The difference between successful people and really successful people is that really successful people say no to almost everything. — Warren Buffett
THE annual parade of boldface names at the World Economic Forum in Davos is always striking. But just as notable are the luminaries who avoid Davos, despite repeated invitations.
One of those is legendary investor Warren Buffett. He is often portrayed as a folksy, regular old chum who has a knack for picking stocks. But he is anything other than a regular guy.
Born in Nebraska in 1930, Buffett demonstrated a knack for business matters as a young boy. Friends have described him as a mathematical prodigy who could add columns of numbers in his head, a talent he has occasionally demonstrated in his later years.
He often visited his father’s stockbrokerage, where he would chalk up the stock prices.
He made his first investment at age 11, buying three shares of Cities Service Preferred at $38 a share. The stock dropped to $27, but Buffett held on until it reached $40, when he sold — only to regret the decision when Cities Service shot up to nearly $200 a share.
By the age of 12 he was running his own businesses as a paperboy and selling (his own) horseracing tip sheets. That same year, he filed his first tax return, claiming his bike as a $35 tax deduction. At age 14, he reportedly bought a 40-acre farm with $1,200 in savings.
Buffett enrolled at the University of Pennsylvania to study business at 16. He moved to the University of Nebraska and emerged at age 20 with $10,000 in cash from his childhood businesses. Influenced by Benjamin Graham’s 1949 book, The Intelligent Investor, he enrolled at Columbia Business School to study under the economist and investor. After earning his Master’s degree in 1951, he offered to work for Graham, who turned him down (even though he was his only student to ever receive an A+ grade) as he wasn’t Jewish.
Buffett returned to Omaha and worked as a stockbroker until 1954, when he finally went to work for Graham. In 1956, he went back to Omaha to open his own partnership. The rest, as they say, is history. But it’s a twisted history, and few myths in the world of finance are more pernicious than the many that surround Buffet’s career. Mainly, the old fiction that you can buy what you know (say, Coca-Cola because you like Coke, or American Express because you like its credit cards) and watch it grow to the sky, and the belief in "buy and hold" as the single best way to accumulate wealth.
As Cullen Roche says in his book, Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance, who better to sell the idea than the financial firms? "After all, a quick allocation in a plain vanilla ‘value’ fund will get you a near-replica of the Warren Buffett approach to value investing, right? Or maybe better yet, reading six months of Wall Street Journals and reviewing the price:earnings ratios of your favourite local public companies will send you on your way to successful retirement."
Financial firms want us to believe the myth of Buffett. By oversimplifying this glorified investor, the general public gets the false perception that portfolio management is so easy a caveman can do it. In reality, Buffett is more entrepreneur than stock picker. Like most of the others on Forbes 400 list of wealthiest people, he did not accumulate his wealth in anything that closely resembles what most of us do by opening brokerage accounts and allocating savings into various assets.
As Roche explains: "The original Buffett Partners fund is particularly interesting due to Buffett’s recent berating of hedge fund performance and fees. Ironically, Buffett Partnership charged 25% of profits exceeding 6% in the fund. This is a big part of how Buffett grew his wealth so quickly. He was running a hedge fund no different than today’s funds. And it wasn’t just some value fund.
"Buffett often used leverage and at times had his entire fund invested in just a few stocks. One famous position was his purchase of Dempster Mill in which he pulled one of the first-known activist hedge fund moves by installing his own management at the firm."
Buffett, the activist hedge fund manager? Yes. He was one of the first. "His venture to purchase Berkshire Hathaway was similar," says Roche.
"Berkshire Hathaway isn’t your average conglomerate. The brilliance behind Buffett’s construction of Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option-writing house. It became a holding company that he could run this insurance-writing business through while using the cash flow to build a conglomerate.
"But Buffett wasn’t just buying Coca-Cola and Geico. He was engaging in real investment in many cases by seeding capital and playing a much more active entrepreneurial role in the production process. He was also placing complex bets in derivatives markets, options markets and bond markets. The perception that he is a pure stock picker is a myth … the portfolio of stocks he has become famous for represents less than 30% of Berkshire’s enterprise value. His most famous holdings (Coke, American Express and Moody’s) account for roughly 8% of its total market cap."
Two of Buffett’s most famous purchases weren’t traditional value picks at all, but distressed plays. His original purchases of American Express and Geico occurred when both companies were teetering on the edge of insolvency. These deals are more akin to what many modern-day distressed debt hedge funds do.
Roche again: "Make no mistake, Buffett has the killer instinct … Just look at the deal he struck with Goldman Sachs and GE in 2008. He practically stepped on their throats when they needed to raise capital in the depths of the financial crisis, and profited handsomely. Buffett described them as long-term value plays. But, if a distressed-debt hedge fund had made the same move, the fund manager might have been described as a thief attacking two great American corporations while they were down."
As for Davos, London mayor Boris Johnson, after attending once, dismissed it as "a constellation of egos involved in massive mutual orgies of adulation".