💾 Archived View for gmi.noulin.net › mobileNews › 1543.gmi captured on 2021-12-05 at 23:47:19. Gemini links have been rewritten to link to archived content
-=-=-=-=-=-=-
By Charles Miller
Money Programme
The world's greatest investor is weathering the financial crisis by practising
what he preaches.
One of Warren Buffett's favourite sayings about the market is: "be greedy when
others are fearful and fearful when others are greedy".
When the market was fearful last September, Mr Buffett was greedy, putting $5bn
( 3bn) into the investment bank Goldman Sachs on exceptionally favourable
terms.
He says he was only able to negotiate the deal because not many people had $5bn
to hand at that particular moment.
But there is no doubt Mr Buffett's public show of confidence in the company
was, in itself, a valuable asset to Goldman.
Mind-boggling returns
The deal already looks like a good one for Mr Buffett, with potential profits
for him in the billions.
He has always enjoyed himself in a falling market, which, as he sees it,
provides him with the best opportunities.
As if to prove his fabled status as the most successful investor ever, Mr
Buffett prints his fund's spectacular growth record, all the way back to 1965,
in the annual report of his company, Berkshire Hathaway.
It shows he has achieved an extraordinary 20.3% average annual growth in the
company's value, which - he helpfully works out - comes to a mind-boggling
336,000% over the years - 84 times that of the standard US index fund, the S&P
500.
The numbers really are off the scale.
Life in Nebraska
As the biggest shareholder in Berkshire Hathaway, Mr Buffett's personal stake
in that growth made him the richest man in the world last year.
This year, he is number two, as Berkshire's share price tumbled in the economic
crisis.
His great friend Bill Gates regained his usual position at the top.
But Buffett has never admitted to any interest in such tables, and has trained
himself to ignore short-term share price movements, either up or down.
So how has he made his estimated $40bn?
This is a man who has not even started a business. (Berkshire Hathaway was an
old textile mill he bought, whose name he kept as the name of his holding
company).
Nor has he invented anything, or come up with a way of making businesses more
profitable.
And he still lives in his native Omaha, in the mid-western state of Nebraska,
1,200 miles from the financial whizzkids on Wall Street.
T-bone plays bridge
On the 14th floor of a non-descript office block he has rented for almost 50
years, Mr Buffett works his financial magic, reading newspapers and companies'
annual reports, looking for the right business to invest in and the right
moment to make a move.
Over the years, the numbers have grown, as Mr Buffett's financial universe has
expanded: from the millions to the hundreds of millions, to today's
multibillion-dollar deals.
And yet his modest office remains defiantly low tech.
"I've never had a computer in there, I've never had a calculator in there, I've
never had a stock ticker in there," he boasts.
He believes that if a deal needs complicated calculations before you can decide
if it is right, then it probably is not. He always leaves a "margin of safety",
he says, so that if things don't work out as he'd hoped, he does not lose
money.
Mr Buffett has one personal assistant, and hates meetings or having a busy
schedule.
He drives himself to work from his house, a few miles along the same street.
His daughter Susie says that most evenings, he will probably have a ham
sandwich, and settle down to several hours of online bridge.
If you go online and find yourself playing someone called T-Bone, that is him.
Conglomerate executive
Those who work for companies Mr Buffett owns say when they call him up, he
often picks up the phone himself, or if not he will always call back promptly.
You want a dynamic system, and you want a market system that's free to make
mistakes to some degree
Warren Buffett
"He seems to have an endless amount of time," says Tony Nicely, chief executive
of the Buffett-owned insurance company Geico.
Despite his image as the great stock-picker, for decades Mr Buffett's success
has come from more than that.
Today, most of the value of Berkshire Hathaway lies in 70 or so businesses it
owns and runs - although it still has billions invested in other companies too.
As Mr Buffett's biographer, Alice Schroeder points out, "the conventional
wisdom is that Warren Buffett sits in a room, buying and selling stocks all
day. But the reality is that since the 1960s, he's been buying companies".
Mr Buffett is now an executive, running a huge conglomerate.
Be an owner
To Mr Buffett, the difference between owning a business outright and owning
shares in it is only one of degree.
He has always bought shares for the long-term and, as a shareholder, thought of
himself as buying a part of a business.
As he says, you should "think like an owner".
Mr Buffett wants to invest in profitable businesses with good prospects rather
than looking for undervalued shares.
Focusing on share prices, he says, makes you a mere speculator, whereas a real
investor "looks to the asset itself to produce the return".
He compares his approach to someone buying a farm: they would not worry about
the price of the farm every day, but would focus instead on its productivity.
Mr Buffett's brief communications with the chief executives of his businesses
exhort them, too, to think long-term, rather than, as in most companies, to
worry about the figures for the next quarter.
"They get a letter from me once every two years," he says.
"It's a page and a quarter long. And that letter says 'treat the business like
it's the only business your family owns. They can't sell it. They're going to
own it for a hundred years'."
The same applies to his shareholders.
He communicates with them in a famous annual letter which, over decades, has
given them, and the wider world, an insight into his thinking.
The process has weeded out speculators, and given him shareholders who think
like him.
Irrational markets
Mr Buffett says the turnover on Berkshire Hathaway shares is a tenth of that on
most stocks.
"We look on our shareholders as partners. They buy into Berkshire to be part of
a business. It's something they expect to die with."
The current financial crisis has put Mr Buffett's message about long-term
thinking to the test: Berkshire Hathaway's businesses are in a mix of sectors,
some of which (construction, confectionery) were more vulnerable to the
downturn than others (energy, insurance).
Berkshire shares lost almost half their peak value - and have since recovered
to be about 25% down on their 2008 peak.
At this year's annual shareholder meeting in Omaha, 35,000 shareholders turned
up to hear Mr Buffett's take on things.
It looked as if his years of patient training had paid off. He was still
smiling, and telling people that the carnage in the markets was just what you
should expect once in a while.
"If you take the couple of centuries we've had, the 19th and the 20th, we've
had about 15 bad years in both centuries," he told shareholders, "and we'll
have fifteen bad years in centuries to come.
"Capitalism overshoots, and market people do get irrationally exuberant
sometimes, but that's the nature of it. You want a dynamic system, and you want
a market system that's free to make mistakes to some degree."
Secret successor
Mr Buffett will be 80 next year, and is still showing no sign of slowing down
or retiring.
Why would he when the financial roller coaster may be starting a slow climb
from the bottom of a deep ravine?
In a few years time, when Berkshire's figures may be benefiting from the
bargains he's been picking up, well, that part of the cycle might just feel
like the moment he and his fellow company directors have been contemplating for
years - the day Berkshire faces life without Warren.
There are succession plans, but Mr Buffett, characteristically, wants to keep
them simple.
He is not planning to emulate his friend (and fellow director of Berkshire
Hathaway) Bill Gates, who arranged a "transition" which lasted a couple of
years, as he stepped down from Microsoft to concentrate on his charity work.
Mr Buffett is thinking in terms of splitting his job - between a person to look
after investing and another to concentrate on Berkshire's owned businesses.
But he is not planning to name a successor until he is ready to leave.
"I mean, what would they do?" he asks with a twinkle.
"Come and sit in my office all day, so I could chuck them the paper to read
when I'd finished with it?"
The World's Greatest Money Maker: Evan Davis meets Warren Buffett, broadcast
2100 Monday 26 October and 1120PM Tuesday 27 October on BBC Two.