Warren Edward Buffett, legendary value investor, turned an ailing textile mill into a financial engine that powered what would become the world's most successful holding company.
Known as the "Oracle of Omaha" for his investment prowess, Buffett has amassed a personal fortune in excess of $62 billion, making him top dog on Forbes' World's Billionaires list in 2008. He inspires legions of loyal fans to make a yearly trek to Omaha for an opportunity to hear him speak at Berkshire's annual meeting, an event ironically dubbed the "Woodstock of Capitalism". (For more on Warren Buffett and his current holdings, check out Coattail Investor.)
The Early Years
Buffett was born to Howard and Leila Buffett on August 30, 1930, in Omaha, Nebraska. He was the second of three children, and the only boy. His father was a stockbroker and four-term United States congressman. Howard served non-consecutive terms on the Republican ticket, but espoused libertarian views.
Making money was an early interest for Buffett, who sold soft drinks and had a paper route. When he was 14 years old, he invested the earnings from these endeavors in 40 acres of land, which he then rented for a profit. At his father's urging, he applied to the University of Pennsylvania and was accepted. Unimpressed, Buffett left after two years, transferring to the University of Nebraska. Upon graduation, his father once again convinced him of the value of education, encouraging him to pursue a graduate degree. Harvard rejected Buffett, but Columbia accepted him. Buffett studied under Benjamin Graham, the father of value investing, and his time at Columbia set the stage for a storied career, albeit one with a slow start. (Keep reading about value investing in The 3 Most Timeless Investment Principles and What Is Warren Buffett's Investing Style?)
Upon graduation, Graham refused to hire Buffett, even suggesting that he avoid a career on Wall Street. Buffett's father agreed with Graham, and Buffett returned to Omaha to work at his father's brokerage firm. He married Susan Thompson, and they started a family. A short while later, Graham had a change of heart and offered Buffett a job in New York.
The Foundation of Value
Once in New York, Buffett had the chance to build upon the investing theories he had learned from Graham at Columbia. Value investing, according to Graham, involved seeking stocks that were selling at an extraordinary discount to the value of the underlying assets, which he called the "intrinsic value". Buffett internalized the concept, but had an interest in taking it a step further. Unlike Graham, he wanted to look beyond the numbers and focus on the company's management team and its product's competitive advantage in the marketplace. (To find out more about intrinsic value, see Fundamental Analysis: What Is It?)
In 1956, he returned to Omaha, launched Buffett Associates, Ltd., and purchased a house. In 1962 he was 30 years old and already a millionaire when he joined forces with Charlie Munger. Their collaboration eventually resulted in the development of an investment philosophy based on Buffett's idea of looking at value investing as something more than an attempt to wring the last few dollars out of dying businesses.
Along the way, they purchased Berkshire Hathaway (NYSE:BRK.A), a dying textile mill. What began as a classic Graham value play became a longer-term investment when the business showed some signs of life. Cash flows from the textile business were used to fund other investments. Eventually, the original business was eclipsed by the other holdings. In 1985, Buffett shut down the textile business, but continued to use the name.
Buffett's investment philosophy become one based on the principle of acquiring stock in what he believes are well-managed, undervalued companies. When he makes a purchase, his intention is to hold the securities indefinitely. Coca Cola, American Express and the Gillette Company all met his criteria and have remained Berkshire Hathaway's portfolio for many years. In many cases, he purchased the companies outright, continuing to let their management teams handle the day-to-day business. A few of the better-known firms that fit into this category include See's Candies, Fruit of the Loom, Dairy Queen, The Pampered Chef and GEICO Auto Insurance.
Buffett's mystique remained intact until technology stocks became popular. As a resolute technophobe, Buffett sat out the incredible run-up in technology stocks during the late 1990s. Sticking to his guns and refusing to invest in companies that didn't meet his mandate, Buffett earned the scorn of Wall Street experts and was written off by many as a man whose time had passed. The tech wreck that occurred when the dotcom bubble burst bankrupted many of those experts. Buffett's profits doubled. (To keep reading about these events, see The Greatest Market Crashes, Sorting Out Cult Stocks and Behavioral Finance: Herd Behavior.)
On the Personal Side
Despite a net worth measured in billions, Warren Buffett is legendarily frugal. He still lives in the five-bedroom house he bought in 1958 for $31,000, drinks Coca Cola and dines at local restaurants, where a burger or a steak are his preferred table fare. For years, he eschewed the ideas of purchasing a corporate jet. When he finally acquired one, he named it the "Indefensible" - public recognition of his criticism about money spent on jets. (To find out how being frugal can save you big bucks, read Downshift To Simplify Your Life and Save Money The Scottish Way.)
He remained married to Susan Thompson for more than 50 years after their 1952 wedding. They had three children, Susie, Howard and Peter. Buffett and Susan separated in 1977, remaining married until her death in 2004. Before her death, Susan introduced him to Astrid Menks, a waitress. Buffett and Menks began living together in 1978 and were married in August of 2006.
What do you do with your money when you are the world's most successful investor? If you're Warren Buffett, you give it away. Buffett stunned the world in June of 2006 when he announced the donation of the vast majority of his wealth to the Bill & Melinda Gates Foundation, which focuses on world health issues, U.S. libraries and global schools. It is on of the world's largest transparent charities. (Find out who the biggest givers are in The Saints Of Wall Street.)
Buffett's donations will come in the form of Class B shares of Berkshire Hathaway stock. His total donation to the Gates Foundation is 10 million shares. It will be given out in 5% increments until Buffett's death or until the foundation fails to meet the spending stipulation or the stipulation that either Bill or Melinda Gates remain actively involved in the foundation's activities. Buffett's 2006 donation was 500,000 shares, valued at approximately $1.5 billion.
At a June 2008 share value, the entire donation to the Gates Foundation is worth about $37 billion. Buffett expects stock price appreciation to increase that amount over time. Another stock donation of more than 1 million shares will be evenly divided among three charities run by Buffett's children. An additional 1 million shares will go to a foundation run in honor of his first wife.
While the donation to the Gates Foundation was certainly a big surprise, Buffett's charitable endeavors are nothing new. He'd been giving money away for 40 years through the Buffett Foundation, renamed as the Susan Thompson Buffett Foundation. This foundation supports pro-choice family planning causes and works to discourage nuclear proliferation.
Buffett has always planned to give the bulk of his wealth to charity, but insisted that it would occur posthumously. The change of heart is quintessential Buffett - rational, decisive, maverick and blazing a path all his own. "I know what I want to do, and it makes sense to get going," he's famous for saying.
The future looks to hold an increase in the amount of money that Buffett will continue to give. His own words on the subject are: "I am not an enthusiast of dynastic wealth, particularly when the alternative is six billion people having that much poorer hands in life than we have, having a chance to benefit from the money" ("Buffett Donates $37B to Charity", BBC, June 26, 2006.)