Words of financial wisdom

2008-12-18 00:00

Every year thousands of investors from around the world make their way to Omaha, Nebraska to attend the general meeting of Warren Buffett’s investment company, Berkshire Hathaway (BRK). They come to listen to the words of wisdom of a man who has beaten the stock market for most of the past 50 years and become one of the world’s wealthiest — and most widely admired — businessmen.

If Buffett did not exist, no fiction writer could invent him. Once a nerdy, tight-fisted number-cruncher with few close friends, he has transformed himself into an urbane, avuncular figure, re-nowned for his wealth, sagacity and lack of ego. He is also among the world’s most generous philanthropists, having given away a staggering $37 billion in BRK stock to the Bill and Melissa Gates Foundation.

Buffett’s is not the archetypal American rags-to-riches story. The son of a far right wing Republican congressman (and member of the John Birch Society) and a shrewish mother who made his early life a misery, the young Buffett grew up in Omaha, Nebraska, but went to high school in Washington DC before going to the Wharton and Columbia business schools. As a young child, he was fascinated by numbers — and obsessed with making money.

At the age of six, he began selling chewing gum, a year later he asked Father Christmas for a book on bonds, and at the age of 10 he was taken to the New York Stock Exchange for his birthday treat. An early source of inspiration was the book, One Thousand Ways to Make 1 000 Dollars, which taught him the power of compounding and led him to predict (correctly) that he would be a millionaire by the age of 35.

As Alice Schroeder, herself a financial analyst, points out in this sprawling, overlong, but fascinating biography which Buffett encouraged and helped her to write, the future sage of Omaha was fortunate in having some exceptional mentors. He learnt his investment technique at the feet of Columbia’s legendary Ben Graham, author of The Intelligent Investor, still regarded as a classic of its kind. It was Graham who taught him that shares often traded at odds with their intrinsic value for long periods of time. But because analysts could be right and still appear wrong in the eyes of the market, it was wise to build in a “margin of safety” to ensure that good decisions are not wiped out by errors. Graham also warned him against the danger of using debt.

Another significant influence was his lively and outgoing wife Susan, who understood that for all her young husband’s confident talk about stocks, he was a fragile, immature person often on the verge of breakdown. While he made the money, she took care of his every need, and almost single-handedly brought up their three children.

“His relentless obsession with money and his obliviousness to his family were a running joke among his friends,” says Schroeder. It is little wonder that in later life Susie left Buffett in the care of a mutual friend (whom he eventually married) and went off to live on her own in San Francisco.

An unlikely but important connection was Katherine Graham, the patrician publisher of the Washington Post, who was intrigued by Buffett’s “corn-fed, Midwestern” appearance, behind which she detected a sharp sense of humour and a keen brain. The two became lifelong friends. He seized the opportunity to tutor the then insecure CEO of the newspaper company about business. She in turn brought him on to her company’s board and introduced him to her powerful friends.

Another key figure has been his like-minded and long-time business partner, Charles T. Munger, who shares his old-fashioned approach to corporate governance and business ethics. Buffett’s method of investing seldom varies: estimate the intrinsic value of a stock, assess its risk, buy using a margin of safety, concentrate, stay in your circle of competence and let compounding do the rest.

It was his refusal to go beyond his circle of competence that led Buffett to shun technology stocks during the IT boom, to the fury of some analysts and shareholders, and to deride financial derivatives as being “toxic” and potential “weapons of mass destruction” — two assessments that caused him much discomfort at the time, but which have subsequently enhanced his reputation for prescience.

All those lucky enough to have been among Buffett’s early partners or subsequent investors have made themselves extremely rich. By the mid eighties, BRK’s share price had risen by more than 23% per annum for 23 years. At the end of 2007, before the market slide, the stock was trading at $140 000 per share and Buffett’s personal fortune was more than $60 billion. As the author observes, “‘the snowball he has created so carefully was enormous by now”.

Yet Buffett remains outwardly unaffected by his great wealth. Now approaching 80, he lives in the same house, dresses the same way and works in the same office that he has for most of his life. He also indulges in a lifelong desire to teach — not only about investment but about the lessons he has learnt from the business of life. As he once told a group of students when his wife was recovering from cancer surgery: “The purpose of life is to be loved by as many people as possible among those you want to have loved you.” Money-conscious though he is, he has learnt the eternal truth that there are some things in life that money cannot buy.

• Richard Steyn, a former editor of The Witness, is a director of a Johannesburg-based publishing company.

• The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, is published by Bloomsbury.

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