases to be the goal – the game is what counts."
Donald Trump, the real estate developer, was valued at $3bn in 2007. The economic crisis has hurt his finances, but he is countersuing his creditors and says the crisis is an act of God.
"Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you're generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don't make."
Thomas Edison (1847-1931) was the inventor of the electric light bulb and founder of General Electric, one of the original 12 companies listed on the 1896 Dow Jones Industrial Average. GE is the world's tenth largest company.
"Genius is one per cent inspiration, and 99 per cent perspiration."
http://www.independent.co.uk/news/business/analysis-and-features/warren-buffet-the-secret-of-the-billionaires-success-1622649.html
