Who is Warren Buffett ? The man and its investments

Posted on Categories Frugality, Investment, Spending
Who is Warren Buffett ? The man and its investments

If you are following personal finance blogs or podcast, you probably have heard the name of Warren Buffett. He’s very famous in the community. Warren Buffett is a very successful investor. He made a fortune from nothing. This the first reason he’s famous in the community. The second reason is that he advised his fortune to be invested in index funds once he passes away. This is one of the few big investors who are supporting index funds. Finally, he also beat the market many years. Which is something very difficult.

Being one of the richest persons in the world also helps making him a very well-know figure. In this post, we are going to look at the history of Warren Buffett first. Some numbers may not seem much in the early years. You need to take into account inflation. 1000 dollars 70 years ago are worth around 10’000 dollars now. We are especially going to focus on the biggest investment he did. Then, I’m going to talk about some important traits of the man. This is going to be a long post ;)

The early years

Warren Buffett in 2014
Warren Buffett in 2014

Warren Edward Buffett was born in 1930 in the state of Nebraska, in the United States. He is coming from the town of Omaha. Hence his surname of the Oracle of Omaha. His father was a congressman. Warren Buffer wanted to skip college to focus directly into business, but his father forced me to go into college.

He started very early to be interested in investing and business. For instance, he did some door to door selling of chewing gum and Coca-Cola bottles. He also worked with his grandpa to make some extra money. He even had a paper route. At the age of 15, he sold his first business for 1’200 dollars. It was some pinball machines installed in several barber shops.

He bought his first shares at 11, buying shares of Cities Service Preferred. In high school he already invested in one of his father’s business and even bought a farm. At the end of college he already accumulated about ten thousand dollars.

Warren then went on to the University of Pennsylvania for two years and finished its Bachelor of sciences in Business Administration at the University of Nebraska. He then completed his Master of Science in Economics at the University of Columbia. There, he was taught by Benjamin Graham, another famous investor. Benjamin Graham is often referred to as the father of value investing.

Buffett Partnership Ltd.

After his studies, Buffett wanted to work on Wall Street. But he was discouraged in doing this by his father and Benjamin Graham. He returned to Omaha and started working as a stock broker. He started working for Benjamin Graham’s partnership in 1954. Here, they performed value investing. Investing only in stocks that traded below their intrinsic value. Two years later, Graham retired and the partnership was closed. This led Warren Buffett to start his own partnership, Buffett Partnership Ltd.

One year later, he already operated three partnerships. And two years later, it was up to seven. At this point, he was able to find eleven people to each invest 10’000$ into his partnership. At this time, this was a large amount of money. One of the most interesting fact from this period is about the Sanborn Map Company. Although the stock was selling at 45 dollar, Buffett valued it at 65 dollar based on the company’s portfolio. When he had enough shares to have a seat on the board, he was able to push the company to repurchase the shares at its value. This operation was a 50% return on investment in two years!

Millionaire and Berkshire Hataway

Most people that know Warren Buffett also know about Berkshire Hataway, the company of Warren Buffett. However, most people don’t know that at the beginning it was a textile company. In 1962, Buffett became a millionaire with the value of his partnerships. At this point, he began investing in Berkshire Hataway. In 1964, he was the majority owner of the textile company. Unfortunately, the company was not doing great. The textile mill industry was starting to go down. Warren said that the textile company was its worst trade. The company was kept but changed focus over the years. By 1985, the last textile mill was sold.

Warren started diversifying the company. In 1967, he started expanding into the insurance sector by purchasing another insurance company, Indemnity. After this, Warren Buffett started a long list of investment. It started with a department store. In 1973, Berkshire Hataway acquired stocks in the Washington Post. Then, in 1979, they began to acquire stocks in the media industry with ABC.

In 1969, Warren liquidated the partnerships and transferred the assets to all the partners. At this point, he had many shares of Berkshire Hataway. Ten years later, Berkshire Hataway began trading at 775 dollar per share and ended at 1310 dollar. At this point, Warren already had a net worth of more than 500 million dollars.

In 1988, he started buying stocks of Coca-Cola. Currently, Berkshire Hataway owns 7% of the company. This was one of the best investments made by Berkshire Hataway.

