Warren Buffett

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DEFINITION of 'Warren Buffett'

Warren Buffet (b. 1930) is a famous American investor known as "the Oracle of Omaha" for his market foresight and oracular pronouncements on the subject of value investing. Buffett is Chairman of Berkshire Hathaway (BRK.A) a holding company for a diverse set of businesses, which he developed from an unprofitable textile manufacturing operation. His wealth fluctuates with the performance of the market, but for the past decade he has been consistently ranked as one of the world's richest men.

INVESTOPEDIA EXPLAINS 'Warren Buffett'

Early History

Warren Buffett was born in Omaha, Nebraska to Howard Buffett, a stockbroker and later Congressman, and Leila Stahl Buffett. As a child, Buffett reportedly showed interest in stocks, writing stock prices on the chalk board in his father's office. Legend has it that he told his childhood friend if he wasn't a millionaire by the time he was thirty, he would jump off of the tallest building in Omaha. When Buffett was 11-years-old he visited the New York Stock Exchange and bought his first shares: three shares of Cities Service Preferred (an oil and gas concern) for himself and three for his sister Doris.

Buffett spent his formative adolescence in Washington D.C. where he graduated from Woodrow Wilson High School. In grade school and high school Buffett showed his precocious proclivity for business by delivering newspapers, running a pinball machine leasing operation, selling stamps, Coca-Cola (KO), golf balls and magazines door-to-door, and editing a horse racing tip sheet called Stable-Boy Selections.

Buffett attended the University of Pennsylvania for two years and then transferred to the University of Nebraska-Lincoln. He graduated at nineteen-years-old with degree in Business Administration and applied to Harvard Business School. After being rejected by Harvard, Buffett matriculated at Columbia Business School, where he studied with legendary value investor Benjamin Graham. He graduated in 1951 with an MS in Economics.

From 1951 to 1956 Buffett was an investment salesman and a securities analyst. In 1956 he started Buffett Partnership Ltd., and in 1960 he became the Chairman and CEO of Berkshire Hathaway Inc.

For more, see: Warren Buffett: The Road To Riches.

In 2007 Buffett expressed his intention to step down from direct management of Berkshire Hathaway.

Famous Deals

Buffett's first, most famous and formative deal was his acquisition of Berkshire Hathaway in 1964. The company started life in the 1830s as the Valley Falls Company, a textile manufacturer, that became the Berkshire Fine Spinning Associates in 1929 and merged with the Hathaway Manufacturing Company in 1955. After the merger, Berkshire Hathaway was a profitable business with millions in revenue, twelve thousand employees and fifteen factories. Buffett made his first investment in the company in 1962. 

For more, see: How did Warren Buffett get started in business?

The company's fortunes followed the decline of textiles and manufacturing in the North-East after World War II, however; and soon Buffett had a losing company on his hands. The president of the company, Seabury Stanton, offered to buy back Berkshire's shares from Buffett, and they agreed on a price, but when Buffett received the deal in writing, Stanton had lowered the price-per-share. Buffett was supposedly angered by this move and proceeded to take over the company and fire Stanton.

Throughout the 70s, Buffett bought shares of media and financial companies. In 1973 he began to acquire stock in the Washington Post Company, and in 1979 Buffett bought stock of the American Broadcast Corporation.

In 1988 Buffett started buying shares of Coca-Cola. His greatest holding was 7% of the company, valued at over $1 billion.

In 1990 Buffett made a case for his large investment in Wells Fargo & Co. (WFC). Wells Fargo continues to be one of Buffett's largest holdings.

Since the turn of the century, Buffett has made notable acquisitions of General Electric (GE), Goldman Sachs (GS), International Business Machines (IBM) and Burlington Northern Santa Fe Corporation (BNSF). 

For more, see: Warren Buffett's Best Buys.

Investment Style

Warren Buffett's investing philosophy is often called "value investing" because it looks at the underlying value of a company rather than at the movements of its stock price. Buffett famously believes that investors should only pick stocks they believe they can hold forever. 

​For more, see the video: How To Pick Your Investment Style.

Value investing is a highly disciplined practice for Buffett. He has given many succinct but incisive rules of thumb for investing in his famous letters to shareholders, in investing publications and the popular press. Some of his most notable rules are never lose money, and it is better to get a great company at a fair price than a fair company at a great price. Of course, Buffett has broken his own rules on occasion, which shows that his first, most fundamental rule is to look at investing pragmatically rather than programmatically.

For more, see: Rules That Warren Buffett Lives By.

In one sense, Buffett breaks with his value investing philosophy by looking not only for returns in dividend income but also in share price growth.

Strictly speaking, a value investor doesn't care at all about the share price or market value of a company because the value of owning a company is in the return of profit it gives to its owners, the shareholders. But even Benjamin Graham, the godfather of value investing, acknowledged that profits can be made when an investor buys company that has been undervalued for whatever reason by the stock market on the assumption that the market will eventually realize the discrepancy and the share price will rise.

For more, see: How Warren Buffett made Berkshire Hathaway a World-beater.

Buffett has bought companies (Berkshire Hathaway being the most obvious example) that were underperforming and steered them to profitability. Deals like this have convinced some people that Berkshire Hathaway is more like a private equity firm than a mere holding company and that Buffett and the partners at his firm are, in fact, not value investors but very cautious speculators.

For more, see: Is Warren Buffett Really A Value Investor?

Pragmatism and thorough caution are core components of Buffett and Berkshire Hathaway's brand. Though Buffett may not be a value investor in the strict sense, his instincts for a good deal and the rules of engagement he set for himself have not only made Berkshire Hathaway outperform other investing firms, they have also protected him from outsized losses.

For more, see: Warren Buffett's Bear Market Maneuvers.

Philanthropy and Later Life

In June of 2006, Buffett announced his intention to give away most of his fortune to charity. The bulk of his donation was announced in a letter to the Bill and Melinda Gates foundation, which has received 185 million shares of Berkshire Hathaway so far at a market value of 28.3 billion in 2014.

Buffett told Charlie Rose in 2006, "I don't believe in dynastic wealth." Buffett's belief that people who inherit wealth are "members of the lucky sperm club" and his liberal politics persuaded him not to give his fortune to his children. Buffett also favors inheritance taxes and higher taxes on capital in general.

Buffett's first wife died in 2004, and in 2006 he married Astrid Menks with whom he "had a relationship of 20 years," according to the New York Times. Though Warren Buffett and his first wife Susan had lived apart since the late 1970s, they remained married, and Susan Buffett encouraged his relationship with Ms. Menks.

Famous Sayings

Buffett is renowned for his wit and wisdom. His annual reports to Berkshire Hathaway shareholders do not contain charts or tables, and they are written in a plain, direct style meant to appeal to common sense rather than impress the reader with Buffett's superior intellect. In his letters, in interviews and in his biographies, Buffett has left many memorable words of wisdom for investors.

  • Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
  • Only when the tide goes out do you discover who's been swimming naked.
  • Price is what you pay. Value is what you get.
  • Someone is sitting in the shade today because someone planted a tree a long time ago.
  • It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
  • Risk comes from not knowing what you're doing.
  • It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction.
  • I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
  • We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
  • Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
  • We have learned to turn out lots of goods and services, but we haven’t learned as well how to have everybody share in the bounty. The obligation of a society as prosperous as ours is to figure out how nobody gets left too far behind.
  • On trading out of a bad investment: That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it's the windshield through which investors must peer, and that glass is invariably fogged.
  • You only have to do a very few things right in your life so long as you don't do too many things wrong.

 

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