Warren Buffett

“The basic ideas of investing are to look at stocks as business, use the market’s fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing.

Origin

Warren Edward Buffett was born on August 30, 1930, in Omaha, Nebraska. His father, Howard Buffet, was an American businessman, investor, and politician, who was a four-term Republican United States Representative for the state of Nebraska. 

Education: He began his education at Rose Hill Elementary School. After moving to Washington, Warren finished elementary school, attended Alice Deal Junior High School and graduated from Woodrow Wilson High School in 1947. Buffett entered the Wharton School of the University of Pennsylvania. He would have preferred to focus on his business ventures, but his father pressured him to enroll. Warren studied there for two years. He then transferred to the University of Nebraska where at 19, graduating with a Bachelor of Science in Business Administration. After being rejected by Harvard Business School, Buffett enrolled at Columbia Business School upon realizing that Benjamin Graham taught there. He earned a Master of Science in Economics from Columbia in 1951. After graduating, Buffett attended the New York Institute of Finance. 

Entrepreneurial Beginnings

After Buffett’s family moved to Washington, D.C. (1943), because of his father’s duties in Congress, Warren would spend his days doing math and reading his own and his father’s investment books. It was in these years that Warren gained the ambition to become rich. So much so that he would tell his friends that if he wasn’t a millionaire by the time he turned 30, he would jump off the tallest building he could find. Buffett started to play the stock market well before he would finish high school. But his ambition wasn’t reserved just for the stock exchanges; One of the first books he read, One Thousand Ways to make $1000, taught him to venture out into every business he could do. In 1944, 14 year-old Warren filed his first tax return. It featured a $45 (around $675 today) deduction for his bicycle and watch, which were crucial for his newspaper delivering business. He then used his profits to buy pinball machines and place them around bars and stores in the neighborhood. But in 1948, the Buffett family was forced to go back to Omaha. Warren sold his pinball business for $1200 (around $14,000 today) and used that money to buy a 40-acre farm in Nebraska, which he proceeded to rent out to pay for his college education. He is famous for his investment philosophy, his success and his holding: Berkshire Hathaway. 

Investment Strategy 

Warren Buffett likes to identify easy to understand business models in companies that have great financial metrics and can stand the test of time with continued growth. This leads us to 4 main points: Business, Management, Financials and Value. He spends a lot of his time reading 10-K forms and SEC filings to know what these companies did during each quarter. It’s the executives that make the decisions, so Buffett likes to know who’s making the calls and who’s guiding the companies to certain directions, to evaluate transparency, leadership, creativity and innovation. For the financials, Buffett focuses on low-levered companies with high profit margins. He prizes the EVA (Economic Value Added) of a company, which measures a company’s profit after removing the shareholders’ stake from the equation.  

EVA = NOPAT – (CI x WACC), where NOPAT = Net operating profit after taxes, CI = Capital invested and WACC = Weighted average cost of capital 

Finding the intrinsic value of a company is key to Buffett. He roughly estimates future earnings and discounts them back to present day values. He often ignores short term fluctuations, but it’s not uncommon for him to take advantage of price drops. If a great, proven company suddenly drops from $ 100 per share to $ 85 per share and the company’s financials and intrinsic value remains the same, Buffett might just pick up extra shares. You can view it as buying clothes at a discount. 

Current Wealth and Current Portfolio 

Warren Buffett’s current net worth is around $85.9 Billion, making him the 6th richest man in the world. Buffett’s personal investments are different from Berkshire’s own. This is because the investments he makes for himself are made up of good ideas that are too small for Berkshire’s policy on market cap requirements. Another reason is conflict of interest. Both Buffett and Berkshire Hathaway must protect the shareholder’s interest when it comes to investment decisions, he allows little cross-over between his dealings and the company’s own. His personal portfolio includes: Coca-Cola; Berkshire Hathaway; Liberty Global; Philips 66; Moody’s; Gillette. 

Best Investments

The top five investments in Buffett’s holding company, Berkshire Hathaway, are Apple, Bank of America, Coca-Cola, American Express, and Kraft Heinz. Also, we can consider the following investments as Buffet’s best investments during his lifetime: Capital Cities(1945), GEICO (1951),  Sanborn Maps (1960), The Salad Oil Swindle (1963) and Freddie Mac(1988). 

Worst Investments

Warren Buffett’s career has been filled with success, but the Oracle of Omaha makes mistakes like everyone else. Some of them are: Dexter Shoe Co. (1993) and the Airline Sector – Delta; American Southwest United (2016). 

Philanthropy 

Each year, Buffet donates a chunk of his Berkshire Hathaway A shares, that are then converted into B shares and given to the foundation. He is also donating to a non-profit that he runs in the name of his late first wife, and to non-profits run by his three children. His children will also receive cash inheritances.  

The most significant charitable donation Warren Buffet has ever made was in his $37 billion pledge to the Bill and Melinda Gates Foundation. This donation, originally pledged in 2006, will take effect upon his death, as he has directed in his will.  

In 2019, he donated around $3.6 billion and his total donations since 2006 are $34 billion, representing 45% of what he pledged at the time. In 2020, the “Oracle of Omaha” is distributing 15.9 million class B shares of Berkshire Hathaway valued at about $2.9 billion.  

According to Buffet “Were we to use more than 1% of my claim checks (Berkshire Hathaway stock certificates) on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others.” 

Sanam Samadani, MSc in Monetary and
Financial Economics

Lourenço Cardoso, BSc in Finance

Published by lisboninvestmentsociety

INVEST IN YOURSELF

Leave a Reply