Billionaire

In 1990, Berkshire Hataway began selling A shares. These shares have much more voting rights than the standard class B shares. They started selling at 7000 dollars, making Warren Buffett a billionaire.

In 2002, he entered in forward contracts, delivering U.S. dollar against other currencies. He made over two billions in four years with this deal.

He had a big role during the subprime crisis of 2007-2008, not investigating it but investing and helping during the crisis. For instance, he acquired 10% of preferred stocks of Goldman Sachs, with a very large dividend promise. He also helped Dow Chemical pay for Rohm & Hass, becoming the largest shareholder in the merged group.

In 2008, he became the richest person in the world for the first time, with a net worth of around 60 billion. He lost the place in 2009, to Bill Gates who was the richest man in the world before Warren.  During 2008 and 2009, both men lost a very large amount of money due to the stock market crisis.

In 2008, he purchased for three billion dollars of General Electric preferred shares. At this time, investors were very nervous about General Electric’s ability to stay financially relevant.

Rise of Berkshire Hataway to new heights

Warren Buffett in 2015
Warren Buffett in 2015

In 2009, he invested more than two billions in Swiss Re, a reinsurance company. He also bought Burling Northen Santa Fe (BNSF) Corporation for more than thirty billions. The rail company was bought to diversify Berkshire Hataway from the finance and insurance industry. After the bubble, Goldman Sachs bought back the preferred shares. Buffett would have wanted to keep the shares that were generating immense amount of dividends.

In 2011, he bought 64 million shares of IBM, for around 11 billion. Until that point, Buffett has always been reluctant to invest in technology stocks. He always said that he did not understand these companies. And he did not want to invest in market he did not understand. This marked a turn in investment at Berkshire Hataway with more Technology investments than before. Since that point, he also invested heavily in Apple. In 2018, Apple and IBM were two of the top five investment of Berkshire Hataway, before all IBM shares were sold.

In 2012, he bought Media General, a corporation of more than 60 newspapers. And in 2013, he bought the Press of Atlantic city, yet another newspaper. In 2013, Berkshire Hataway bought several million of shares of H.J. Heinz, the food processing company, becoming a majority owner a year later by buying more shares.

2014 was a very good year for Berkshire Hataway. The company went back to its pre-recession status. In the second quarter, it generated more than six billion in profit, its record. And in August, the price of the A shares hit 200’000 dollars. This means a capitalization of 328 billion dollars.

In December 2017, the class A shares reached 300’000 dollars per share for the first time. It’s interesting that these shares were never split. The idea was to keep them focused on long-term investors. And they only paid a dividend once, already a long time ago. The earnings were always used to grow the company. This is something on which Warren Buffet insisted.

Investment philosophy

Over the years, Warren Buffett investments have been greatly successful. He was able to beat the market for many years. But he stated that beating the market was pure chance.

As for his philosophy, Warren Buffett is a value investor. It means that he’s buying stocks that have a market value below the value that he thinks the stock should have. Most of time, he invests for the long-term. He’s an advocate against day trading. He buys companies that have a potential for large growth.

One thing that is very interesting about his style is that he mostly invest in things that he deeply understands. This changed in the later years when he invested heavily in some technology companies such as Apple and IBM. But this helped a lot during the dotcom bubble where Berkshire Hataway almost didn’t suffer since they had not a lot of these tech stocks.

When he’s evaluating the value of a stock, he’s considering twelve different points. They can be grouped in four different categories. There are business points, management points, financial points, value points. For instance, one of the question he’s asking is “Is management rational?”. This is not an easy question to answer. It requires a lot of research to be able to find enough information on these twelve points.

But of course, his investment style is not perfect. Over the years, he made many mistakes. According to him, his biggest mistake was to buy Berkshire Hataway. He also invested in Conoco Phillips thinking that oil prices would continue to rise. However, he bought at too high of a price and this resulted in a loss of several billions for Berkshire Hataway.

Index funds

Over the years, Warren Buffett has been more and more critic of active management in mutual funds. He’s arguing that it’s highly unlikely that active funds can outperform the market in the long-term. This is a point that is often used by personal finance figures. It has been shown time and time that no active funds can beat the market for many years.

Therefore, he is advising that most investors should move their money to low-cost index funds. Like this, people can save on fees while still tracking many stocks. That is the strategy he wants his money after his death for his wife.

