Of Permanent Value: The Story of Warren Buffett
October 28, 2006
Warren Buffett's Berkshire Hathaway was created by Buffett from a financial career he began while operating alone in his bedroom as a young man in Omaha. Even at the age of six, Buffett paid a quarter for a six pack of Cokes and sold each Coke for a nickel - a return of 20%. From then on he compounded his returns at slightly better than 20%. That's why he's a multi-billionaire - one of the richest people in the world.
But not every year is a good one and 1999 was Buffett's worst. Still, despite a sharp drop in the stock price, the book value - or the accounting value - of Berkshire remained virtually unchanged. And the intrinsic value, the true value of the company in the real world as it would be set by rational buyers and sellers - not by the fearful and greedy at the edge of the market - remained well above the stock price.
Today Berkshire is a huge insurance conglomerate which owns General Re Corp., one of the world's largest reinsurance companies, but which was hit by storm damage, movie flops, and a $20 million home fire in 1999. Berkshire owns GEICO, the fast-growing auto insurer.
Berkshire also is a significant shareholder in some of the greatest companies on earth: Coca-Cola, Gillette, American Express and Dun & Bradstreet - a brand name extravaganza.
In addition to these and other stocks worth about $35 billion, Berkshire owns about $30 billion in bonds and holds about $3 billion in cash.
General Re, GEICO, and Berkshire's other insurance businesses make up one of Buffett's secret weapons. The insurance empire provides about $25 billion of "float," or other people's money. Berkshire receives the money in the form of insurance premiums, then invests it, multiplying it profitably until time to pay off insurance claims.
Berkshire, often thought of as a clutch of stocks, is far more. The stock portfolio is one of its three legs. The second leg is the enormous insurance empire. A third leg is a large collection of businesses.
With the purchase of Executive Jet in 1998, Jordan's Furniture in 1999, and MidAmerican Energy, a Midwest utility which plans to buy other utilities, and CORT Business Services, the fifth in a string of furniture companies, and Ben Bridge Jeweler, the third in a string of jewelry companies, Berkshire is a constellation of operating businesses. Long known for painting business masterpieces, Buffett, at 70, is creating business galleries. The enormous stock portfolio, the insurance empire and the operating businesses all do one thing - throw off tons of cash to make new investments.
In the end, Buffett's fortune will go to his foundation making it the largest charity in the world. Buffett is more than a whiz stock-picker. He is the business muse of the world.
Although it is Buffett's genius ("smartest man in the country") and personality ("When I issue stock, I tend to break out in a rash.") which holds Berkshire together, he has help from an extraordinary group of people. First and foremost is Charles Munger who has offered advice for more than 40 years and has pulled Buffett away from investing in lesser quality stocks. Munger has helped Buffett see the advantages of brand name companies with consumer franchises, pricing power and durability. Buffett and Munger - in Buffett's words - became "mental partners" back in 1959. Munger jokes that he deserves some credit for hooking up with Buffett in the early days when Buffett had no outward appearances of success.
Buffett has been aided by Munger, Lou Simpson and Ajit Jain from within Berkshire. From outside Berkshire, he has counted on the help of a number of figures including Tom Murphy, Katharine Graham and Bill Ruane.