How Warren Buffett changed the way investors thought about investing
Warren E. Buffett’s approach to investing is deceptively simple.
“Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices,” he once wrote to shareholders of Berkshire Hathaway, his business conglomerate.
This method — known as value investing — had existed long before Mr. Buffett, now 94, began his career. No one else did it better or as long as he did. In the process, he influenced many financiers including Wall Street hedge funds and promoted the now common advice about investing over the long term. One of America’s biggest railroads? Berkshire Hathaway is the owner. Who is the largest shareholder in American Express, Coca-Cola and other companies? Berkshire, too.
Mr. Tens of thousands of them were present at Berkshire’s annual meeting in Omaha on Saturday when he announced he finally planned to step down as chief executive. Tens of thousands of them were on hand at Berkshire’s annual meeting in Omaha on Saturday when he declared he finally planned to step down as chief executive.
His announcement was greeted with surprise and then minutes of thundering applause from shareholders — many of whom became millionaires by owning Berkshire stock and hang onto his every financial aphorism.
“I tell people everything I know about investing I learned from Warren Buffett,” Bill Ackman, the billionaire hedge fund manager who was in the crowd, said in an interview after Mr. Buffett’s announcement.
Mr. Buffett has admitted that his fortune is largely due to pure luck. Buffett learned how to pick stocks from Benjamin Graham, a pioneer in value investing who was his Columbia University professor. With crucial advice from Charles T. Munger, a fellow Nebraskan who became his longtime business partner, Mr. Buffett turned Berkshire, which he bought control of in 1965, into the best-possible argument for the discipline.
But few lived and breathed the discipline as he did, reading corporate balance sheets for research — and fun — from dawn to dusk.
Mr. Buffett put this knowledge to use in several ways. Berkshire acquired a wide range of successful companies, including See’s Candy and Fruit of the Loom, as well as the private jet service NetJets. The most important acquisitions were those of insurers such as National Indemnity or Geico that held premiums paid by customers but not yet claimed. He used the money, along with profits made by other companies, to purchase what is now a group of 189 businesses. Among the biggest are the BNSF railroad, acquired in 2010 for about $26 billion; and the electricity producer Berkshire Hathaway Energy, purchased in 2000 for $2 billion that was then expanded via its own acquisitions.
As of March 31, that cash pile, which Mr. Buffett has called his “elephant gun,” was nearly $348 billion.
Those who have sat across from Mr. Buffett at negotiating tables over the years have said that he is friendly and courteous — but unyielding when it comes to the numbers. When he’s involved, he doesn’t like to haggle over price. He is willing to walk away. “His ability to distill complexity into clarity, and to lead with humility and conviction, is unmatched.”
Mr. Buffett used Berkshire cash to purchase stocks. His portfolio included American Express, Bank of America and Coke. Apple was one of his most profitable investments. Berkshire has a huge balance sheet, and Mr. Buffett has unmatched control. This has allowed the conglomerate to buy at the right time, when others are forced to sell. Buffett has been “an extraordinary investor in American Express and a personal friend to me,” Stephen Squeri, the chief executive of American Express, said after the Berkshire announcement.
Another key to his success was holding onto investments for ages — “our favorite holding period is forever,” he has said — letting returns compound again and again, a process that he has compared to a snowball rolling downhill. The phenomenon is the name of a biography with which Mr. Buffett collaborated but later criticized. Berkshire has another advantage for its investors: it does not charge fees, unlike hedge funds or mutual funds. In fact, Mr. Buffett has criticized the size of the fees charged by Wall Street vehicles.
That said, Mr. Buffett has admitted that he made plenty of mistakes over the years. One of his mistakes was not investing early in technology giants such as Amazon and Microsoft whose businesses, he claimed, he did not understand at the time. Berkshire, according to his calculations, gained 5,502,284 per cent from 1964 to 2024, compared to the S&P 500’s 39,054 per cent over the same time period. His average annual gain was 19,9 percent, while S&P’s gained 10.4 percent. Buffett’s strategy has inspired many other financiers including Mr. Ackman, the mutual fund mogul Mario Gabelli and others. Sardar Biglari’s Biglari Holdings shares Berkshire Holdings’ initials, website design, and investment focus. Buffett’s Nebraska persona, which eschewed the trappings of wealth and plutocracy, has helped him become a celebrity. Fans make pilgrimages in his Omaha home and praise his preference for mainstream products such as Dairy Queen Blizzards, See’s Fudge and Cherry Coke. All are Berkshire products. It was a low point in Mr. Buffett’s career. It was a low moment in Mr. Buffett’s career.
Called to testify before Congress about Salomon, Mr. Buffett delivered a steely message to the firm’s employees: “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
His fame also gave him unique sway in Washington, adding weight to his pronouncements on political and fiscal issues. Mr. Ackman said that policymakers also closely followed Mr. Buffett’s comments and annual letters, and acted on his ideas like treating stock options for executives as a corporate expense.
Though a Democrat who endorsed Hillary Clinton for president and whose name graced an Obama-era proposal for higher taxes on the wealthy, Mr. Buffett advised presidents from both parties. This was most evident in 2008, when corporate executives and George W. Bush’s administration begged him to help prevent the global financial system from collapsing. Buffett’s future appears financially solid, with Mr. Ackman calling the company “the Rock of Gibraltar.” However, longtime Buffett followers say that it may not retain its seemingly mythical status without its chief architect. True to form, however, he charged both companies a then-astronomical interest rate of 10 percent — a burden executives have said they were willing to pay to gain his imprimatur and survive.
“Warren Buffett represents everything that is good about American capitalism and America itself,” Jamie Dimon, the chief executive of JPMorgan Chase, said after Saturday’s announcement.
While the future of Berkshire appears financially solid, with Mr. Ackman calling the company “the Rock of Gibraltar,” longtime Buffett followers say that it may not retain its seemingly mythical status without its chief architect.
Berkshire’s next chief executive, Gregory Abel, is regarded as an excellent operator of businesses and a savvy deal maker, and Mr. Buffett hired Todd Combs and Ted Weschler as high-level investment executives more than a decade ago.
To Lawrence Cunningham, director of the Weinberg Center for Corporate Governance at the University of Delaware and a shareholder, Mr. Buffett has “given Berkshire the best possible chance for the next chapter.”
But other investors worry that the company will become a bit less special, and won’t revolve around the stock picking that put it on the map. Lawrence Cunningham, director of the Weinberg Center for Corporate Governance at the University of Delaware and a shareholder, believes that Mr. Buffett has “given Berkshire the best possible chance for the next chapter.”
But other investors worry that the company will become a bit less special, and won’t revolve around the stock picking that put it on the map.