He even made a bet about it in 2007. He stated that a simple S&P 500 index fund would beat managed hedge funds over ten years. In 2017, he won that bet by a large margin. No manager were able to beat the market for ten years during that bet. Once again, proving the point that passive funds are superior to active funds.

Philanthropy

Barack Obama and Warren Buffett in 2010
Barack Obama and Warren Buffett in 2010

Warren Buffett is a very generous philanthropist. Over the years, he has donated many billions to charity. He stated several times that his fortune will go to charity. Although he’s still among the richest men in the world, he already donated a large amount of his net worth.

In 2006, he said 83% of his fortune will go to Bill & Melinda Gates Foundation. This foundation tries to enhance healthcare and reduce poverty in the world. And also tries to expand education in the United States. He pledged for around 30 billion dollars of Berkshire Hataway shares. The foundation will receive some of the money each year, under some conditions.

He also donated several billions to the Buffett Foundation. This foundation invests in reproductive health and family planning. Moreover, he auctioned one of his car for charity. And he auctioned several times a dinner with him for the Glide Foundation.

Since 2000, it’s estimated that Warren Buffett donated around 46 billion dollars. This makes him the most charitable billionaire of the world. This is really incredible.

Frugality

Warren Buffett's house in Omaha
Warren Buffett’s house in Omaha

It’s very interesting to note that even though Warren Buffett is one the richest men in the world, he’s very frugal.

He bought his house in 1958 for 31’500$. He has lived in this house for 60 years. It’s not a luxury house either. He drives himself an old car. He doesn’t have a personal computer on his desk. He’s often seen in McDonald restaurant and enjoy simple steak houses. And he’s known to keep his breakfast around 3$ each day.

He even has frugal hobbies. He reads a lot and play bridge (often with Bill Gates). And he doesn’t travel a lot.

It’s really impressive how frugal he kept over the years. I’m trying to be frugal now, but if I had as much money as he, I would definitely not be that frugal ;) But of course, his net worth is linked to his frugality. It’s also by spending little that he became rich.

Personal Finance Quotes

Finally, we can finish up with some advice from Warren Buffett about personal finance.

Do not save what is left after spending but spend what is left after saving

This one is definitely one of my favorite personal finance quotes. It’s very important to get the difference. You should save first, it should be one of your goal. And then, if you achieve your saving goal, you can afford to spend money.

Do not put all your eggs in the same basket

OK, he’s not the only one having said that, but it’s an important quote nonetheless ;) It’s important to diversify investment in wide range of assets. Investing in a single company can be bad. Investing only in real estate can also be a bad thing for instance. Or investing too heavily in the company you’re working, this is same problem.

Price is what you pay, value is what you get

This one is definitely at the basis of value investing. Try to find some bargains where you pay less than the value of something. By doing so, you made a profit in net worth. But be aware that it is often difficult to find the real value of things. If you overestimate the value, you may well pay more than the real value. This also apply to other things than investing, such as buying things online.

Our favorite holding period is forever.

This one is also a very important advice. You should hold your stocks positions forever. Don’t try to make a short-term profit on them. But invest in things you believe in and that you can hold for a very long time. Only sell when you need the money from the sale.

Of course, over the years, Warren Buffett had many more great quotes. I encourage you to read more about them. The man is really full of great and inspiring quotes!

Summary

To conclude, I think that Warren Buffett is a great man. He is a brilliant investor, a very generous philanthropist and a very frugal person. He made many great things over the years and never made any fuss about it. I really wish more businessmen would be like him.

Doing the research for this article, I learned many things about him. I hope you learned a thing or two while reading it :)

I haven’t been able to find free pictures of him at a young age unfortunately.  If you know where to find some, please let me a comment and I’ll add them to the article :)

What do you think about Warren Buffett ? Do you have anything to add ?

2 thoughts on “Who is Warren Buffett ? The man and its investments”

  1. Amazing and comprehensive overview of Warren Buffett, great post Poor Swiss :)

    P.S. I both can’t wait to see what happens when he dies with his pledge and at the same time can’t think of a world without him!

    1. Hi Mr. RIP,

      Thank you very much!

      Yes, I would also like to see what happens at his death, but I also wish to see him leave longer and see what great things he’s still going to do!

      Thanks for stopping by :)

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