by Harini Dhinakaran
Warren Edward Buffett, a renowned investment guru and one of the richest businessmen in the world, was born on August 30, 1930, to his mother Leila Stahl Buffett, a homemaker and father Howard, a stockbroker-turned-Congressman. He has two sisters, a younger and the other elder.
Buffett was born with business in his blood. He demonstrated remarkable business abilities and an amazing aptitude for both money and business at a very young age.
Acquaintances recount that he was a mathematical prodigy and he had an uncanny ability to calculate columns of numbers very easily— this is a feat Warren still amazes business colleagues with today.
At the mere age of six, Buffett purchased six-packs of Coca-Cola from a grocery store owned by his grandfather for about twenty-five cents and resold each of the bottles for a nickel, pocketing a five-cent profit. Children in his age group were busy with games, but Warren was making money. Five years later, Buffett took his first step into the world of high finance.
He used to visit the stock brokerage shop that was owned by his father and wrote down the stock prices on the blackboard in the office. When he was 11, he made his first move in the field of investment and purchased three shares of Cities Service at $38 per share for both himself and his sister, Doris.
As soon as he bought the share, the stock fell to $27 per share. A frightened but resilient Warren held his shares adamantly until they rebounded to $40. He then decided to sell them immediately, which he realized was soon a mistake. The stocks had soared up to $200. But this incident taught him a lesson: patience is a virtue.
In 1947, Warren Buffett graduated from high school at 16 years old. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to approximately $42,000 in 2000). His father had other plans and urged his son to attend the Wharton Business School at the University of Pennsylvania.
Warren undertook his graduate studies at the University of Pennsylvania to study business. He remained in the university for a period of two years and then moved to the University of Nebraska to finish up his degree. He emerged from college at age 20 with nearly $10,000 from his childhood businesses.
Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which rejected him as "too young."
Slighted, Warren then applied to Columbia University, where esteemed investors Ben Graham and David Dodd taught, both well-known securities analysts —an experience that Warren still treasures.
He had once stated in an interview that Graham's book, The Intelligent Investor, had given lots of inputs to him about life and set him on the path of professional analysis to the investment markets. In the year, 1951 he received a master's degree in economics. He further pursued his education at the New York Institute of Finance.
Mentor Ben Graham
Ben Graham is often called the "Dean of Wall Street" and was one of the earliest proponents of value investing. He had become well known during the 1920s. At a time when the rest of the world was approaching the investment arena with a lot of skepticism, Graham made it a point to search for stocks that were so inexpensive they were almost completely devoid of risk. One of his best-known calls was the Northern PipeLine, an oil transportation company managed by the Rockefellers.
As a 40-year-old, Ben Graham published "Security Analysis," which was one of the most notable works ever penned on the stock market. It was through this book that Graham came up with the principle of "intrinsic" business value, a measure of a business's true worth that was completely and totally independent of the stock price.
Flying through his graduate studies at Columbia University, Warren had a stellar performance and was the only student ever to earn an A+ in one of Graham's classes. However, both Graham and Buffett's father advised him not to work on Wall Street after he graduated.
Absolutely adamant, stubborn, and determined, Buffet offered to work for the Graham partnership for free. However, Ben turned him down.
Gaining Control of Berkshire Hathaway
Buffet, on May 10, 1965, after having accumulated a 49% share, named himself the director of Berkshire Hathaway. The management of the company was terrible and had driven the company to the ground. He was positive that with a bit of tweaking in the management strategies, the company could do wonders.
As an immediate effect to becoming the director, Mr. Buffett made Ken Chace president of the company, giving him complete autonomy over the organization. Although he refused to award stock options on the basis that it was unfair to shareholders, Buffett agreed to cosign a loan for $18,000 for his new president to purchase 1,000 shares of the company's stock.
In the subsequent years, Warren requested National Indemnity's founder and controlling shareholder, Jack Ringwalt, to his office. In that meeting, Ringwalt told Buffett the company was worth at least $50 per share, a $17 premium above its then-trading price of $33.
Buffet then offered to buy the whole company on the spot for $8.6 million dollars. That very year, Berkshire paid out a dividend of 10 cents on its outstanding stock. Buffet made sure that this never happened again.
In 1970, Buffett named himself Chairman of the Board of Berkshire Hathaway and for the first time, wrote the letter to the shareholders. That same year, the chairman's capital allocation began to display his prudence.
