ISRAEL VALUE INVESTING: Who is this Warren Buffett Dude Anyway?

Most people have heard of Warren Buffett, but very few have taken the time to discover how he has generated such immense wealth, why he has had such a profound influence on so many, and why his company Berkshire Hathaway attracts more than 20,000 people for the Annual Shareholders Meeting.

Warren E. Buffett is many things to many people. To me, he is first and foremost a teacher – probably one of the greatest teachers I have ever had. Many may ask 'how can you call him a teacher if you have never met him or spoken to him'. My answer is simple: a teacher is someone that you learn from. Someone that successfully passes on to you a message. The greater that message, and the greater the impact that it has had on your life, then the greater the teacher. I suspect that in this, I am not alone.

With good reason Buffett is viewed by many as one of, if not the greatest investor of all time. Not only has he created immense wealth for himself, but also a greater collective wealth for the thousands of loyal shareholders of his investment holding company, Berkshire Hathaway Inc. Like Donald and Mildred Othmer.

The Othmers, he a chemical engineer and she a school teacher, made two astute investment decisions in their lives. Their first astute investment decision came in 1956, when the then 25 year old Buffett established his first investment partnership. The Othmers, a modest couple in their mid-50's and friends with the Buffett family, each gave the young Buffett $25,000 to invest. In 1970, they each received 7,500 shares of Buffett's new company Berkshire Hathaway Inc, which were then priced at $42 a share. Buffett had multiplied the Othmer's initial investment by almost 13 times, in less than 15 years. Recognizing Buffett's investment prowess, the Othmers decided not to sell their shares and continued to hold Berkshire stock for the long term. This was their second astute investment decision.

Donald Othmer died in 1995, and his wife three years later. Their shares, which they had refused to sell, had grown from $42 a share to over $60,000 a share, creating an estate that was worth over $800 million.

And then there's the story of Buffett’s neighbor, Don Keough. Keough served as chairman of the board of Coca-Cola (1986-1993) and Columbia Pictures (1985-1989), and has served as a member of the boards of McDonalds, Heinz, The Washington Post, and Home Depot. He currently serves on the boards of Coca-Cola and Berkshire Hathaway. Keough once mentioned in an interview that when he was a young executive he would leave for work every day while Buffett ran his investment operation from his home. He recounts:

"Warren Buffett had a marvelous hobby, model trains, and my kids used to troop over there and play with them. One day, Warren popped over and asked us if I’d thought about how I was going to afford to send my kids to college. In truth, I hadn’t given it much thought. But I told him I planned to work hard and see what happened. Warren said that if I gave him $5,000 to invest, he’d probably be able to do it better. My wife and I talked it over, but we figured we didn’t know what this guy even did for a living – how could we give him $5,000? We’ve been kicking ourselves ever since. I mean, if we had given him the dough, we could have owned a college by now".

– from The Midas Touch, John Train

If you had invested $10,000 in the S&P 500 in 1966, your investment would have grown to almost $528,000 by the end of 2006, or what equates to an annualized return of 10.6% annualized return. If on the other hand you chose to allow Buffett to manage those funds, your initial investment would have ballooned to an incredible $59.2 million by the end of 2006 – more than 100 times the S&P 500's return. Buffett's annualized return over that period equates to an annualized return of almost 24%, more than double the S&P 500. This more than anything else demonstrates the difference between the results of average and exceptional performance that is compounded over the long term.

A little over a decade ago, when I first heard of Buffett's phenomenal investment track record one thing became absolutely clear to me: there is something different that this man is doing that allows him to outperform the market by a wide margin – and I needed to know what it is. I became a man on a mission and was determined to discover Buffett's investment secrets.

Within six months I had collected and read all the Annual Berkshire Shareholder Letters and voraciously soaked up every fact and detail from the few books that had been written about him at the time. After I devoured those, I went on to read the writings of those that had the most influence on his investment philosophy - Buffett's mentor Benjamin Graham and other investment giants such as Philip Fisher and Peter Lynch. I soon realized how little I knew, and how much learning lay before me.

If you are at all interested in generating the wealth (who isn’t?), then I highly recommend that you embark on the same journey that began for me over a decade ago – and learn about Buffett’s methods, and the views of those that influenced him.

The Israel Value Investing Blog is a great place to start.

Some Interesting Buffettology:

With a net worth of more than $52 billion, Bufffett is the 3rd richest man on the planet behind Bill Gates and Mexican businessman Carlos Slim Helu.

Most of Warren Buffett wealth is in Berkshire Hathaway stocks. He owns approximately 38% of the company.

Berkshire Hathaway is currently worth $184.87 billion, and holds $47 billion in cash (about 40%).

