Warren Buffet is regarded as the most successful investor in the world and he is also one of the greatest philanthropist of this century. The business story of Warren Buffet is similar in many regard to that of other world reputed successful entrepreneurs, and this further underscores the fact that there is a pattern to wealth and financial success. If anyone follows understands and follows this pattern, and obeys all necessary rules of finance, saving and investment then nothing would stand in your way of being financially independent and comfortable. Being financially successful doesn’t mean you have to become a billionaire, but you would transcend a level where you want and hunger for the basic satisfactions of life.
Warren Buffet was born on the 30th of August, 1930 in Omaha, Nebraska to Howard and Leila Buffet. He was the second of three children and the only son. His father was a stockbroker who later became a United States Congressman for four terms. Just like many entrepreneurs, Buffet started his business journey at a very tender age. When he was six years old he bought six packs of Coca cola from his grandfather’s grocery store at twenty five cent each and sold them for a nickel earning a five cent profit. At 11, he made his first investment, buying three shares of Cities Service at $38 per share. He bought the shares for himself and his sister. He learnt an early lesson from this venture. The share of Cities Service fell to $27 per share, frightening the young Buffet, but soon it picked up and rose to $40 per share. Fearing that the shares may fall again, Buffet sold his shares and made little profit. But instead of the Cities Service shares to fall it rose tremendously, reaching $200 per share.
Buffet started his education at Rose Hill Elementary before moving to Alice Deal Junior High School. He graduated from Woodrow Wilson High School in 1947. Buffet had a strong inclination for business and didn’t see the need to go to college, but his father insisted he continue his education. He enrolled at the Wharton Business School of the University of Pennsylvania in 1947 where he studied for two years complaining he knew more than his professors. Before Buffet entered college he had already made $5,000 delivering newspapers, which is equivalent to $42,610.81 in 2000 money.
He eventually transferred to the University of Nebraska-Lincoln where he graduated in under three years with a Bachelor of Science in Business Administration. His father once again wanted him to further his studies, but Buffet wasn’t interested. In the end, he agreed and applied to the Harvard Business School but his application was turned down. He was regarded as ‘too young’. Buffet later learnt that Ben Graham, one of the greatest Value investor of all time, was lecturing at Columbia Business School. He applied, and was accepted.
Buffet studied under Graham and the experience changed his life forever. After graduating, Buffet failed to secure a job with his mentor, Graham, so he returned home and joined his father’s brokerage firm. It was at this time that he married Susan Thompson and started a family.
Graham later agreed to employ Buffet and the latter worked for his mentor for two years as Analyst. Although Buffet respected Graham a lot and agreed with his key principles and theories there were certain aspects that they disagreed strongly.
Graham was known the whole over as the god of value investing.
Value investing, according to Graham, involves seeking stocks that were selling at an extraordinary discount compared to the value of the underlying assets, which he called the “intrinsic value“. In Value investing the investor seeks out stocks which are selling at a price far lower than their real value, which is called their intrinsic value.
Buffer internalized this concept but decided to take it even further. He didn’t just look at the asset of the company he considered the company’s management team as well the competitive advantage of the company’s product in the market.
In 1956 Buffet came back to Omaha and started Buffet Partnership Inc. Employing the Value investing concept, Buffet bought Berkshire Hathaway; a dying textile company. The business slowly picked up and soon it started generating real income. The cash flow from Berkshire Hathaway was used to fund other investments.
In 1969, Buffet dissolved Buffet Partnership so he could focus on Berkshire Hathaway. He kept buying shares of different companies using the Value Investing concept. For some companies he bought them out rightly but allowed the management to continue running the day-to-day business, and for others he bought a part of their shares. His portfolio cut across many industries; in media he invested in The Washington post, in insurance he invested in GEICO, in oil and gas he has bought shares in Exxon, in beverage he bought shares in Coca cola. Presently, he owns 7% of the Coca cola Company. He also owns shares in American Express, Duracell, Kraft Foods Group and Gillette Company.
In 1985, Buffet completely sold the textile mills of Berkshire Hathaway but continued to use the name as the holding company for his portfolio of investments.
Despite his billions, Buffet lives a frugal lifestyle. He lives in a five bedroom apartment which he bought in 1958 for $31,000, drinks Coca-Cola, dines at a local restaurant where burger or steak are his preferred meals and prefers to travel by public transport. As he is legendarily frugal so is he legendarily philanthropic. Aside from signing the Giving Pledge; a promise to give away more than half of his wealth to charity, Buffet have unrepentedly donated hugely to charitable causes, especially through the Gates and Melinda Foundation. In June 2006, Buffet stunned the world by donating 500,000 shares to the foundation which was valued at $1.5 billion at 2006. The donation is so far the largest act of charitable giving in the United States history. As at June 2008, the value of the donation had risen to $37 billion.
When queried about his act of his extreme charity he responded, “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.”
Buffet and Susan separated in 1977 but remained married until her death in 2004. Buffet married Astrid Menks, a former waitress whom Susan introduced him to, in 2006. Buffet has three children from his first marriage.
He became the richest person in the world in 2008 with a total net worth estimated at $62 billion by Forbes, overtaking Bill Gates who had been the No.1 on Forbes list for the past 13 years. The next year, Gates regained the first position and Buffett moved to second place.
Currently Warren Buffet is the fourth richest man on earth with a new worth of $61.9 billion.
Lessons from Warren Buffett
The concept of Value investing:
Value investing was a concept developed by Ben Graham in the 1930. It is the strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued.
Value investing is an interesting concept that practiced by serious investors. Buffett helped to fine tune the concept by looking out for not just the price of the stock as compared to the business intrinsic value but other important parameters such as the company’s management team as well the competitive advantage of the company’s product in the market.
Putting all these parameters into consideration, an investor can hardly go wrong in the choice of the business to invest in. some companies have great products and sweet business plans, but mismanagement and managerial blunders would cause the company to be undervalued. As in investor, investing in such a company and replacing the managerial team with a more competent bunch will earn you substantial gains. This was exactly the case with Buffett and Berkshire Hathaway.
Avoid the bandwagon mentality (Herd behavior):
Herd behavior is the tendency for individuals to mimic the actions (rational or irrational) of a larger group.
In finance, a herd instinct would relate to instances in which individuals gravitate to the same or similar investments, based almost solely on the fact that many others are investing in those stocks.
During the dotcom bubble several investors sank billions of dollars into dotcom businesses. Some of these investors didn’t even know jack about what some of the companies did. Buffett, for reasons best known to him, refused to invest in any of the dotcom companies. He was insulted and mocked and laughed at as a man who lived in the ice age, but he paid them no heed.
And then it came; the burst. Billions of investors’ money disappeared overnight. There were suicides and depression. Buffett laughed last.
The fact that everyone does it doesn’t mean it is right, several of those doing it are as lost as you and are only doing it because they saw the next person do it. Stick to your guns, do what you believe is right, and not because other people are doing it. Even if your decision turns out to be the wrong one, it is still less hurtful than failing because you sheepishly followed the herd.