Posted by: Susan Vollmer | 23 December 2007

Of Permanent Value – The Story Of Warren Buffett

This book, written by Andrew Kilpatrick, tells the story of Warren Buffett, a self-made billionaire from Omaha, who knew even as a child that he was destined for good fortune.  “He has said he has known all along, even as a youngster that he would be rich.”  And indeed, his vision of himself has come true and exceeded beyond what many could ever imagine.

 

At his own request, Warren did not receive an inheritance from his father.  Instead, he made money by choosing his own investments, seeking value and holding for the long term.  He leads a company called Berkshire Hathaway, which is based in Omaha; however, it is named after a New England textile mill.  The mill turned out to be one of his unsuccessful investments; yet the name lives on.  And through the success of his other investments, Berkshire Hathaway’s primary stock is the most expensive on the market today.  A secondary “B” stock has been created which opens the door for many others to own a piece of this unusual empire.

  * * * 

Warren observed that when The Washington Post Company went public, the shares were not doing well on the stock market.  In 1973, he began buying the shares, and Berkshire became the largest shareholder at the time, after the Graham family.

 

“The reason he could buy Post stock at a great price was because people just weren’t very enthusiastic about the world at the time.”

 

* * *

 

Some of the companies that Berkshire holds are insurance companies.  The benefit of the insurance industry is that the premiums provide low-cost money to invest, but it can be volatile.

 

In 1936, a company was formed called Government Employees Insurance Company (GEICO).  It was formed by an accountant who researched and discovered that government employees had fewer accidents than the overall population.  Originally, this was the target market.  The company later included other business segments with drivers from different industries.

 

By 1975, GEICO came close to bankruptcy.  From 1972 to 1974, states began requiring prior rate approvals due to rising costs and the introduction of no-fault insurance.  A new chief executive office was hired in May 1976 who took three steps to turn the company around:

 

1)      Operation Bootstrap – included increasing rates and reducing expenses

2)      Reinsurance – to share the risk

3)      Capital – Salomon Brothers underwrote a $76 million stock offering of approximately 34 million shares.

 

Berkshire is a primary shareholder of GEICO and has been listed as a permanent holding.  To help promote GEICO, you will find a link to request an insurance quote from the home page of Berkshire Hathaway at:

 

      http://www.berkshirehathaway.com

  

In 1992, Berkshire paid $125 million in claims resulting from the damage of Hurricane Andrew in Florida.  Warren wrote a letter to the shareholders which confirmed the payment and stated, “Whenever the choice is offered, we welcome the chance to forfeit stability of quarterly or annual earnings in exchange for greater long-term profitability.”

  * * * 

Warren’s son, Howard Buffett, was quoted as saying:  “My dad couldn’t run a lawnmower . . . (but) he once told me it takes a lifetime to build a reputation and five minutes to ruin it.”

 

It was a lesson that Warren not only taught his son but also major American corporations.  Warren was a large investor in a securities firm called Salomon in New York.  In 1991, this company became the focus of a bond trading scandal.  Warren stepped in to become the interim chairman.  Those who were involved in the scandal and in the cover up were let go.

 

To those who remained, Warren said, “If you lose money for the firm by bad decisions, I will be very understanding.  If you lose reputation for the firm, I will be ruthless.”  Warren told the sales force, “Everyone must be his own compliance officer.  That means that everything you do can be put on the front page of the newspaper, and there will be nothing that cannot stand up to scrutiny.”

Warren interviewed the senior officials remaining at Salomon and selected the person to lead the company based on integrity.  Through Warren’s involvement, Salomon worked with government regulators, and those clients who had left began to return to the company.

    

At a shareholder’s meeting in 1991, Warren shared advice from a former teacher and author named Ben Graham.  “You’re neither right nor wrong because other people agree with you.  You’re right because your facts are right and your reasoning is right.  That’s the only thing that makes you right.”

 * * * 

Warren does not look for popular or sexy products, but looks for basic items that he understands.  The author wrote: “Buffett was looking for that everyday, necessary product – and one that has to be replaced from time to time.”  This seemed to apply to some shoe companies that he invested in, along with Gillette razor blades and Kirby vacuum cleaners.  For refreshment and snacking, he enjoys Cherry Coke and See’s Candies, where Berkshire is also a stockholder.

 

One of the few luxuries Warren has allowed over the years is a corporate jet, which he has nicknamed “The Indefensible.”  When he dies, he has predicted there will be an increase in the sale of Coca-Cola.  “There actually will be a short-term bulge (in Coke sales) as I plan to have a large supply buried with me aboard the plane.”

 * * * 

He has described being a serious investor as similar to an investigative reporter.  He reads the annual reports of companies that he is considering plus he reads their competitors’ annual reports.  He looks for a great business that has a lower stock price due to misunderstandings or stigmas about the company.

 

In a 1990 annual report, he wrote, “The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry.  We want to do business in such an environment, not because we like pessimism but because we like the prices it produces.”

 

Warren also believes in limiting the number of investments within a portfolio.  “I can’t be involved in 50 or 75 things.  That’s a Noah’s Ark way of investing – you end with a zoo that way.  I like to put meaningful amounts of money in a few things.”

 

He proved this in the 1991 annual report by stating, “We own fewer stocks today at $7 billion than we did when our total portfolio was $20 million.”

 

Warren advocates that it requires more patience than intelligence to be a good investor.  His advice includes:

 

  • “Invest only in what you understand.”
  • “And only with someone you trust.”

  * * * 

The author of the book is clearly a fan and does disclose that he owns shares of  Berkshire Hathaway.  The author wrote, “The permanent value he has created is a statement – a statement about how to do things right, how to do them ethically, sensibly, simply and inexpensively.”  The author of the book went from being a newspaper reporter for about 20 years to being a stockbroker.  He said in the early years, he tried to sell shares of Berkshire Hathaway but potential clients would balk at the price of this stock, which paid no dividend and questioned, “How high can it go?”

 

Many people have asked this same question — “How high can it go?”  Only time will tell.

 

* * *

 

Reviewed by Susan Vollmer

http://www.susanv.com

Author of Legends, Leaders, Legacies

(Hopes to be a future shareholder in Berkshire one day)

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