Warren Buffett

In one of his more famous quotes. Warren Buffett once asked somebody, “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?” It was an interesting insight into the world’s richest man. His point was that world is going to have an opinion of you, whether you like it or not. But if you’re true to yourself, it won’t matter.

These kinds of quirky philosophies are typical of 78-year-old Buffett, the CEO of Berkshire Hathaway, who is as famous for his witticisms and bon mots as he is for his billions. Dubbed the ‘Oracle of Omaha’, Buffett seems to have an answer for everything – and not just the current financial crisis. He’s been dabbling in investments since he was 13 (when he filed his first tax return) and has proven you can make money quite easily, simply by following the right philosophies. The richest or second richest man in the world, depending on who’s doing the ranking and when (he was ranked first in early 2008 by Forbes, with an estimated net worth of $62 billion), Buffett believes that wealth gained through the snowball effect – roll a little over, and if you push it downhill hard enough, and through the right kind of snow – it gathers substance and eventually turns into a bigger snowball. It’s the power of compounded money – well-invested money compounds, and then compounds some more. Eventually, if you roll it enough, you’ll get to the bottom of the hill and find you’ve got a million.

But Buffett also believes in investing with a margin of safety. After all, snowballs can become dangerous. In essence, a margin of safety refers to the style of investing in which an investor only purchases something when its market price is significantly below its intrinsic value. The difference becomes ‘the margin of safety’, and allows an investment to be made with minimal downside risk. So that if you feel that a stock is worth $20, buying it at $12 will give you a margin of safety in case your analysis turns out to be incorrect and the stock is only worth $16.

“The basic ideas of investing are use the market’s fluctuations to your advantage – and seek a margin of safety,” says Buffett, in his usual over-simplified way.

The idea, which was popularized by Buffett’s mentor, Benjamin Graham,
has stood the Oracle in good stead over the years. Of course, it doesn’t guarantee a successful investment, but it does provide room for error in an analyst’s judgment.

And then there’s Buffett’s third philosophy, which is to live well beneath your level of wealth. Even though he’s a billionaire, Buffett still lives in the same small, three-bedroom house he bought in Omaha for $31,000 in 1958. He only pays himself $100,000 a year in income. And he goes to great efforts to live frugally. That way, he says, you’ve always got enough when the going gets tough.

These things may sound like something our fathers or grandfathers would tell us (Buffett has been likened to a grandpa for his back-to-basics advise), but they’re actually very effective. Most of us imagine that wealth is a complicated business,
full of intrinsic facts and figures. But as Buffett proves, the tried and tested methods still apply.

The boy who would become the $62 Billion Man started his career in 1941 at the age of 11, when he purchased his first share. He says he now regrets that he started too late. In 1943, at the age of 13, he filed his first tax return, using money he’d made on a paper round. At the age of 14, he bought his first property – a small farm – paid for using his savings from delivering newspapers. Over the following years he and a partner bought pinball machines, which they placed in barbershops.  After graduate school, Buffett started working as a stockbroker, and then took a Dale Carnegie public speaking course. The course was so inspiring he decided to use his new communication skills to make money by lecturing on what he knew best – shares. It was pure Buffett. Not only was he making money on the stockmarket, he was making more money by telling others how to do it.

Eventually, he began to understand that he could make real money through investing other people’s money. So in 1957 aged just 27, he gathered together 10 doctors who were willing to invest some of their money and form a partnership. In the following years, he created further partnerships. In 1962, aged 32, and with a million under his belt, he merged the partnerships and then bought a textile manufacturing firm, called Berkshire Hathaway. Berkshire’s share were $14.86 each but the company had working capital (assets minus liabilities) of $19 per share, excluding the value of fixed assets (factory and equipment). For Buffett, it was enough of a margin of safety. He bought so many shares that he took control of Berkshire. It was the start of Buffett’s extraordinary empire.

In 1973, aged 43, he began buying stock in the Washington Post Company. Two years later he added to his portfolio by purchasing stocks in ABC when shares were $290 each. He had the money: his net worth had reached $140 million. In 1988 he bought stock in Coca-Cola, and eventually purchased 7 percent for $1.02 billion. It proved to be one of Berkshire’s most lucrative investments.

Eventually, more than 67 years after he first started working his way towards wealth, Warren Buffett became the richest man in the world, thanks to a combination of the compound/snowball principle and a little margin of safety.

