Wednesday, July 15, 2009

Buffett: Rock Star of American Capitalism

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. For many at this event, which Buffett calls the "Woodstock for Capitalists," it is an annual ritual of paying homage to the man who made them money through Berkshire's stock and from his investing and business insights. Little wonder that Alice Schroeder's insightful biography titled, The Snowball: Warren Buffett and the Business of Life, has proved popular among readers. She 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 (see Warren Buffett's Letters to Berkshire Shareholders on berkshirehathaway.com) are widely read. The letters 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. Some letters have noted that executives should be paid bonuses only if their company's long-term performance is better than that of industry peers; others have warned of looming disasters – such as the red flag he raised about derivatives morphing into "weapons of mass financial destruction." During the subprime mortgage crisis that led to the global financial collapse, 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

By the late 1970s, according to an earlier biography, Buffett had spent $15.4 million to buy 46% of Berkshire, including 3% for his wife Susan, paying an average $32.45 per share. (See Roger Lowenstein, Buffett: The Making of an American Capitalist.) 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.

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