Warren Edward Buffett, who was often called the “Oracle of Omaha” or the “Sage of Omaha”, born August, 30th 1930 in Omaha, Nebraska. In his early age, Mr. Buffet started working in his grandfather’s grocery store. He purchased his first stock at age 11, which he ended up making a five-dollar profit on this investment. At age 14, he started working as a newspaper delivery boy. He got his bachelor’s degree from The University of Nebraska. Mr. Buffett graduated from Columbia Business School and earned M. S. in Economics in 1951. Shortly after completing college, Warren founded the Buffet partnership.
Warren Buffet married in 1951 and had three children. In 2008, Forbes magazine had ranked Mr. Buffett as the richest person in the world. Despite his immense wealth, he is noted for his value investing and his personal frugality. Even as a billionaire, he still lives in five bedroom stucco house in Omaha which he purchased for $31,500 in 1958. Buffett is also a notable philanthropist, having pledged to give away 85 percent of his fortune to the Gates Foundation. In 1999, Buffett was named as the top money manager of the twentieth century in a survey by Carson Group. In 2007, he was listed among Time’s 100 Most Influential People in the world.
He is known for his "value investing" and is the most famous disciple of value investing inventor Benjamin Graham. A simple, honest man with grandfatherly looks, Buffett is considered an intellectual genius who makes rapid decisions and decides on a major purchase with just a few days of research. Today, Warren Buffett the chairman and CEO of Berkshire Hathaway is unquestionably the most successful investor of our times. For the last four decades, Warren Buffett's annual letters to shareholders are a very valuable source in understanding his investment style and outlook about economy.
Focus on Leadership In my paper, the main focus will be on Warren Buffett’s leadership skills and investment style, which made him a legendary investor of all time. It is very fascinating to know why Warren Buffet became an American icon for millions of investors in the world. In my opinion, his market acumen spurred countless investors to take their first step of investment. It all started when Buffett started working with Benjamin Graham, a value investing Guru. In the beginning of his investment career, Mr. Buffet imitated his mentor’s investment style.
But slowly with the influence of his business partner and friend Charlie Munger, he began to focus on high-quality businesses with enduring competitive advantages. Many critics think with changing world economies, Mr. Buffett‘s value investing style will not be able to give good returns. Even after recent economic meltdown, many pundits have raised their eyebrows over his decision on investing in Goldman Sachs and GE as a preferred investor. But Mr. Buffett’s value investing strategy has proven them completely wrong. I believe Mr.
Buffett’s business knowledge, investment wisdom, independent thinking, emotional stability, and understanding of both human and institutional behavior distinguish him from his peers. He is naturally programmed to recognize and avoid serious risks in investment business, which is vital to Berkshire Hathway’s long-term investment success. It took more than four decades for Buffett to establish Berkshire Hathaway as an investment empire which can give its investor more than 21% compounded return on their investment. Success of Berkshire Hathaway
After taking ownership control in Berkshire Hathaway in 1962, Buffett started making changes to the company’s business culture. Earlier, it was just a small family owned textile company. Under Buffett’s effective and action oriented leadership, Berkshire Hathaway became a diversified and investment conglomerate holding company. At the end of December 2008, the estimated employees on Berkshire Hathaway’s payroll was more than 246,000. Today, Berkshire Hathaway is a publicly traded company in United States and has offices in the U. S and worldwide. It manages a number of subsidiary companies across the globe.
Its sale has grown from a few thousand dollars to more than $107 billion. In the late 1970, it was Mr. Buffett’s decision to expand into insurance operations. Today, the company’s insurance operation is a major source of capital for Berkshire Hathaway’s other investments. When Buffett made a decision in expanding into insurance, the insurance industry was a booming business. He always made sure Berkshire’s insurance companies maintained capital strength at exceptionally high levels. This strength differentiated Berkshire’s insurance companies from their competitors.
Again this proves his market acumen and visionary ability which helped to see future trend and understand business well ahead of other rivals. After Warren Buffett converted Berkshire Hathaway from a textile to an insurance company, he started doing strategic acquisition. Initially he looked for reinsurance companies in the United States that had sound management, but were in need of capital to expand. In today’s economic uncertainties, Buffett’s saying will remain a guiding principal for all investors: “Be fearful when others are greedy; be greedy when others are scared for their capital”. Mr.
Buffett started expanding Berkshire Hathaway’s business into life, accident and health reinsurers. He did strategic investments and acquisition in internationally-based property and casualty reinsurers. In the late 19th century, when the financial market took a nose dive, Buffet was on shopping spree. He added utilities, energy, manufacturing, service, retailing, flight services, financial sectors and rail road companies. After the dot com and financial bust, we would agree with Buffet’s investment strategy “the business has to have solid economics behind it”. Warren Buffett is conservative and choosy in his investment decisions.
