Wednesday, December 28, 2005

Personalities: Warren Buffett 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Any outline of investment history and tales over the ages would not be complete without the personalities who have played important roles in shaping them, and hence it makes sense to also drag in this new category on investment personalities within my blogsite. I think it might even make it less boring, as it brings a human element to the hitherto rather drab tales of Pan-El and the forward contracts or how LBOs led to the 1980s junk bond boom.

And who to start with but THE man himself? Warren Buffett, the original Sage of Omaha, second richest man in the world, who built his riches around his ability to pick extraordinary stocks and having the admirable discipline to hold them to great financial effect.

I will hardly be able to cover much of the man in a few short paragraphs, given that there have been books written about him. In any case, I assume most investors will be familiar about his life history already. His was a perfectly typical American lifestyle in his formative years, except for his atypical fascination with stocks that probably grew from an early interest in horse racing (in truth, gambling and investing/trading are rather alike, in attracting people with an appetite for risk and an affinity for numbers). Probably he toyed with various techniques of playing the stock market before he, apparently, had an epiphany after reading Benjamin Graham's "The Intelligent Investor" when in university; he subsequently studied investment under Benjamin Graham at Columbia and then worked in the latter's investment firm for two years.

Buffett's basic investment philosophy were shaped from his academic and professional stints with Graham, generally acknowledged as the father of modern value investing. It was there that he learnt to view buying shares as buying a piece of a company's business, and to see intrinsic value of the business as separate from its share price. Later in his life he would integrate the ideas of Philip Fisher into his investment philosophy ie. that of growth investing, where the focus was not so much on margin of safety (typically seen as trading below NTA) but on buying great business franchises which enjoyed consumer loyalty and steady long-term growth. Some term Buffett's integrated investment approach GARP, or Growth At a Reasonable Price (But really, are value investing and growth investing so different? Ultimately, both aim to maximize the business value/share price ratio before buying, except that the focal point is different: value investing on share price, growth investing on business value).

Buffett's key triumphs have come in his purchase of so-called "consumer monopolies" (ie. excellent franchise enjoying great brand value) at bargain prices. First there was American Express in 1964 during the salad oil scandal (find out more about it yourself), Walt Disney Co. in 1965, Washington Post in 1973 during a management succession crisis, Capital Cities/ABC in 1985, and then Coca-Cola and Gillette in the mid-to-late 1980s. Each of these picks rewarded him manyfold. For example, his Gillette and Coca-Cola stock each yielded eight-to-ten baggers between 1990 to 1999.

Yet Warren Buffett's stock-picking acumen is only part of the story. There are several other facets to the man that are as admirable. Firstly, he had the moral and intellectual courage to dissolve his investment partnership in 1969 because he felt unable to find any bargains on the market. That was at the height of the bull market and he had some nerve to exit at that point. As it turned out, it was the prelude to a huge secular bear market in the 1970s: Buffett was spot-on. This courage of conviction was also exhibited during the dot-com boom when he steadfastly refused to invest in the tech stocks which he felt unable to value because he couldn't figure out the technology and how to value it. As it turned out, the market hadn't either: it had just been a massive manifestation of the greater fool game. Secondly, he exhibited superb strategic thinking in recognising that insurance companies, more than any other business, would allow him access to massive amounts of cash (the "float" otherwise known as the insurance premiums) which he could deploy to create even more wealth. Today Berkshire Hathaway, Buffett's holding company, is more than anything else a collection of insurance companies such as General Re and GEICO. Thirdly, he is marvellously articulate about his investment philosophy: just go read a collection of Buffett's essays or if you're rich enough, buy a Berkshire share worth $89,000 at last count and attend his AGM together with thousands of other Buffett fans to hear him in live action fielding questions. I haven't, but I just might before the legend passes on, as all must eventually do.

(1) Money Masters of Our Time (John Train)
(2) Stingy Investor: Warren Buffett (a new link added on Jan 06




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