Warren E. Buffett

Family: Son of Howard Buffett (banker, investment broker, and four-term U.S. representative) and Leila Stahl (clerk, secretary, and homemaker); married Susan Thompson; children: three.

Career: Buffett Partnership, partner, 1956–1969; Berkshire Hathaway, 1969–, chairman and chief executive officer.

■ Warren E. Buffett was considered the second-wealthiest person in the United States in the early 2000s and the only one to have made his money through stock investing, as president and chief executive officer of Berkshire Hathaway Holdings, the most expensive and profitable listing on the New York Stock Exchange. Buffett, a deceptively shy and self-effacing man, sustained a reputation as the most astute investor in the United States for half of the twentieth century. He had become a genius at value investing and in the critical discernment of corporate talent and management. Conservative to a fault where money was concerned, he sustained a liberal, almost libertarian image in public life. Investors who followed his lead all became comfortably well off or even extraordinarily wealthy. His every investment was founded on an obligation to his investors to outperform every performance indicator.

LAYING THE FOUNDATION

Buffett created Berkshire Hathaway in 1969, after shutting down his 13-year-long partnership with a select group of seven

recruited investors (from among his family and friends). This group, formed in 1956, put in a total of $105,000, of which only $100 was Buffett's. By 1962 the group's capital had grown to more than $7 million, more than $1 million of which belonged to Buffett. He charged a fee of only 25 percent of profits above 6 percent, and he would forgo his fee if his performance did not exceed the return on government bonds, which yielded the same 6 percent.

Buffett alone had authority to make investments for the partnership, and he would answer no questions regarding them. New investments were allowed only once or twice annually, and he broadened his investor base as his profits grew, bringing in 90 more limited partners from throughout the nation at $100,000 each. (Laurence Tisch of Loews and CBS put in $300,000.) Buffett incorporated the group as Buffett Partnerships Limited and opened an office in Kiewit Plaza. This location would endure as the headquarters for what was to become Berkshire Hathaway, the most successful investment company in history. Within 10 years Buffett had assets of $44 million, of which nearly $7 million was his. In 1969 he determined that further suitable investments were unavailable and began to liquidate the partnership. By then the assets had grown to $104 million; Buffett's share came to more than $25 million. He had always said that someday he would be wealthy, but for Buffett this was only the beginning.

Buffett had become a master at arbitrage investing, taking large positions in stocks of companies that his research showed to be ripe for mergers, liquidations, or takeovers. He used margin borrowing to gain leverage, which helped him establish partnership positions that put him on corporate boards, where he could exercise influence. Undervalued companies were a specialty, as they proved vulnerable to large investments that enabled him to exert pressure for control. This was his key to gaining control of Berkshire Hathaway, which was to become the keystone of his rise to financial power.

He was joined in his enterprise in 1962 by Charles Munger, who became virtually an alter ego. Munger was possessed of a brilliant mind and a rapier wit and tongue, and the two became partners for over 40 years. During the years of the Buffett Partnership, they invested in a group of stagnant knitting mills that were slowly withering in New England. This was Berkshire Hathaway, which consisted of a struggling milling entity in the town of New Bedford, Massachusetts. Buffett examined the books of the company and began to discern greater value than was evident at first glance. The long history of the fabric industry in New England and the resolute men who had shaped it intrigued Buffett. He set about quietly purchasing blocks of shares as the stock began to slide. An internal fight between relatives over the future of the company played into his hands.

He visited the main plant in New Bedford and was shown the operations by Kenneth Chace. Chace was open and candid and shared with Buffett forty years' worth of corporate statements regarding the company. Buffett continued buying the stock both directly and through brokerage houses, and he saw in Chace a man who was virtually the model of the kind of business personality that interested him. Buffett invested in companies, but he always made sure that he was investing in the right kind of people. Chace was offered the presidency of the company as soon as Buffett took controlling interest. When he liquidated his original partnership, Buffett kept 29 percent of Berkshire, which would become the foundation of his new enterprise, the holding company Berkshire Hathaway.

THE BOY BECOMES THE MAN

When he was asked how he had discerned any value in his investments, Buffett said simply that he read thousands of annual reports and corporate statements. Value Line, Moody's, and Standard and Poor's were the core of his studies, followed by corporate publications. Buffett saw the library as the true basis of anyone's education; the fact that it was cheaper than the cost of attending college warmed his conservative heart even more. Buffett did not like to spend; he was a gatherer and a holder. His childhood was replete with stories of youthful enterprise, beginning at the age of six, when he bought six-packs of cola for 25 cents and then sold individual bottles for 5 cents each. He scoured golf courses for lost balls, which he then sold individually and by the dozen. When his father went to the U.S. Congress, Buffett took over several paper routes conveniently confined to large apartment houses. He kept careful records of all his customers, and when someone did not renew a subscription, he was quick to remind them and even to sell them a competing newspaper.

Buffett was grateful when his father, who had served four terms in the U.S. Congress, lost one of his campaigns, and the family left Washington, D.C. His father was a staunch conservative and a member of the John Birch Society, which was dedicated to combating liberal, socialist, or communist tendencies in society. His father always asked whether legislation "would add or subtract from human liberty." When he returned to Omaha, he put the young Warren to work in his brokerage office, chalking prices and quotations. With his mathematical mind, he enjoyed the job immensely, and the experience was to serve him well in his future career.

Back home in Omaha, Buffett used $1,200 saved from his paper routes to buy 40 acres of land, which he leased out to a farmer. He also developed a keen interest in horse racing. The statistics involved with weights, speed ratings, pace, past performance, and breeding variables intrigued him. He formed a partnership with a friend to print the "Stable Boy's Tip Sheet," sold at Ak-Sar-Ben racetrack. He and a partner also went into the pinball machine business, which generated a nice profit. His first venture into the stock market was at the age of 11, when he bought three shares each of Cities Service stock for his sister and himself at $38 and saw it drop to $27 and then climb to $40, at which point he sold, garnering a profit after costs of $5. The same stock then began to climb, reaching $200. This was a lesson to Buffett about staying in the market.

FOUNDATIONS OF LEARNING

While Buffett admired and loved his father, he tried to stay clear of his mother, who was given to rages that traumatized her children. To keep out of her way, Buffett spent more time in his father's offices. He was fascinated by numbers and money, especially how money could grow through compound interest. The notion of compounding interest never ceased to intrigue and delight him. He could compute and project interest rates off the top of his head in mid-conversation. His lifelong guiding credos were "Number One: Never Lose Money!" and "Number Two: Never Forget Number One!"