Unless he understands business very well, he will not make any impulsive investments. Even in the age of globalization and electronic commerce, Buffett’s advice remains a guiding principal for Berkshire Hathaway investments. As per Buffett, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price” Even at the age of 79, Mr. Buffett attends his office every day and makes investment decisions for his company. Today, many financial institutions and the government turn to Mr. Buffett for his advice on how to weather through the current financial storm which has turned global economy up-side down.
According to his admirers, Buffett has excellent people judging skills. Rich Santulli, CEO, NetJets, said, "He is the best judge of human talent there is. And people want to work for him. " In 38 years of Berkshire Hathaway history, not a single employee in the top management level has left to join another company. When Buffett gets controlling interest in business, he doesn’t interfere with the day to day business of the company. As a CEO, he makes sure to allocate enough capital to businesses with good economics and keep their existing management to lead the company.
Buffett's management style and hands-off approach has held strong appeal and created room for his managers to perform as owners and ultimate decision makers of their businesses. Buffett wants Berkshire Hathway's managers to think like owners, and he likes to leave them with a significant stake to make the ownership practical. Their rewards are tied exclusively to the achievements of their own businesses, but not those of Berkshire Hathaway. As a true leader, Buffett has various leadership skills; he delegates his responsibility to his managers. As a CEO, he has identified talented and capable individuals who can easily step into his shoes.
Buffett is grooming these individuals to become future Berkshire leaders. According to Buffett, he treats his managers as equals who know their business, customers, and can be trusted with anything from accounting honestly or about succession. Besides his skills in managing Berkshire's cash flow, Buffett is skilled in managing the company's balance sheet. Since taking over Berkshire Hathaway, Buffett has weighed every decision against its impact on the balance sheet. He has succeeded in building Berkshire into one of the few companies which has solid cash flow with the lowest cost of debt.
In recent financial turmoil, Buffet has invested in companies like GE, Goldman Sachs, etc. as a value investor for long term returns. This contrarian strategy is what led Berkshire Hathaway through dot com boom, bust, and financial meltdown. Buffet’s primary focus is not only on the financials of the organization under consideration, but also on its business practices, its attitude towards the customers, its current market standing, its competitive edge over other players in the market, and its potential to expand its business in the years to come.
As a CEO of the company, he understands financial and give tremendous importance to Berkshire investors. It is very natural that a layman will ask why the stock price of Berkshire Share “A” is so high ($100,000). In the last 4 decades, company never split the stock or gave dividend to its investors. This helps to increase stock price of Berkshire Hathaway. Also the high price automatically keeps short term investors or day traders out of the stock. Since there are very few short term investors, the stock price doesn’t fluctuate on a day to day basis. This benefits loyal investors to preserve their investment value.
Another company following Buffett’s strategy is Google, because they don’t want day traders to create volatility in the stock price and shake investor’s confidence. What is Economic moat investment and how it helps to grow Berkshire Hathaway? “It is a long term competitive advantage that allows company to earn oversize profit over time”. These types of companies have greater advantage over their competitors. Coca-Cola is very good example of a wide-moat company. Consumers are willing to pay more for Coke products than a generic one. Buffett always considers wide-moat companies for long term investment.
As a result of Buffett’s value investing philosophy his company owns a large number of businesses which are dominant players in their respective industries, specialize in various niche markets, or possess other unique characteristics to separate them from their competitors. This has been proven approach over the period of time. If you had invested $10,000 in Berkshire Hathaway in 1965, it would have grown to 51million dollars. Buffet’s Management Style Admirers of Buffett call superior system as Buffet’s system. It is self evident that in the Berkshire Corporate culture, Buffett has created a climate of confidence and freedom.
This environment generates better performance than suspicion in control. Buffett rewarded his performing managers with financial incentives. Trust is what ultimately distinguishes the Buffett and other CEO styles. This maestro’s magic method in his associate word; ‘Somehow Warren has been able to keep a diverse cast of characters working harder for him than they did for themselves. I see it every day - and I still don't know how he does it'. When Buffett does investment in new business or acquisition, he looks for individuals with independent thinking, emotional stability, and understanding human and institutional behavior.
He gives more importance to managerial brains, discipline, and integrity. These days lot of smart CEO lack these virtues. From Asia to America, CEOs are lacking business ethics and integrity. Buffet gives the highest significance to honesty, pride of products, and respect for customers. These critical variables are the pillars of Buffet’s success and emergence of Berkshire as an investment powerhouse. As per Buffett, “It is very important that at Berkshire, neither history nor the demands of owners impede intelligent decision-making. ”