Tuesday, March 27, 2007

Why I like Warren Buffett

Is there anyone anywhere who has more nicknames than Warren Buffett or who has more books written about him in investment? Vanity fair calls him the Forest Gump of finance.

He’s been dubbed the “Oracle of Omaha, Omaha’s plain dealer, the corn-fed capitalist, St. Warren and the financial world’s Will Rogers,” says Janet Lowe in the introduction to her book “Warren Buffett speaks: Wit and Wisdom from the World’s Greatest Investor.”

Needless to say, I like and admire Warren Buffett.

He’s as much of an enigma as he is a financial genius. Despite his immense wealth, he is famous for living an unpretentious and frugal lifestyle. He still lives in the same house he bought in 1958 for $31.500. His annual salary is $100,000, tiny by any standards of senior executive of corporation of all types.

He was born August 30, 1930, in Omaha, Nebraska. He attended grade school there, junior high and high school in Washington after his father was elected to Congress. He dropped out of the University of Pennsylvania’s Wharton School and finished his degree at the University of Nebraska. Here’s the mother of all disaster in the modern history of university enlistment. He was rejected by Harvard’s graduate school and was accepted at Columbia where he met and was mentored by Benjamin Graham, the investment fundamentalist, alongside with future value investor like Walter Schloss and Irving Kahn. This could be the luckiest mistake Harvard can commit by doing the world a great favor by rejecting him.

Buffett’s current company Berkshire Hathaway is an investment holding company where stock has traded for as little as $7.50 in 1965 to as much as $115,000 per share recently.

The investment world doesn’t necessarily hang on every word from the mouth of Warren but it does listen. Here are a few excerpts of Mr. Buffett’s wits and wisdom: “Rule No.1: Never lose money. Rule No.2: Never forget Rule 1.

He often uses the advice of Ben Graham and quotes from Ben’s books, “The Intelligent Investor.” I consider there to be three fundamental ideas, ideas that if they are really ground into your intellectual framework, I don’t see any other way but to do reasonably well in investing. None of them are complicated and take supreme mathematical talent of anything or the sort.

Ben said, “You should look at stocks as small pieces of the business. (Market) Fluctuations are your friend rather than your enemy – profit from folly rather than participate in it – the three most important words ‘Margin of Safety.’”

Those ideas, whether 50 years ago, presently or 100 years later, as long as capitalism prevails, will be regarded as the three cornerstones of sound investing.

I love the “profit from folly” idea. Most people panic when the market drops or when the stock they bought at which is already cheap drops yet further. If you are paying 40 cents for a dollar and tomorrow someone is selling the dollar yet lower at 30 cents, it doesn’t make the value bought today lower. The pros hang in there. They invest on the downturn. They make money when others are losing, buying into their inefficiency, by insisting on having a “margin of safety.”

Buffett’s and Ben’s advice is to ignore the market moods. Ben said, “The market is there to serve you. Not to instruct you.” Warren said, “The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stock, we invest in businesses.”

”If we find a company we like, the level of the market will not impact our decisions. We will decide company by company. We spend essentially no time thinking about macroeconomics factors….We simply try to focus on businesses that we think we understand and where we like the price and management. ”For some reason, people like their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.”
From this brief glimpse at a few of Mr. Buffett’s statements I get a clearer understanding of why he is the self-made “Billionaire from Nebraska.”

Notable Quote: “It’s an old principle. You don’t have to make it back the way you lost it.” — Warren Buffett.

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