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Well-Rounded Genius
Picking great stocks isnit the only thing Warren Buffett can do, says an author who writes and lectures on the Berkshire Hathaway chairman.
By Francis X. Gilpin
Associate Editor
The worldis most famous investor has been pigeonholed. Quite unfairly, thinks a self-professed expert on Warren E. Buffett.
iHeis a scientist when it comes to the science of investing, which is easily taught and learned,i Robert P. Miles says of Buffett. iBut what he is not well-known for is the art of managing.i
Buffett, 74, has assembled a formidable team of managers to run the various wholly owned subsidiaries of his Berkshire Hathaway Inc., from the Buffalo News daily newspaper to automobile insurer GEICO. Miles says the average net worth when the executives all get together is around $100 million. A few have even attained the billionaire status of their boss, according to Miles.
Miles, an author of three admiring books on Buffett, sung the praises of the Oracle of Omahais management philosophy in an entertaining speech and video presentation Oct. 12 before the Financial Analysts Society of Tampa Bay.
Thereis no quibbling with Buffettis performance. Anybody with the foresight to have handed Buffett $10,000 in 1956, when he cobbled together his first investment partnership, would be sitting on $350 million today. Thatis after taxes and other expenses, adds Miles.
iHe has created more millionaires and billionaires than any other capitalist, simply by investing in other peopleis businesses,i says Miles.
Eventually, Buffett bought more than stock in companies. He purchased entire companies, as Berkshire Hathawayis market capitalization leapt from $17 million to around $130 billion over the course of 40 years.
Miles thinks the true genius of Buffett emerged only when Buffett started having to hire people to run his far-flung but usually highly profitable enterprises. Buffett insists on managers with strong character and unshakable integrity.
Buffett once told his son: iIt takes 20 years to build a reputation and only five minutes to ruin it.i
The Buffett management philosophy was on full display in 1991. Sitting on the board of Salomon Inc. at the time, Buffett stepped in to save 8,000 jobs in the wake of a scandal involving bids on U.S. Treasury notes by the companyis Salomon Bros. investment unit.
Miles says Buffett told a congressional committee how he began the corporate cleanup: iIive explained to all of the employees at Salomon Bros. Inc. that if they lose money for the firm, I will be understanding. But, if they lose a shred of reputation, I will be ruthless.i
With the exception of his lengthy, extemporaneous remarks at Berkshire Hathawayis standing-room-only annual shareholder meetings, Buffett no longer accepts invitations to speak. But there is one exception to that, too. He will address college students, says Miles.
To help illustrate his intrinsic-value approach to investing, Buffett likes to ask young listeners to think about which classmate they would prefer to have provide them with 10% of that personis future earnings. Buffett says students donit usually pick the most athletic, the most popular or even the most studious peer. More times than not, they choose the classmate who is considered the most honest and trustworthy.
Buffett explains his investment philosophy to these audiences by trying to value a college education as he would a companyis stock.
The market value of the education would be the tuition cost. The book value might be the tuition plus the wages that a student forfeits by going to school for four years instead of working full time.
But, as with companies, Buffett says the most important measure of a college education is its intrinsic value. How much would a college graduate earn over a lifetime versus working without the degree?
In accounting parlance, Buffettis stock-picking method projects the future cash flows of a company and then discounts it back to present value. If market value is at least 25% below Buffettis estimate of present value, he might consider buying the stock.
iHe does the opposite of what the average person is going to do,i says Miles. iWarren looks at earnings. If there are no earnings, he cannot determine a value of an investment. Thatis one of the reasons heis stayed away from technology.i
His insistence on valuing a college education over a lifetime is indicative of how long Buffett likes to keep a stock. iHis favorite holding period is forever,i says Miles.
Five companies have passed the Buffett test and make up 70% of the Berkshire Hathaway stock portfolio: American Express Co., Coca-Cola Co., Gillette Co., Washington Post Co. and Wells Fargo & Co.
Of Buffettis interest in Gillette, Miles says, ihe loves the fact that two-and-a-half billion men go to sleep each night and grow whiskers and Gillette owns 70% of that market.i
Buffett goes against the grain in his personal life and politics as well. Miles declined to address the former in much detail.
In conservative Nebraska, Buffett is an atheist. But he was married for more than 50 years to the same woman. His wife died in July.
Susan Buffett left Omaha and her husband in 1977 for San Francisco, but the couple never divorced and remained close. Susie Buffett introduced her husband to a woman who became his mistress and with whom he lived openly for years. Friends of Buffett say it was not unusual, on special occasions, to receive a gift with a card signed in the names of all three.
The son of a libertarian Republican congressman from Nebraska, Warren Buffett tends to back Democrats, although he advises friends such as Arnold Schwarzenegger, Californiais GOP governor. He is supporting U.S. Sen. John Kerry of Massachusetts over President George W. Bush. Buffett has criticized Bush for lowering taxes on wealthy Americans instead of providing more tax relief to the middle class and poor.
Miles says Buffett possesses several characteristics of a certifiable genius.
For instance, his comprehension and linguistic skills allow Buffett to read up to five books a day. Miles says he furnished Buffett with a 400-page manuscript to be published as one of his Buffett books and Buffett called back before 7 a.m. the next day to point out six factual errors. Still, Miles says Buffett has praised his books.
Likewise, Buffett has extraordinary mathematical ability. Personal computers and calculators are absent from his office. Miles says Buffett does calculations for present and future value in his head.
Ready to celebrate his 75th birthday next summer, Buffett stays sharp by reading, walking on a treadmill for an hour every day, and playing bridge about 12 hours every week.
iIn fact, Warren says he wouldnit mind going to jail as long as he had three cellmates who all knew how to play bridge,i jokes Miles.
Despite his successes and riches, Buffett has remained surprisingly humble. The story of how he acquired and kept his companyis name demonstrates that.
Berkshire Hathaway was a Massachusetts manufacturer that Buffett bought in the 1960s. iHe could have changed his [companyis] name over 100 acquisitions ago,i says Miles. iBut he held on to [the name of] his largest investment mistake, Berkshire Hathaway, a New England textile mill that he had to close in 1985 because he was unable to sustain a profit due to cheaper, more competitive foreign labor.i
The Miles web site, www.robertpmiles.com, features a rotating series of Buffett quotes. A recent one read: iOf the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.i
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