Warren Buffett - THE SAGE'S STORY

THE SAGE'S STORY

Born in Omaha in 1933, Warren Edward Buffett showed a very early affinity for remembering and calculating numbers. According to a profile in the online magazine Salon, the young Buffett was marking the board at his father's brokerage and purchasing his first stock at age 11. Within three years, Buffett used his paper route savings to dive into real estate, purchasing 40 acres of farmland and leasing it to a tenant farmer.

He came across the highly regarded investment tome The Intelligent Investor, by Benjamin Graham, as a senior at the University of Nebraska, and was strongly influenced by the investment principles therein. Graham was a famous skeptic of Wall Street trends, encouraging so-called value investors to seek out "cigar butts"—those firms that Wall Street had all but abandoned but which could still be lit up for a few good puffs of stock activity. Buffett's first investment success came in 1951, when he threw $10,282 into the auto insurance firm Geico. Just a year later, he pulled out for $15,259. In 1952, the 21-year-old Buffett began offering his own classes on investing, selling his course via an advertisement in a local Omaha newspaper.

After a few years working and studying with Graham, Buffett began to feel constrained by the former's strict rules of value investment. Instead of picking up nearly lifeless companies cheaply, Buffett began to experiment with buying stocks of still vigorous but undervalued companies. In 1956 Buffett began an investment partnership on the seed money provided by himself, his sister, his neighbor, and his lawyer. The following year, a local couple who had attended his class invested $100,000 into the partnership. Buffett's earliest believers, known as the Berkshire Bunch, amassed enormous fortunes over the years by putting money behind the young investment guru's ideas. In Omaha alone, according to Forbes, more than 30 families accumulated at least $100 million in Berkshire Hathaway stock.

In 1962, Buffett began purchasing shares of Berkshire Hathaway, a struggling textile manufacturer in New Bedford, Massachusetts. Three years later he controlled the entire company. Berkshire's book value per share registered nearly 25 percent compound annual gains through the rest of the century, according to Credit Suisse First Boston Corp. By the end of the 1960s, finding good bargains few and far between, Buffett dissolved the investment partnership, returning his investors' money. From this point, he concentrated on Berkshire, which at first functioned primarily as a textile company with a small investment operation. Before long, however, investments were Berkshire's bread and butter and Buffett returned to his practice of picking up depressed companies. There were many such firms by the early and mid-1970s, after the 1960s stock rally gave out and inflation set in, making cheap stocks plentiful.

Buffett's bold moves and foresight helped him weather the tough economic climate of the late 1970s, and despite the tremendous market crash in 1987, Berkshire finished that year in much better shape than the year before. His head-scratching investments in companies such as Coca-Cola proved ingenious, with their brand-name recognition and untapped international potential. By 1993, Berkshire's $8.3 billion placed it at the very top of the Forbes 100 list.

Once viewed basically as an investment fund, acquisitions of insurance firms, such as Geico and General Reinsurance, through the 1990s transformed Berkshire Hathaway primarily into an insurance company in which the investment portfolio happened to be managed by one of the world's most famous investors. By the end of the 1990s, insurance accounted for more than 70 percent of Berkshire's revenues. Buffett came to believe that his company's greatest strength lay in purchasing companies outright rather than simply picking established stocks at the right stages of their valuations.

Buffett's attraction to the insurance industry was fairly logical. Since policyholders pay their premiums up front, while the firms pay out claims later, the company can be used as a strong investment catalyst. With a constant stream of revenue coming in, the insurers have a gap of time in which they have a good deal of money to invest before the claims are actually paid. This was Berkshire's strength, using the premium money to invest in Buffett's favored brands of under-valued stock.

His methods of investing and strategizing were extremely out of fashion and against the grain in the dot-com explosion of the late 1990s. The year 1999 saw Buffett's first down year in a decade, with Berkshire's per-share book value under-performing the S&P 500 index for the first time in 20 years. At the time, the judgmental pronounced his insistence on investing in firmly established, proven businesses out of date for the much-heralded, dot-com-heavy new economy. In 2000, however, Buffett appeared to have the last laugh, as reality weighed down the dot-com mania and the high-tech stock bubble burst. Buffett's portfolio, meanwhile, bounced back as investors ran to established companies, and once again pundits and analysts were praising the far-sighted wisdom of Buffett.

Buffett is a committed stickler for rigorous balance-sheet scrutiny, teasing out the elements that will produce long-term profitability. While he eyes technology stocks with a degree of skepticism, Internet stocks, at least as of the early 2000s, were almost completely off the menu for Buffett. Given his commitment to balance sheets and sound predictability, it's not difficult to ascertain why. Buffett refuses to throw money into a company unless he actually can visualize the company's numbers a decade or so down the road. With regards to the Internet, Buffett admits his vision is extremely cloudy at best.