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This story comes from Roger Lowenstein's Buffett: The Making of an American Capitalist (Doubleday, 1996), a splendid biography of the man sometimes called the "Oracle of Omaha" for the way he combines uncanny investment acumen with a heavy dose of casually irreverent folk wisdom, a kind of Will Rogers meets Ben Franklin.
Indeed, Buffett is generally considered the greatest investor of all time because he so skillfully joins a cold analysis of the "numbers" with an old-world emphasis on hard work, honesty, and character. He believes that investing involves entering into a partnership in which managers and owners share a mutual responsibility as well as a mutual interest. As chairman of Berkshire Hathaway (NYSE: BRK.A) and (NYSE: BRK.B), the publicly traded company that has served as his principal investment vehicle since 1969, he's cultivated precisely such partnerships.
Buffett looks for management that can deliver an attractive return on shareholder equity rather than growth at any cost since the goal is to create shareowner value rather than simply indulge the CEO's ego. But even in his wholly owned businesses, Buffett allows his managers complete autonomy in running the operations, providing general counsel only when they ask for it. He wants results, but he gets them mainly by demanding integrity and accountability. He abandons an investment only when good management still fails to make a business successful. And as in the well-publicized crisis at Salomon Brothers in 1991, Buffett is willing to shoulder the duty of cleaning house when management fails to meet his standards.
As a result of his investment success and of his insight into the financial world, Buffett's annual letters to Berkshire's shareowners have become required reading for many who agree with his roguish sentiments. His iconoclastic positions are legendary. For example, he thinks stock options for top executives are counterproductive since they allow CEOs to claim potentially vast rewards without sharing in capital risks borne by the stockholders. And he's said that capital gains on stocks held for less than a year should be taxed at 100%.
Buffett's unconventional wisdom follows from the way his early childhood experiences found a perfect intellectual embodiment in Ben Graham's method of value investing, first described in Security Analysis, the 1934 classic that Graham wrote with David Dodd. Yet, Buffett's genius follows from his ability to maintain his grounding in Graham while expanding his vision of what makes for a good investment. Over his career, Buffett's method has evolved so that he no longer looks merely for stocks that are inexpensive relative to their assets but for stocks that are reasonably priced relative to their growth prospects. Determining a company's potential for growth involves subjective evaluation of such intangible factors as the value of a consumer brand and the quality of its management, assets that simply didn't figure into Graham's analysis.
In many ways, Buffett's methods are of greater interest than his returns because they are so full of lessons for individual investors. That's because with few exceptions, nearly anyone could have engaged in the investments that Buffett has made. His huge stake in Coca-Cola (NYSE: KO), for example, was bought on the open market at a time when most analysts were too timid to say the stock was undervalued. Though he's had increasing access to Wall Street insiders and other powerful, well-connected people, his investments ultimately involve no special tips from either. Instead, he has relied on his own encyclopedic, indeed, legendary knowledge of publicly available annual reports, which he devours like pulp fiction.
Still, the returns justify the method. For its July cover story on Buffett, Business Week calculated that $10,000 invested in Berkshire when Buffett took over the company in 1965 would be worth $51 million now. The same amount invested in the S&P 500 index would be worth just $497,431.
But Buffett's performance was exceptional from the start. Between 1957 and 1966, the partnership Buffett managed delivered a 1,156% return (or 704.2% after deducting Buffett's share of the profits) versus just 122.9% for the Dow, according to Lowenstein. So a partner's theoretical $10,000 investment would have grown to $80,420 in less than a decade.
Operating in what he deemed a highly speculative and thus (for him) difficult investment climate, Buffett followed up that first decade of gains with a 36% return in 1967 and a 59% return in 1968. It was the "Go-Go" era, and the broader market was surging. Still, Buffett was continuing to lap the market's performance.
By May 1969, however, he had had enough. He confessed to his partners, "I am not attuned to this market environment, and I don't want to spoil a decent record by trying to play a game I don't understand just so I can go out a hero." So he announced he was dissolving the partnership, something few successful money managers ever do. Buffett spent the rest of the year liquidating the partnership's holdings. Yet, he still managed a 7% gain in 1969, much better than the 11% loss recorded by the Dow.
Though speculator George Soros, former Fidelity Magellan fund manager Peter Lynch, and British economist John Maynard Keynes are revered for their investing prowess, no investor rivals Buffett for putting together such a consistently outstanding record over so long a period. And Buffett's returns have come without a single down year and without taking excessive risks or employing much leverage. For the most part, his success has simply followed from intelligent, long-term investing in American businesses.
