Buffett: Rock Star of American Capitalism …

A summary of a gushing biography of the Oracle from Omaha …

Excerpted from Knowledge@Emory,  Buffett: Rock Star of American Capitalism, September 16, 2009

Warren Buffett’s rock star status is evident from the fact that each year tens of thousands of fans from all over the world travel to Omaha, Nebraska, to listen to him speak at his company Berkshire Hathaway’s shareholder meeting.

Alice Schroeder’s insightful biography titled, The Snowball: Warren Buffett and the Business of Life … seeks to explain how Buffett became one of the world’s richest men and why he is admired for his business ethics and for uniquely pledging most of his money to philanthropy.

Buffett’s annual letters to shareholders … analyze good and bad businesses, give examples of managers who treat customers and employees fairly while also making good profits, and expose accounting tricks that fool many investors. One of Buffett’s letters pointed out that rich people like him should be made to pay a higher tax rate than wage earners like his secretary.

Buffett’s most important act has been to donate much of his wealth to the Gates Foundation, to be spent over 20 years mainly on health care and education. As he states: “The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society.” Also, unlike most other philanthropists, Buffett has not set up a foundation nor paid for buildings at hospitals or museums to try to perpetuate his name.

Rational Money Machine

Buffett had spent $15.4 million to buy 46% of Berkshire, With Berkshire stock recently around $87,200, Buffett has grown his wealth nearly 3,000-fold in some 30 years.

This massive capital accumulation is based on an investment discipline he learned from Benjamin Graham. Buffett’s approach to investment involves using seventh grade math and common sense to analyze a company’s underlying economics; buying a business not a stock; ignoring the fluctuations of the stock market; and, most importantly, maintaining a margin of safety. Of course, the mathematical magic of compounding gains over time have also helped Berkshire Hathaway multiply its wealth.

Buffett’s three rules of portfolio management are: 1) Don’t lose money; 2) Don’t forget rule one and 3) Don’t go into debt.

He attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success.

Right Side of the Edge

Buffett criticizes the high fees charged by investment managers, especially of hedge and private equity funds. Yet, Buffett himself accumulated much of his initial capital from the fees he charged a hedge fund-type partnership, pocketing half the gains over 4%.

Some of Buffett’s investments for his partnership were also made based on the expectation that managements would buy back his stock at a higher price. In

Buffett has argued for the expensing of stock options, which many chief executives liberally give as incentives and bonuses to themselves, other managers and employees. Only in 2002, going against the views of most CEOs, Buffett found the time was right to push Coke’s board to make it the first major company to expense stock options. 

Buffett draws a token $100,000 annual salary from Berkshire and awards himself or other managers no stock options, grants or warrants.

Personal and Family Life

Buffett owns no fancy houses, cars or yachts. He wears cheap clothes, craves hamburgers, French fries and cherry Coke and appears awkward in social situations. Buffet also spends hours playing bridge online, enjoys golf, handball and table tennis and plays the ukulele. He is a showman who avoids confrontation and hides his true opinions behind coy remarks, if being blunt may hurt his business or other relationships.        

Since Buffett was consumed with his work, he had little extra time for his wife and three kids. “While he was friendly with his kids, he hadn’t really gotten to know them” while they were growing up at home in Omaha. On occasion Buffett’s secretary blocked even his family’s access to him, not on explicit but on implicit orders, a typical Buffett method of operating.

His wife wanted him to stop being consumed with making more money once he had made his initial millions. His actions that led his wife to leave their home in Omaha are the major regret of Buffett’s life: “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

Unlike most other capitalists, Buffett believes that children should not inherit money just because of the lottery of their birth. He says children should be left “enough money so that they feel they could do anything, but not so much that they could do nothing.”

Buffett’s views:  capitalists: should give their money back to society, to which he believes they owe their wealth in the first place,

“Buffett always avoided or limited his time with anyone he feared might criticize him.”

As Buffett has often noted, the American economy in the second half of the twentieth century provided the ideal environment – lots of wet snow and a long hill to roll and grow his snowball — for someone of his skills, temperament and personality to become immensely wealthy.

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