Wednesday, February 20, 2008
Man in the News: The veteran of value
By Francesco Guerrera
Published: February 15 2008, FT
“Creditworthiness is like oxygen: you don’t notice it when it’s around.”
Spoken over a decade ago, Warren Buffett’s words sound eerily prescient at a time when a liquidity squeeze is leaving markets gasping for air. Yet Mr Buffett, already the world’s second-richest man and perhaps best known investor, shows no signs of running out of breath. After years lamenting a lack of attractive targets he appears re-energised by the credit crisis and stock market disarray. In less than two months, Berkshire Hathaway – the textile group he has transformed into a $222bn insurance-to-candies conglomerate over four decades – has spent more than $6bn buying companies or undervalued shares.
His impatience for action was on display again this week. On Thursday he disclosed that he had been buying shares in Kraft, the world’s second-biggest food maker, becoming its largest investor. And on Tuesday morning, the 77-year-old investor phoned in during a CNBC television programme to offer to take $800bn of municipal bonds off the books of three troubled insurers facing downgrades. The insurers had “created this mess”, by straying from plain-vanilla products into riskier markets. “They sort of did what Mae West said: ‘I was Snow White but I drifted,’” Mr Buffett quipped, citing the 1930s Hollywood sex symbol.
One of the insurers has since rejected the idea and several experts have attacked it as counterproductive and self-serving. The plan may go the way of Mr Buffett’s abortive attempt to buy into the failing Long Term Capital Management hedge fund 10 years ago. Yet even if it fails, that bold move is a reminder that, in the current environment, Berkshire’s cash of $40bn and Mr Buffett’s credibility give him leverage over struggling companies.
“The elephant gun is still out,” says Mohnish Pabrai, an asset manager who owns shares in Berkshire and follows Mr Buffett closely. “This is Berkshire’s market. When you have this kind of sell-off in equity markets and the capital Berkshire has, things will happen”.
Mr Buffett’s investments will probably look a lot like those that preceded them. For years, he has eschewed financial markets’ pursuit of change and innovation and stuck to an almost maniacal observance of his own principles.
His money-making instincts began early in his home town of Omaha, with two American classic brands: Wrigley’s chewing gum and Coca-Cola. His grandfather, who ran a grocery store, sold him small amounts of both and he re-sold them door to door. Aged 11 he made his first trade – three shares in the utility Cities Service. At 13 he filed his first income tax return, allegedly deducting the cost of his bicycle as a work-related expense. On the advice of his father, however, he attended college then gained a master’s degree in economics at Columbia, where he forged his later investment philosophy as a pupil of Benjamin Graham, the pioneer of “value investing”.
Since then, Mr Buffett has redefined his mentor’s urge to look for “cigar butts companies with a few puffs left” to impressive effect, amassing a fortune estimated at $52bn. After classic “vulture investing” in his early career, he then focused on companies that trade at bargain prices but promise value for the long term. He says that “forever” is the expected holding period for the companies Berkshire owns – a far cry from the ethos of private equity and hedge funds. “We don’t like to participate in what I call gin-rummy investing, where you keep discarding your least attractive investment of the moment in favour of something else,” he once said.
Deeply distrustful of debt and derivatives – he dubbed the latter “weapons of financial mass destruction” – he has criticised investors’ pressure on companies to deliver quick fixes through deals and financial engineering. In an unusual bout of corporate honesty, Mr Buffett and his long-time business partner Charlie Munger, a rambunctious alter-ego to his down-to-earth Nebraskan persona, shocked Wall Street in 1996 when they told investors in a share offering: “Neither Mr Buffett nor Mr Munger would currently buy Berkshire shares at that price, nor would they recommend that their families and friends do so.”
He works alone from a spartan home office, eschews email and pores over annual reports and research notes, guzzling Cherry Coke (Coca-Cola has been one of his most lucrative investments) and chewing candies in a hunt for undervalued companies.
This steady, unflinching pragmatism is mirrored in his private life. He is a creature of almost obsessive, if frugal, habits, ranging from his diet of steaks, hamburgers and cokes, to spending hours online each week playing bridge, to his refusal to move from the unflashy house he has lived in for decades. He likes making money more than spending it, although he does own a private jet – a rare contradiction of his noted hatred of corporate excess. In 2006 he said he would gradually give away his fortune to a charity created by his friend Bill Gates, founder of Microsoft.
“He really thrives in his comfort zone and does not enjoy material trappings. What turns him on is seeing Berkshire’s value rising,” says Roger Lowenstein, author of Buffett: The Making of an American Capitalist.
The cosy bubble that shielded Mr Buffett was pierced in the late 1970s. After 25 years, his first wife, Susan, moved out (they never divorced) to pursue a singing career on the West coast. Even then, knowing the heartbreak her departure would cause, she arranged for some girlfriends to visit Mr Buffett. Astrid Menks, a former waitress, ended up staying and after years spent in a strangely blissful triangle with Susan, she married him in 2006, two years after Susan’s death.
Mr Buffett’s penchant for homespun humour granted him cult-like status and the nickname the “Sage of Omaha”. Berkshire’s annual meetings – he calls them “Woodstock for capitalists” – draw over 25,000 adoring shareholders who hang on his every word. “People who are that brilliant tend to have a public persona and private persona. But he is a genuinely nice guy ... He likes making fun of himself and he has no pretensions,” says Henry Hu, a University of Texas professor who first met Mr Buffett over a decade ago.
Every anecdote about Mr Buffett underlines how hard the succession will be. He usually dismisses the problem, saying he has three candidates ready to take over when he dies, adding that, by the way, he feels “terrific”. He could feel even better if his bets in the credit crisis pay off. That will make the job of any successor even more daunting.