Profits in textiles were very pitiful, while insurance and banking each brought in $2.1 million and $2.6 million dollars. The paltry cash brought in from the struggling looms in New Bedford, Massachusetts had provided the stream of capital necessary to start building Berkshire Hathaway into what it has become today.
A year or so later, Warren Buffett was offered the chance to buy a company by the name of See's Candy. The gourmet chocolate maker sold its own brand of candies to its customers at a premium to regular confectionary treats. The balance sheet reflected what Californians already knew: they were more than willing to pay a bit extra for the special See's taste.
The businessman decided Berkshire would be willing to purchase the company for $25 million in cash. See's owners were holding out for $30 million, but soon conceded. It was the biggest investment Berkshire or Buffett had ever made.
Following several investments and an SEC investigation, Buffett began to see Berkshire Hathaway's net worth climb. From 1965 to 1975, the company's book value rose from $20 per share to around $95. It was also during this period that Warren made his final purchases of Berkshire stock.
Years later, he had invested more than $15.4 million dollars into the company at an average cost of $32.45 per share.) This brought his ownership to over 43% of the stock. He placed his entire fortune into Berkshire. He had no personal holdings, and thus the company had become his sole investment vehicle.
In the year 1976, Buffet once again became involved with GEICO. The company had recently reported amazingly high losses, and its stock was pummeled down to $2 per share. He immediately realized that the basic business was still intact; most of the problems were caused by an adept management team.
Subsequently, Berkshire managed to build up its position and reaped millions in profits. Years later, the insurance giant would become a fully owned subsidiary of Berkshire.
Two Nickels to Rub Together
By the late '70s, Buffett’s reputation had grown to the point that even a rumor that Buffett was buying stock would shoot its price up 10%. Berkshire Hathaway's stock was trading at more than $290 a share, and Buffett's personal wealth was almost $140 million. The irony was that he never sold a single share of his company, meaning his entire available cash was the $50,000 salary he received.
Warren was then prompted to start investing in his personal life. According to Roger Lowenstein's book, "Buffett," Warren was far more speculative with his own investments than he was with Berkshire's. At one point he bought copper futures, which were unadulterated speculation.
In a short time, he had made $3 million dollars. When prompted to invest in real estate by a friend, he responded: "Why should I buy real estate when the stock market is so easy?"
Warren Buffett in 1983, walked into Nebraska Furniture Mart, the multimillion-dollar furniture retailer which was developed by Rose Blumpkin. Speaking to Mrs. B, as local residents called her, Buffett asked if she would be interested in selling the store to Berkshire Hathaway, to which she simply agreed, and wanted to part for “60 million”
Scott & Fetzer was another great investment. The company itself had been the target of a takeover when an LPO was launched by Ralph Schey, the chairman.
The maker of Kirby vacuum cleaners and World Book encyclopedia, S&F was panicking. Buffett dropped a message to the company asking them to call if they were interested in a merger, as he had owned a quarter of a million shares, the phone rang almost immediately. Berkshire offered $60 per share in cold, hard, cash.
Due to his success, he had become increasingly recognizable, and it was no longer comfortable for him to fly commercially. As a result, he bought a used Falcon aircraft for $850,000. The idea of luxury was a lifestyle that was hard for him to accept, but he loved the jet immensely. The passion for jets eventually, in part, led him to purchase Executive Jet in the 90s.
Buffett and Coke
A year later, in 1988, he started buying up Coca-Cola stock like an addict. His old neighbor, who became the president of Coca-Cola, noticed someone was loading up on shares and became concerned. After researching the transactions, he noticed the trades were being placed from the Midwest.
He immediately thought of Buffett, whom he called. Warren confessed to being the culprit and requested they don't speak of it until he was legally required to disclose his holdings at the 5% threshold. Within a few months, Berkshire owned 7% of the company or $1.02 billion dollars worth of the stock. In three years, Buffett's Coca-Cola stock would be worth more than the entire value of Berkshire when he made the investment.
Buffet at the Turn of the Millennium
During the late 1990s, the stock soared as high as $80,000 per share. Even with this epic feat, as the dot-com bubble burst, Warren Buffett was accused of "losing his touch." In 1999, when Berkshire reported a net increase of 0.5% per share, several newspapers made up stories about the demise of the "Oracle of Omaha."
Certain that the technology bubble would burst, Warren Buffett continued to do what he did best: allocate capital to great businesses that were selling below intrinsic value. His efforts were rewarded. When the markets finally did come to their senses, Warren Buffett was once again a star. Berkshire's stock recovered to its previous levels after falling to around $45,000 per share, and the man from Omaha was once again seen as an investment icon.