Given Berkshire's current market capitalization of nearly $102 billion, Buffett's 31.5% economic stake is now worth about $32 billion. Due to Microsoft's (Nasdaq: MSFT) stunning run, Buffett's personal wealth has now fallen well behind that of his sometimes golfing companion Bill Gates. Still, Buffett is among the world's wealthiest people.
If this litany of numbers seems excessive, it's only appropriate. As Lowenstein makes clear, Buffett himself was obsessed from an early age both with numbers and with making a lot of money. He was continually doing calculations in his head, often to the amazement of the various groups of "apostles" who would gravitate to him as he sat on front porches as a child or in leather chairs as a fraternity brother and simply explained all things financial.
Buffett was born in 1930 in Omaha, Nebraska, in the midst of the worsening Depression. His father wanted to be a journalist but ended up as a securities salesman just when the public was losing what little faith it had in stocks. Times were tough, and though they soon got much better for the Buffett family, the Depression years made a lasting impression on young Warren.
"He emerged from those first hard years with an absolute drive to become very, very rich," Lowenstein writes. "He thought about it before he was five years old. And from that time on, he scarcely stopped thinking about it."
From an early age, Buffett was a bit quiet and bookish, someone who shied away from confrontation and seemed in need of protection. But he was also focused, determined, and energetic. He exhibited mental toughness and self-confidence. At age six, he would buy six-packs of Coke from his grandfather's grocery store for a quarter and sell each bottle for a nickel. When struck by a mysterious and dangerous illness the next year, he spent his time in bed calculating his future wealth. Later he worked at his father's brokerage house, chalking up stock prices on the blackboard. He would huddle over books like One Thousand Ways To Make $1,000.
The young Buffett cooked up endless schemes for making money, most of them quite successful. His contagious enthusiasm helped enlist the help of friends. They gathered stray golf balls that Buffett would package by brand and re-sell. Intrigued by oddsmaking, he and a friend put together a tip sheet on the horse races called Stable Boy Selections. He often declared that he would be a millionaire by age 30. He succeeded.
In 1942, Warren's father, Howard Buffett, made an unlikely run for Congress as a Republican isolationist opposed to Roosevelt's New Deal and to the war. Surprisingly, he won. The family moved to Washington, D.C., an abrupt change that so disturbed young Buffett that he ran away from home.
This momentary revolt lasted only one day, but Buffett responded in turn by devoting himself with gusto to his paper route for The Washington Post, as if he were determined to be independent. By age thirteen, the young Buffett had accumulated five routes that had him delivering 500 papers every morning before school. He was making $175 a month, the equivalent of a full-time salary for a grown man. He was saving all of it, too, except for what he paid in taxes, which he handled himself. At age 14, he bought 40 acres of Nebraska farmland with his $1,200 in personal savings and rented it out to a tenant farmer.
Buffett was ever on the make for new businesses. During his senior year of high school, he and a mechanically oriented friend started buying up used arcade games for $25 to $75 each. Buffett put up the capital; his friend did the repairs. They set them up in barber shops and split the profits with the barbers. Soon, they were raking in $50 a week. When he graduated from high school, Buffett sold the business for $1,200 to a war veteran and went off to the Wharton School of Finance and Commerce at the University of Pennsylvania.
Having read so many business books and lived the life of the entrepreneur, Buffett found Wharton disappointing. The professors spun fancy theories, but none of it was practical enough. Besides, he concluded that he knew more than they did. After two years, he skipped off to the University of Nebraska, where he supervised paper routes for the Lincoln Journal and finished off his college in three years with a schedule full of classes in business and economics. By that point, he had also accumulated, solely by his own labor, personal wealth of $9,800. He was not yet 20 years old.
Most of Lowenstein's narrative is elegantly straightforward and unobtrusive, but he occasionally pauses to consider the key question of motivation: What makes a Warren Buffett who he is? Clearly, Buffett liked numbers and had a knack for thinking in terms of business enterprise. His father's brokerage business undoubtedly helped Buffett think of investing as a likely career. But Lowenstein plausibly suggests other factors too.
For one thing, Buffett's mother suffered terrible headaches and could turn on her children out of the blue "with the wrath of God," degrading them with unrelenting hour-long tirades in which she criticized their every conceivable failing. Indeed, there was a bit of madness in her family. Buffett's family never talked about his mother's black moods, and he didn't discuss them with his friends. But they were one factor motivating him to get out of the house and do something.
Buffett's analytical nature also made him hostile to his parents' Christianity at an early age. He implicitly embraced his father's high ethical standards, but not his father's faith. But even as a boy, he would repeatedly confide in his friends his fear of death.
As Buffett has said, Berkshire Hathaway is his "canvas." What Lowenstein draws from this is that Buffett's obsessive creation of wealth is something like an ongoing artistic wager against mortality, an accumulation of fragments that Buffett can shore up -- with beautiful compounding interest -- against his inevitable physical ruin.