In 1979, the share price of Berkshire Hathaway (Buffett’s company) traded at $279. Today (August 2007) it trades at around $120,000. That’s $120,000 for one share!

From 1965 to 2006 Berkshire Hathaway achieved an annual compound return of 21.4% compared to S&P 500 of 10.4%. The overall return for Berkshire Hathaway shares from 1965 to 2006 was 361,156 % compared to 6,479% for the S&P 500.

The Berkshire Hathaway companies have more than 217,00o employees and generate more than $100 billion in revenue per year.
Berkshire owns 49 private businesses which can be viewed here. These businesses generate a minimum of $150 million per week in free cash flow for Berkshire Hathaway. Simply put - every week these businesses 'send checks' back to 'Head Office' worth at least $150 million for Buffett to invest (it is no wonder he is sitting on $47 billion of cash!)

There are about 20 employees at Berkshire's head office - mostly accountants. There are no analysts. Buffett is the only one.

Buffett’s current annual salary is $100,000 (compare this to the average CEO salary of the S&P 500 companies which is $9 million).

Every year in May approximately 25,000 Berkshire shareholders gather Omaha’s Qwest Center for the Annual Shareholders meeting. It is a 2-day affair and involves many activities. The main event is a 6-hour Q&A session with Buffett and his partner Charlie Munger.

Buffett loves playing bridge, and plays about 12 hours a week. Sometimes over the internet with Bill Gates.

Buffett’s favorite place to eat is Gorat’s in Omaha. He always purchases a T-bone steak (cooked rare), a double order of hash browns, and Cherry Coke.

According to U.S. News and World Report, he drinks about five Cherry Cokes a day.

Buffett does not have a pc on his desk, does not use e-mail and drives his own car.

In 1956 he purchased a 5-bedroom home for $31,500. He still lives there today.

Buffett reads 5 different newspapers a day. On several occasions he has said that he spends 80% of his day reading - mostly company annual reports.

Buffett does not read analyst reports or economic forecasts.

Every year an auction takes place with the highest bidder winning a lunch with Buffett. In 2007, the highest bid was $650,100 to up and coming value investor, Mohnish Pabrai.

Berkshire’s largest holdings are: Coca-Cola (8.6% of the company), American Express (12.6%), Moody’s (17.2%), Proctor & Gamble (3.2%) & Wells Fargo & Co. (6.5%).

In June 2006, Buffett publicly committed to giving away his entire personal fortune to charity, with 83% going to the Bill and Melinda Gates Foundation (that’s $15 million a day!). This is the largest philanthropic gift in history.

In 2006, 35 separate university classes from around the U.S visited Warren Buffett. Over 2,000 students received 6 hours face-time with Buffett. During this time, Buffett lectures them on character, business ethics, and takes questions. He then takes them out to eat at Gorat’s – his favorite steak house. You can view some of the notes from these meetings here, here, here, here, here and here.

The Making of Buffett – Ages 13 - 38

At age 11, Buffett bought his first stock – Cities Service – for $38 per share. The stock dropped to $27 before shooting up to $40. Buffett sold his stock at this price. Soon after, the stock rocketed to $200 a share and Buffett learned the value of patience.

At age 13, Buffett filed his first tax return and claimed a $35 tax deduction for his bicycle. The same year he declared to a friend that he will be a millionaire before he turns 30, or "[I'll] jump off the tallest building in Omaha."

At age 15, Buffett began delivering newspapers for the Washington Post company, earning $175 a month. This was his first exposure to the print media industry. Later on in life, he bought 18% of the company.

Also at age 15, he invested $1,200 of his savings and bought 40 acres of farmland.

At age 17, Buffett and a friend bought a used pinball machine, and placed it in a nearby barber shop. Within a number of months, he owned 7 machines in different locations and was earning $50 a week. He later sold this business for $1,200.

Whilst in highschool, he bought a 1934 Rolls Royce with a friend for $350, and rented it out for $35 a day. By the time he graduated high school he had saved $6,000.

At Age 19, Buffett applied to Harvard Business School and was not accepted.

That same year he read Benjamin Graham’s “Intelligent Investor” and was so impressed with the book that he immediately applied to Columbia’s Business school, where Graham was teaching. He was accepted, and received the only +A grade that Graham ever gave.

At age 21, Buffett purchased a Texaco Gas station as a side investment, but the investment was not successful.

At age 25 (1956), Buffett established a Limited Investment Partnership “Buffett Associates with $105,000 of investor funds, and worked from a bedroom in his home. Within 3 years Buffett doubled his investors’ funds. Within 6 years the partnership’s assets were worth $7.2 million. Within 11 years they were worth $65 million. Within 12 years they were worth $104 million. You can view facsimile copies of his letters to his investors during these years here.