Copyright The Financial Times Limited 2008
Published: February 15 2008, FT
“Creditworthiness is like oxygen: you don’t notice it when it’s around.”
Spoken over a decade ago, Warren Buffett’s words sound eerily prescient at a time when a liquidity squeeze is leaving markets gasping for air. Yet Mr Buffett, already the world’s second-richest man and perhaps best known investor, shows no signs of running out of breath. After years lamenting a lack of attractive targets he appears re-energised by the credit crisis and stock market disarray. In less than two months, Berkshire Hathaway – the textile group he has transformed into a $222bn insurance-to-candies conglomerate over four decades – has spent more than $6bn buying companies or undervalued shares.
His impatience for action was on display again this week. On Thursday he disclosed that he had been buying shares in Kraft, the world’s second-biggest food maker, becoming its largest investor. And on Tuesday morning, the 77-year-old investor phoned in during a CNBC television programme to offer to take $800bn of municipal bonds off the books of three troubled insurers facing downgrades. The insurers had “created this mess”, by straying from plain-vanilla products into riskier markets. “They sort of did what Mae West said: ‘I was Snow White but I drifted,’” Mr Buffett quipped, citing the 1930s Hollywood sex symbol.
One of the insurers has since rejected the idea and several experts have attacked it as counterproductive and self-serving. The plan may go the way of Mr Buffett’s abortive attempt to buy into the failing Long Term Capital Management hedge fund 10 years ago. Yet even if it fails, that bold move is a reminder that, in the current environment, Berkshire’s cash of $40bn and Mr Buffett’s credibility give him leverage over struggling companies.
“The elephant gun is still out,” says Mohnish Pabrai, an asset manager who owns shares in Berkshire and follows Mr Buffett closely. “This is Berkshire’s market. When you have this kind of sell-off in equity markets and the capital Berkshire has, things will happen”.
Mr Buffett’s investments will probably look a lot like those that preceded them. For years, he has eschewed financial markets’ pursuit of change and innovation and stuck to an almost maniacal observance of his own principles.
His money-making instincts began early in his home town of Omaha, with two American classic brands: Wrigley’s chewing gum and Coca-Cola. His grandfather, who ran a grocery store, sold him small amounts of both and he re-sold them door to door. Aged 11 he made his first trade – three shares in the utility Cities Service. At 13 he filed his first income tax return, allegedly deducting the cost of his bicycle as a work-related expense. On the advice of his father, however, he attended college then gained a master’s degree in economics at Columbia, where he forged his later investment philosophy as a pupil of Benjamin Graham, the pioneer of “value investing”.
Since then, Mr Buffett has redefined his mentor’s urge to look for “cigar butts companies with a few puffs left” to impressive effect, amassing a fortune estimated at $52bn. After classic “vulture investing” in his early career, he then focused on companies that trade at bargain prices but promise value for the long term. He says that “forever” is the expected holding period for the companies Berkshire owns – a far cry from the ethos of private equity and hedge funds. “We don’t like to participate in what I call gin-rummy investing, where you keep discarding your least attractive investment of the moment in favour of something else,” he once said.
Deeply distrustful of debt and derivatives – he dubbed the latter “weapons of financial mass destruction” – he has criticised investors’ pressure on companies to deliver quick fixes through deals and financial engineering. In an unusual bout of corporate honesty, Mr Buffett and his long-time business partner Charlie Munger, a rambunctious alter-ego to his down-to-earth Nebraskan persona, shocked Wall Street in 1996 when they told investors in a share offering: “Neither Mr Buffett nor Mr Munger would currently buy Berkshire shares at that price, nor would they recommend that their families and friends do so.”
He works alone from a spartan home office, eschews email and pores over annual reports and research notes, guzzling Cherry Coke (Coca-Cola has been one of his most lucrative investments) and chewing candies in a hunt for undervalued companies.
This steady, unflinching pragmatism is mirrored in his private life. He is a creature of almost obsessive, if frugal, habits, ranging from his diet of steaks, hamburgers and cokes, to spending hours online each week playing bridge, to his refusal to move from the unflashy house he has lived in for decades. He likes making money more than spending it, although he does own a private jet – a rare contradiction of his noted hatred of corporate excess. In 2006 he said he would gradually give away his fortune to a charity created by his friend Bill Gates, founder of Microsoft.
“He really thrives in his comfort zone and does not enjoy material trappings. What turns him on is seeing Berkshire’s value rising,” says Roger Lowenstein, author of Buffett: The Making of an American Capitalist.
The cosy bubble that shielded Mr Buffett was pierced in the late 1970s. After 25 years, his first wife, Susan, moved out (they never divorced) to pursue a singing career on the West coast. Even then, knowing the heartbreak her departure would cause, she arranged for some girlfriends to visit Mr Buffett. Astrid Menks, a former waitress, ended up staying and after years spent in a strangely blissful triangle with Susan, she married him in 2006, two years after Susan’s death.
Mr Buffett’s penchant for homespun humour granted him cult-like status and the nickname the “Sage of Omaha”. Berkshire’s annual meetings – he calls them “Woodstock for capitalists” – draw over 25,000 adoring shareholders who hang on his every word. “People who are that brilliant tend to have a public persona and private persona. But he is a genuinely nice guy ... He likes making fun of himself and he has no pretensions,” says Henry Hu, a University of Texas professor who first met Mr Buffett over a decade ago.
Every anecdote about Mr Buffett underlines how hard the succession will be. He usually dismisses the problem, saying he has three candidates ready to take over when he dies, adding that, by the way, he feels “terrific”. He could feel even better if his bets in the credit crisis pay off. That will make the job of any successor even more daunting.
Copyright The Financial Times Limited 2008
Labels: Warren Buffett
¶ 10:24 AM