Indeed, aside from his relatively recent indulgence in a Berkshire corporate jet, there's little indication that Buffett cares for his money at all beyond the pleasure he has in accumulating it and the fact that it allows him to be independent enough to spend nearly all of his time making more. He lives in a modest home in Omaha in easy sight of a public street. He drives an old car. He maintains a modest office with a tiny staff.
Moreover, he has never sold any of his Berkshire stock, and as a result, he relegates very little of his personal income to charity (though he does give a percent of Berkshire profits to the charities designated by each individual shareholder). Still, it's not that he lacks a social conscience.
In 1969, Buffett applied to join Omaha's all-Jewish Highland Country Club. He wanted to use his acceptance there as a means of confronting the waspish Omaha Club, to which he already belonged, and inducing its members to admit Jews, who were then excluded. The same year, he and his business partner, Charlie Munger, underwrote the legal appeal to a California court case that proved a landmark victory for those seeking to legalize abortion. He has also personally financed the college education of many African-American students from Omaha.
But Buffett's spirit of self-reliance runs deep. He's also addicted to tangible returns and seems uncomfortable with the fact that much charitable giving doesn't translate clearly into bottom-line results. Still, since he also doesn't believe in leaving large sums of money to children (he favors an "enormous" inheritance tax), most of Buffett's money will go to his foundation when he dies.
Lowenstein believes that this apparent stinginess really goes back to a psychological need that the "canvas" is fulfilling for Buffett. His "fear of death has contributed to his drive to accumulate," Lowenstein suggests.
The mix of his talents and his circumstances has led Buffett, it seems, to thrive on a kind of Emersonian self-reliance and intellectual independence even as he desperately clings to continuity, as if the supremely self-confident person that he is might slip away if the various tissues holding his life in place vanished. Lowenstein describes him as childlike in his obsession, a man who is happiest poring over an annual report and always likely to have one handy.
But Buffett's intense focus also makes him incapable of recreating himself, and he is threatened by anything that might force him to do so. He's someone who in a sense needs to be sheltered both from many of the practical chores of life and from unnerving emotional entanglements. His genius needs its untethered space in which to flourish, and he's spent most of his adult life around people who would insure he got it.
Perhaps the most surprising example of his need for continuity is found in his personal life. According to Lowenstein, Buffett's wife Susie had long been his chief comfort and protector, handling all of the family matters, like buying a new car, that he simply took no interest in. In 1973, however, Susie decided to move to San Francisco to pursue a long-delayed career as a nightclub singer. With her three children grown and out of the house and Warren traveling a great deal to keep track of his investments, she simply wanted her own life. Buffett was mystified and devastated.
Soon after, however, it became clear that not so much had changed after all. He and Susie would still vacation together for weeks at a time. She would still talk to him almost daily. And to compensate for her absence from home, she encouraged women from her wide circle in Omaha to look in on him. That's how Buffett got to know Astrid Menks, a Latvian woman of 31 who traveled in Omaha's bohemian circles. Within the year Astrid had moved in with Buffett. And now, the two women both remain very much a part of his life. The three of them send out cards together and sit side by side in perfect harmony at Berkshire's famed annual meetings.
Buffett's investing has embodied this same spirit. "In a sense, his whole career has been an act of holding on -- of refusing to say goodbye," Lowenstein writes. Buffett has made a number of "lifetime" commitments to the companies he's invested in. When he bought into Capital Cities as part of its bid for ABC -- now part of Disney (NYSE: DIS) -- he signed over his proxy rights to CEO Tom Murphy as a sign of ultimate trust. Moreover, many of Buffett's greatest investments -- such as the Washington Post (NYSE: WPO), Coca-Cola, and GEICO -- have marked personal returns of one kind or another, attempts to bring some earlier part of his life full circle.
Moreover, Buffett has always worked to educate those investing with him to see things as he does, to become long-term investors in Buffett. As a result, the Berkshire Hathaway shareowner meetings are like family reunions, with an air of community and continuity that Buffett obviously enjoys.
The point of all of this, really, is that Buffett's genius for long-term investing has something more than an intellectual rationale behind it. Yes, Ben Graham helped Buffett develop an investment framework that makes it easy for Buffett to serve as a counterpoint to an entire age, with its technical analysis, modern portfolio theory, efficient market theory, and now day trading.
But what Buffett shares with other remarkable but quite different investors -- such as George Soros -- is an understanding that an investment philosophy works best when it is deeply personal, a reflection of one's larger approach to the world. Buffett's success, then, might be partly chalked up to one great insight that any investor can follow: Know thyself, and invest accordingly.
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