A collection of Forbes articles on Warren Buffett from 1969 to 2005.
How Omaha Beats Wall Street
Forbes Discovered Warren Buffett In 1969, And This Early Interview Introduced The Iconic Investor To A Wide Audience For The First Time.
Warren Buffett has lived in Washington and New York and studied at Columbia University Business School, but he has never stayed in these places very long. He has always returned to his home town, Omaha, Nebr. If he were a doctor or lawyer r ordinary businessman, this might not be surprising. But Buffett is what is usually called a Wall Streeter, a Money Man. For the last 12 years he has been running one of the most spectacular investment portfolios in the country.
Since adjectives like “spectacular” don’t prove much, we’ll tell you exactly how spectacular Warren Buffett has been: $10,000 invested in his Buffett Partnership in 1957 is now worth $260,000. The partnership, recently at $100 million, has grown at an annual compounded rate of 31%. Over that 12-year period it hasn’t had one year in which it lost money. It gained 13% in 1962 and 20% in 1966, years when the Dow average fell 7% and 15%, respectively. It hasn’t lost money this year, either.
“Oh,” you say, “a hot stock man.” