Warren Buffett is an American business magnate and investor, who as the largest shareholder has served as the chairman and CEO of Berkshire Hathaway since 1970 (Wikipedia, 2018). He is considered one of the most successful investors in the world and has a net worth of $90 billion as of September 24, 2018, making him the third wealthiest person in the world (Forbes, 2018).
Buffett was born in Omaha, Nebraska to Howard and Leila Buffett. He started investing at a young age and bought his first stock at the age of 11and filed taxes in 1944 at the age of 13 (Page, December). He purchased his first piece of property at the age of 15, a 40-acre farm in Nebraska for which he paid $2000. He hired a farm laborer to work the farm, using the profits to help pay his way through college (Page, December). He eventually entered the Wharton School of the University of Pennsylvania in 1947 before transferring and graduating from University of Nebraska at the age of 19.
Warren emerged from college at age 20 with nearly $10,000 from his childhood businesses (Biography.com Editors, 2018). He went on to graduate from Columbia Business School, where he molded his investment philosophy around the concept of value investing, the practice of purchasing stocks that an investor believes is undervalued(Armstrong, Kotler, & Opresnik, 2017). He attended New York Institute of Finance to focus his economics background and soon after began various business partnerships, including one with Graham, another famous value investor (Wikipedia, 2018). He created the Buffett Partnership after meeting Charlie Munger, and his firm eventually acquired a textile manufacturing firm called Berkshire Hathaway and assumed its name to create a diversified holding company.
Buffett has been referred to as the ‘Oracle’ of Omaha by global media outlets (Forbes, 2018). He is noted for his adherence to value investing and for his personal frugality despite his immense wealth. Buffett is still living in the same Omaha, Nebraska house he purchased in 1958 for $31,500. He also eats at McDonalds nearly every day (Page, December). Buffett told Charlie Rose in 2006, ‘I don’t believe in dynastic wealth.’ (Page, December). His belief is that wealth should be earned through one’s own hard labor and should not just be passed on to their children. Buffett also favors inheritance taxes, and higher taxes on capital in general (Page, December).
Due to these beliefs, Buffett practices philanthropy at a staggering level, pledging to give away 99 percent of his fortune to worthy causes. He founded The Giving Pledge in 2009 with Bill Gates, whereby billionaires pledge to give away at least half of their fortunes, and has already donated nearly $35 billion, mostly through the Bill and Melinda Gates Foundation. He is also actively contributing to political causes, having endorsed Democratic candidate Hillary Clinton in the 2016 U.S. presidential election (Wikipedia, 2018) (Page, December).
The company was formed in the 1830s as the Valley Falls Company, and later turned Hathaway Manufacturing Company established in 1888 by Horatio Hathaway. The other half of the company was formed in 1929 was Berkshire Fine Spinning Associates. These two textile companies merged in 1955 to form what is now known as Berkshire Hathaway (Kristen, 2018) (Page, December). After the merger, Berkshire Hathaway was 10,000 employees strong and 15 factories. Although a huge company, profits started to decline and by the late 1950’s half of the plants had been sold, half the workforce laid off, and many plants only operated 4 days a week (Kristen, 2018).
Buffett made his first investment in the company in 1962; and he and his associates acquired it in 1965 (Page, December) (Kristen, 2018). After world War 2 textile prices were falling, and Buffett decided to make moves into diversification. He phased out most of the textile business and purchased companies that were managed and produced products the way he liked. This was a key feature in most of his future investments, opting for companies that were stable and positioned to grow. His diversification strategy included buying media and insurance companies, at first in Omaha, such as Indemnity Company and National Fire and Marine, as well as Sun Newspapers. Later he would expand outward and acquire Illinois National Bank and Trust in an effort to stabilize Berkshire Hathaway’s profits. He would continue this trend of expansion with the purchase of The Washington Post, Geico, and investments in oil with large purchases of Exxon shares (Chandler, 2014).
Berkshire Hathaway is now a multinational conglomerate is an American multinational conglomerate. The company now wholly owns GEICO, Dairy Queen, BNSF Railway, Lubrizol, Fruit of the Loom, Helzberg Diamonds, Long & Foster, FlightSafety International, Pampered Chef, and NetJets, and also owns 38.6% of Pilot Flying J; 26.7% of the Kraft Heinz Company (Barry, 2018). Berkshire Hathaway is currently the largest shareholder in United Airlines and Delta Air Lines, and a top three shareholder in Southwest Airlines and American Airlines. They have minor holdings in American Express, Wells Fargo, The Coca-Cola Company, Bank of America, and Apple (Barry, 2018).
Apple is now the largest equity holding that Berkshire currently owns, with a stake of 258 million shares at a worth of $57 billion. The company’s equity portfolio had an estimated worth of $192 billion at the end of the second quarter (Barry, 2018). Buffett, now 88 years old, still remains active in the day-to-day operations of his company. The stock continues to rise and is considered under-valued by many of his contemporaries.
Buffett’s Management Style
Warren Buffett is one of the most successful businessmen in history. His management style is based on 9 basic principles that he has used all his life and freely offers this advice to anyone.
- Play the long game: Stock shouldn’t be purchased with the sole intention of selling. The longer a stock is held, the better the outcome. Only buy stock in enterprises that you like and there is familiarity. Only sell when capital is needed (Michaels, 2018).
- Always learn new things and be humble: Learn something every day, face opportunities head-on, and never forget to be humble. If you live by this example, people that work for you will also (Michaels, 2018).
- Invest your own money: The trouble with using loans to invest in stock may cause an investor anxiety when the value of a stock drops and lead to poor decisions (Michaels, 2018).
- Build relationships and treat people well: Relationships are the basis for building trust both inside and outside of an organization. Inside, good relationships enable a positive corporate culture, increasing productivity and innovation. Treating people well keeps them happy, and a happy employee brings loyalty and longevity (Michaels, 2018). This could further the output to the market and increase customer satisfaction (Armstrong , Kotler, & Opresnik, 2017). This leads to building good relationships outside the corporation with suppliers and customers, providing for a stable base market from which to grow.
- Look to the future, not the past: Today’s investors do not profit from growth of the past long-term. Future growth should be the focus as past performance is not always a good indicator when choosing sustainable investments (Michaels, 2018).
- Higher costs does not always equate to superior products or services: Just because something cost more, doesn’t automatically make it a better choice or fit as an investment. High-priced investment consultants could be a waste of money as a financial product or service is available to people investing a few thousand dollars just as it is to the wealthy (Michaels, 2018). Serving the bottom of the pyramid a less-costly option opens up a larger market and increasing profitability (Daft, 2016).
- Avoid Herd Mentality: In 2004, Buffett said,” try to be fearful when others are greedy and greedy when others are fearful.” (Michaels, 2018). Sell stock when the vaue is high, not when there are issues and a fear that a stock won’t return to its high value.
- Know when to cut your losses: Sometimes a problem will only increase losses when investing more in an attempt to alleviate the problem only makes it worse. A dead end is a dead end, back out and start over with another idea (Michaels, 2018).
- Don’t focus too much on the money: Being rich is nice, but how you get there and the people who help and support you along the way are what matters most (Michaels, 2018).
Applying these general words of wisdom can also lead to success in management by building relationships, inspiring innovation, learning skills, and leading by example. These are the tenets that Warren Buffett lives by and his accomplishments, humility, and generosity have turned him and his legacy into a household name.
