Warren Buffet may be only the second richest man in the world (around $36 billion), but he gets almost as much attention as Bill Gates in the number one spot. His annual letter to the shareholders of Berkshire Hathaway has become a rite of spring. While the general public may be more interested in Berkshire’s investments, such as Coca Cola or Gillette, the street knows that, at least since 1998 when it acquired General Re & Cologne Re for $22 billion, Berkshire means insurance.
This core business generated two thirds of the company’s $5.4 billion operating earnings in 2003. Gen Re, National Indemnity and Geico are names most people have heard of, certainly those on the street. Buffett doesn’t directly manage any of these companies. He and his partner Charlie Munger manage Berkshire Hathaway, but Buffett prides himself on picking good people, like Joseph Brandon at Gen Re, to manage the companies well. They usually do.
That alone doesn’t explain Buffett’s iconic status. Start with the money. Lots of people have made lots of it for themselves and their investors over the years, but Berkshire’s rise under Buffett’s leadership, which began in 1965, has been nothing short of phenomenal. In his letter, Buffet cautioned that comparisons with the company’s early history are “not meaningful.” Still Berkshire’s value has risen steadily, an average annual gain of 22.2 percent compounded annually. In 2003, the company’s net worth rose by $13.6 billion, increasing the per-share book value of both its Class A and Class B stock by 21 percent. “Over the last 39 years (that is, since present management took over) per-share book value has grown from $19 to $50,498,” Buffett wrote. The Class A shares are currently trading in the $90,000 range (Class “B” shares are valued at one-thirtieth the value of the “A” shares). The total percentage increase has been 259,485 percent; no, that’s not a typo.
The money alone, however, isn’t what sets Buffett apart—although it certainly is a big factor. Buffett represents an older America; an idealized version of the American Dream made real. Start with his roots. He’s called the “Oracle of Omaha,” as in Nebraska—farm country, sodbusters. He’s not the “Oracle of Oceanside” (even if he owns an estate near there), much less yet another “Wizard of Wall Street” (even if he’s made a great deal of money there); no, he’s Omaha, the Midwest, the heartland, corn, meatpacking and railroads. He lives in the same house he bought years ago—at least when he’s in Omaha.
In an age when most moms work in an office and apple pies come frozen, if at all, he epitomizes old-fashioned virtues. Whatever their political leanings, most Americans, indeed most people, are troubled by change and uncertainty. Buffett represents a rock in a sea of such changes, which people naturally gravitate to, as proof that all is not lost.
Everything he writes and everything he says seems to enforce that view.
For example—from Berkshire’s Owner’s Manual: “The financial calculus that Charlie and I employ would never permit our trading a good night’s sleep for a shot at a few extra percentage points of return. I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.” It’s comforting to hear that from a businessman.
Make no mistake about it, that’s what Buffet is, from his hair to his toenails, but rather than provoking the revulsion people frequently feel due to the excesses that the bosses of the business community have engendered over the last two decades, Buffet belongs to an increasingly rare species—the admired businessman. Jack Welch’s image has been tarnished by his divorce and revelations about his excessive perks. For all his charitable work, many people still see Bill Gates as a predatory nerd. The Kozlowskis, Ebbers and the Enron crew make the headlines. No wonder Buffett stands out in that crowd.
Perhaps his most outstanding quality, and certainly one of the most important in the public’s perception of him, is his honesty. In his latest letter he wrote, “If we fail, we will have no excuses. Charlie and I operate in an ideal environment. To begin with, we are supported by an incredible group of men and women who run our operating units. If there were a Corporate Cooperstown, its roster would surely include many of our CEOs. Any shortfall in Berkshire’s results will not be caused by our managers.”
How refreshing it is to hear that in an era when there doesn’t seem to be a politician or a businessman on the planet ready to take responsibility for what they’ve done or failed to do. Contrast Buffet’s no nonsense assertion with former Enron CEO Jeffery Skilling’s, who told a Congressional Committee that despite the fact that he was a graduate of Harvard Business School, he didn’t know what was going on in his own company because he wasn’t an accountant. You get the picture.
Unlike Skilling, Buffet didn’t make it into Harvard; he went to Wharton instead, and eventually graduated from the University of Nebraska. He’s always been a hard worker and a good investor from the time he used the earnings from his newspaper route to buy property that he rented at a profit—how American is that? He continued his studies at Columbia under the legendary Benjamin Graham, whose book “The Intelligent Investor,” became his Bible, and the source of his investment philosophy.
He has consistently sought to invest in well run companies that are undervalued. The concept is deceptively simple. To begin with, if the company is undervalued, why? Maybe it isn’t all that well-run. If it is, then why is it undervalued? Even Buffett admits that finding such companies these days is becoming increasingly difficult.
Another part of Buffet’s appeal is his willingness to speak his mind and his ongoing commitment to setting high corporate standards for both managers and shareholders. He has long deplored the system of compensating top-level executives with stock options, as he feels they reward quick profits and ultimately undermine shareholder value.
In this year’s letter, Buffett took on the mutual fund industry for keeping and paying fund managers enormous sums regardless of their performance. “I am on my soapbox now only because the blatant wrongdoing that has occurred has betrayed the trust of so many millions of shareholders,” he wrote. “Hundreds of industry insiders had to know what was going on, yet none publicly said a word. It took Eliot Spitzer, and the whistleblowers who aided him, to initiate a housecleaning. We urge fund directors to continue the job. Like directors throughout Corporate America, these fiduciaries must now decide whether their job is to work for owners or for managers.”
Buffet also appears remarkably free of accusations of hypocrisy, a deep and abiding fact of American life. For example he pointed out that Berkshire’s directors, all of whom he knows personally, and has worked with over the years, stand to benefit when the company profits. However, “The downside for Berkshire directors is actually worse than yours [the shareholders] because we carry no directors and officers liability insurance. Therefore, if something really catastrophic happens on our directors’ watch, they are exposed to losses that will far exceed yours.”
At 72, the oracle shows no signs of slowing down, but he wrote that one of the board’s primary tasks is selecting someone to replace him, if and when. He indicated that “the real discussion—both with me in the room and absent—centers on the strengths and weaknesses of the four internal candidates to replace me. Our board knows that the ultimate scorecard on its performance will be determined by the record of my successor. This isn’t the toughest task in the world—the train is already moving at a good clip down the track—and I’m totally comfortable about it being done well by any of the four candidates we have identified. I have more than 99 percent of my net worth in Berkshire and will be happy to have my wife or foundation (depending on the order in which she and I die) continue this concentration.” His matter of fact candor on a subject that most people usually choose to ignore is also quite refreshing.
Buffet’s letter goes on for many pages, and it’s well worth going to the Berkshire Web site (www.berkshirehathaway.com) just to read it. He thanked Joe Brandon and Tad Montross for straightening out Gen Re and apologized for not closing Gen Re Securities sooner. He lavished praise on Ajit Jain, who runs one of the world’s largest reinsurance operations, specializing in mammoth and unusual risks, for his “incredible contributions to Berkshire’s prosperity over the past 18 years.” He praised the good results at Geico, and finally took a swipe at the U.S. trade deficit.
If there were such a thing as a “businessman for all seasons,” Buffett would probably come the closest to fulfilling the role. Although they say records are made to be broken, it’s unlikely that anyone will ever break Buffet’s. He’s a unique personality, a real American icon, and for once in all the right ways.
‘I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.’
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