After talking about John Bogle (Inventor of Index Funds), Peter Lynch (Legendary active fund manager), I want to talk about the most famous investor in history: Warren Buffett. He is the 4th wealthiest person in the world, with a net worth of $88.9 billion as of December 2019. He is the CEO and Chairman of Berkshire Hathaway, the only top 10 fortune 500 company to be built from scratch. He is the physical embodiment of the level of success that is possible for value investing.
Without further ado, let me start looking at the history of this legendary investor.
1. Background
Warren Buffett was born in Omaha Nebraska August 1930 (during the stock market crash) into a family of 5. His father lost his job in 1931, one year after he was born. His dad then started a company after losing his job. When he was 7, he was inspired by a book titled "One Thousand Ways to Make $1000". Traits of his entrepreneurship started extremely early, with him selling chewing gum, coke, and newspapers to people. This was because of his weekly allowance of a nickel, and he wanted more than a nickel. He preferred selling newspapers as he had the liberty to choose his own routes (which further tells us of his entrepreneurial spirit).
When Buffett was 12, his dad transitted into politics was elected to Congress, and Buffett had to move to Washington, D.C. He was not interested in studying and focused on tormenting his teachers by pranking them. After graduating high school, Buffett did not want to go on to university, but his dad pressured him into continuing in his education.
After graduating in 1949, he applied to Harvard Business School but was rejected. This was a life-changing situation for Buffett as it led him to meet his mentor in investing: Benjamin Graham (who started value investing, believing that you can understand the state of the company by looking at its finances) at Columbia Business School (After finding out that Graham was teaching there, Buffett wrote a letter that he wanted to study under him). Buffett then graduated in 1951.
He started a partnership as a general partner, dealing with stocks. In 1962, Buffett became a millionaire at the age of 32 In 1965, he bought over Berkshire Hathaway (a textile company). He then transformed Berkshire from a textile company to a holdings company, the rest was history.
This is a list of the more prominent companies Berkshire is holding/has held:
Amex - 1963 (BEFORE BERKSHIRE)
National Indemnity Co. 1970
Wesco Financial 1978
Coke - 1988
GEICO - 1996
Dairy Queen - 1997
Bank of America - 2011
Kraft Heinz - 2013
Duracell - 2014
Apple - 2016
He is a big fan of American hallmark companies, and it shows in the holdings. Also, there are other holdings in companies like Goldman (2007), JP Morgan, Washington Post (sold already), and General Motors.
In 2006, he announced to give 83% of his fortune to the Gates Foundation the biggest charity gift in history. He has also tried convincing other billionaires to give away their fortunes to charitable causes. As of 2020, he has a net worth of $68.1 billion, still the CEO and chairman of Berkshire Hathaway, the 3rd largest company in the world at the age of 89. He is still active in investing, especially in the AGM of Berkshire Hathaway.
2. Investment Approach
Buffett was famous for his 2 rules to investing:
Rule 1: Do not lose money
Rule 2: Never forget Rule 1
This makes me laugh when I hear it. But it is definitely true.
His initial investment approach would be to pick companies that are good for "one last puff", that means looking for companies that are in sunset industries but trading below the intrinsic value (Similar to his approach of buying Berkshire Hathaway). This investment approach was similar to Benjamin Graham's approach to investing.
This idea of buying "ok" companies at cheap prices was gradually shifted to buying "great" companies at "fair" prices, after meeting Charlie Munger, his right-hand man in investing. He has attributed Munger as a large reason for Modern Berkshire's exponential growth.
He believes that in investing, he does not need to be right all the time. He can rely on a few stocks that perform exceptionally well for his returns. Buffett also remains in his area of confidence (where he understands the business model of that industry). Essentially, he treats a company as a business to invest in and he buys companies that he believes can make money
When Buffett looks at a company, these are the things that he looks out for:
- Return on Equity (ROE) - He wants the company to have a positive ROE that has been happening for a long period of time and compare that to other competitors in that industry.
- Debt to Equity ratio - A low ratio would mean that a company's growth is from equity and not from debt.
- Profit Margins - He wants the company to have a healthy and increasing profit margin, which is an indicator that management is good at controlling operating costs
- Moat - This competitive advantage that the company possess against its competitors (this can be things like patents, technology, branding)
3. Broader Impact on Industry
There are 3 points in his life that I felt had the largest impact on the industry:
1. Berkshire Hathaway AGM
The world pays attention to the yearly meeting of Berkshire, his holdings, his decisions to buy or sell certain stocks (like the recent selling of airline stocks). Everything that he does impact the market in a very big way - This was known as the "Buffett Effect".
2. Most successful investor in the world
His identity as the most successful investor in the world has introduced value investing to a large number of investors and is practiced by many investors today.
3. Influencing others in philanthropic efforts
Buffet has pledged to give a large portion of his fortune to charitable causes, especially the Gates foundation. He also started the giving pledge with Bill and Melinda Gates, where he hopes to convince other rich people to give 50% of their money to philanthropy.
4. Personal Impact
Buffett's legacy is something that I cannot hope to emulate. Mainly because he was a millionaire already by 32. He was a billionaire at 59. All I can hope is that I can follow in his example of giving away my net worth to charity after death or when I no longer need it.
5. Fun Fact
- When he was younger, he would try to prank his teachers by shorting the stocks they bought. This would cause them unnecessary stress as they know that Buffett was talented in investing.
- He has an article of the New York Times that featured extreme volatility in the market; a reminder to himself that anything can happen in the stock market.
- His decision to buy Berkshire Hathaway was an emotional one, one that he commented that he was wrong.
- He filed his first income tax at the age of 14.
I hope that this article was educational to you. For the next post in this series, I will be talking about the mentor of Warren Buffett. I am pretty sure you know who that is.
Till next time,
Stay vested, stay frugal my friends
Dionysius
Becoming Warren Buffett
https://www.thestreet.com/investing/history-of-berkshire-hathaway
https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berkshire_Hathaway
https://www.investopedia.com/articles/01/071801.asp
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