 What is most curious about Warren Buffett, though, is that he refuses to live the life of a billionaire. He still uses his father’s plain wooden desk to sit behind in his office. He’s framed a certificate from the Dale Carnegie course that he completed in 1952, which now sits above his sofa, and the rest of his office is full of photographs of family and friends, which clearly illustrates that his life is far more than just dollars and profits.

Together the sum of these various parts show that Buffett is a billionaire with a difference. They also show that his philosophy appears to be one of humility rather than ego.

But what Buffett really wants to show is that you can achieve success in an honest way, without resorting to dirty tricks. In fact, his motivation all these years has been to prove that you can be successful and still be honest and decent. “Balzac said that behind every great fortune lies a crime,” explains Buffett in his biography. “That’s not true at Berkshire.”

So how can a man who travels via a $30-million private Gulfstream IV jet maintain the healthy sense of balance as he does? This is the dichotomy that is Warren Buffett. He goes out of his way not to be disliked by anyone and yet, according to his biographer, Alice Schroeder, who wrote The Snowball, he has a reputation as a tough, even icy, dealmaker. He’s a genuinely simple man, with simple pleasures, yet he leads a complicated life. He has five homes but is happy just living in two of them. 

In short, he’s quite possibly the thriftiest, most modest billionaire the world has ever seen. He may have the money to single-handedly save the US economy (and is helping to, through his $5 billion investment in Goldman Sachs), but wealth is not what drives him. The measure of success in life, he says, is the number
of people you want to admire you who do.

In Warren Buffett’s case, it’s a hell of a lot.

The Snowball – Warren Buffett And The Business Of Life by Alice Schroder is published by Allen & Unwin, $49.95.

A Life in Numbers

1943:  Aged 13, Buffett files his first tax return. Working as a paperboy, he deducts his bicycle and watch as a work expense.

1945:  Aged 15, he and his friend buy a second-hand pinball machine for $25, which they place in a barbershop. In the next three months, they buy three more.

1950: Aged 20 and a graduate, he applies for admission to the Harvard Business Schools but is turned down. Inspired by his mentors, two famous securities analysts Benjamin Graham and David Dodd, he enrolls at Columbia Business School instead.

1951: Aged 21, he buys a gas station, works as a stockbroker and takes a Dale Carnegie public speaking course. Then he teaches a night class to people twice his age at the University of Nebraska on the subject of investment principles.

1954: Aged 24, and after marrying, he begins work with Benjamin Graham, earning $12,000 a year. Graham teaches him that good stocks should provide a wide margin for safety, calculating using the difference between their prices and intrinsic value. Basically, stock has to be worth more than its price.

1956: Aged 26, Buffet’s personal savings now sit at more than $140,000. He starts Buffett Partnership Ltd., an investment partnership.

1957: Aged 27, he purchases a five-bedroom stucco house in Omaha for $31,000, in which he still lives. He also starts several other partnerships. He asks one of his partners, a doctor, if he knows ten other doctors who would be willing to invest $10,000 each in his partnership. Eventually, eleven doctors invest.

1962:  Aged 32, he becomes a millionaire. His partnerships have in excess of $7 million, of which more than $1million belongs to Buffett. He merges the partnerships and then finds a textile manufacturing firm called Berkshire Hathaway. He begins purchasing shares at $7.60 each.

1965: Aged 35, he keeps buying Berkshire shares for $14.86 each while the company has working capital (current assets minus current liabilities) of $19 per share, excluding the value of fixed assets (factory and equipment). He takes control
of Berkshire.

1966: Aged 36, he closes his partnerships to further partners.

1967: Berkshire pays out its first and only dividend of 10 cents.

1969: After a bumper year, he liquidates the partnership, transfers assets to his partners and pays out shares.

1973: Aged 43, he begins to buy stock in the Washington Post Company.

1979: Aged 49, he begins to buy stock in ABC, at $290 per share. His net worth reaches $140 million.

1988: Aged 58, he begins buying stock in Coca-Cola. He eventually buys 7 percent of the company for $1.02 billion. It becomes one of Berkshire’s most lucrative investments, and one which it still holds.

2008: Aged 77, he passes friend Bill Gates to become the richest man in the world, worth $62 billion according to Forbes.