Warren Buffett 2/2

Warren Buffett

Warren Edward Buffett was born in Omaha in 1930, the son of Howard Buffett, a stockbroker and Republican congressman. As a youngster, Warren had an affinity for numbers, impressing his friends by memorizing the population of scores of U.S. cities. At age 11, he began marking the board at his father's brokerage; that same year, he bought his first stock, three shares of Cities Service Preferred at $38 a share. The price immediately dropped to $27, but then recovered to $40, at which point the young Buffett sold -- making a $5 profit, but missing the company's subsequent rise to $200 a share. It was Buffett's first lesson in patience.

As an adolescent, he was a tireless entrepreneur. At the age of 14, with savings from his two paper routes, he spent $1,200 on 40 acres of Nebraska farmland, which he leased to a tenant farmer. But Buffett truly caught the investment bug as a senior at the University of Nebraska, when he read Benjamin Graham's "The Intelligent Investor." The bible of the so-called value investors, Graham's book advised investors to ignore the trends that sweep Wall Street and instead hunt for stocks that trade far below their actual value. He called them "cigar butts" -- companies the stock market had discarded but that still had a few "puffs" of value left in them.
Finding such companies isn't easy. It requires tremendous patience and intense balance-sheet analysis. But the challenge appealed to Buffett's mathematical skills. After graduating, Buffett was rejected from Harvard Business School, so he instead moved to New York to study with Graham at Columbia University. After earning a masters in economics, he began working for his mentor.

But if Graham's approach was lucrative, it wasn't a whole lot of fun. By its very nature, value investing means saying no a lot more than saying yes, and Buffett soon felt constrained by Graham's strict rules. He began to wonder if it made as much sense to buy good businesses at a fair price, rather than dying businesses on the cheap. So in 1957, he returned to Omaha and started his first investment partnership. A group of Omaha investors handed him $25,000 each. Buffett put in $100 of his own money, appointed himself general partner and began to purchase stocks. His goal was to beat the Dow Jones Industrial Average by an average of 10 percent a year. When the partnership dissolved in 1969, Buffett's investments had ballooned at a compound rate of 29.5 percent, compared to just 7.4 percent for the Dow.

In 1962, Buffett began purchasing stock in a struggling New Bedford, Mass., textile mill called Berkshire Hathaway. With a price of less than $8 a share, Berkshire was a classic cigar butt. But it turned out that this old stogie had more than a few puffs of life in it. As the U.S. textile industry withered in the face of foreign competition, Buffett began redeploying Berkshire's capital into an array of other businesses, including insurance.

It turned out to be a classic Buffett move. While some insurance companies are better investments than others, all of them are good investment vehicles. Policyholders pay premiums up front and claims are only paid out later, providing insurers with a steady stream of low-cost cash to play with. Such funds are known as "float," and soon, Berkshire was generating millions of dollars of it. As it happened, the insurance-generated cash came along just as the financial markets went into their deepest swoon since the 1930s. Buffett, always on the lookout for values, went on a shopping spree, filling his portfolio with solid companies that began to rise once the market regained its footing.

Of course, the same qualities that have made Buffett a legendary investor have played havoc with his personal life. His wife, Susan T. Buffett, accompanies him on almost all of his public appearances, serves on Berkshire's board and is one of the firm's largest shareholders. But in fact, the couple have not lived together since 1977, when Susan -- a sometime cabaret singer and passionate abortion-rights activist -- moved from Omaha to an apartment in San Francisco. Making things even weirder, it was Susan who introduced her husband to Astrid Menks, a Latvian-born waitress at the French Cafe in Omaha, who ended up moving in with Buffett and has been his companion ever since. Susan and Astrid remain friends, and the three send presents to relatives from "Warren, Susie and Astrid."

His relations with his three children -- all of whom have had difficulties living up to their father's high standards -- have been equally unusual. His children have hardly been the typically spoiled scions of the ultra rich. When his son Howard told his father he wanted to purchase a farm, Buffett offered to help, albeit under the same exacting terms he might offer a business partner -- he told Howie he would buy the farm and rent it to him, requiring his son to fork over a percentage of his farm income and pay the taxes. Howie agreed to the terms. But even then, his father visited the farm only twice in six years. And that's far from the only example of Buffett's tightfistedness. Once, when his daughter Susie needed $20 to get her car out of the airport garage, he made her write him a check.

That same attitude characterizes Buffett's approach to philanthropy. Despite his immense personal wealth, Buffett has not been particularly charitable -- even now, late in his life, a time when many moguls, with their eyes on the history books, seem suddenly to develop an urge to share. He often is criticized as a tightwad. Politically, he seems to be a liberal. In the late 1960s, he became involved in abortion rights issues and worked to integrate Omaha's segregated country clubs. But the Buffett Foundation, which was established in the mid-1960s, disburses a pittance of his wealth -- just $11 million to $12 million a year, mostly to family-planning clinics. Although he has three children, his wife is his sole heir, and Buffett has said that he intends for 99 percent of his money to eventually go to his foundation, which will likely become the largest endowment in the country.

Indeed, even the world's greatest investor will die someday. And what happens to Berkshire Hathaway in his absence is certain to be one of Wall Street's great dramas. The company's lofty share price, after all, has as much to do with its bottom line as it does with the so-called Buffett premium. Buffett claims to have chosen a successor, but he has told neither the public nor his anointed. Most expect the top spot to go to his longtime associate Charlie Munger or Lou Simpson, chairman of Government Employees Insurance Co., or GEICO, which Buffett invested in for decades before buying the company outright in 1996.

Whatever happens to Berkshire Hathaway, Buffett's legacy is bound to live on in ways the investor never intended. Even in these speculative times, his investment decisions are scrutinized by would-be Buffetts the world over. And then there are the tens of thousands of Berkshire shareholders out there who owe a hefty chunk of their personal wealth to the man's investing acumen.
Remember Donald and Mildred Othmer, the modest-living but financially well-endowed couple from Brooklyn? They're not alone -- not by a longshot. "There are more coming," Buffett told the New York Times in 1998. "There are going to be some bigger ones than this."salon.com Aug. 31, 1999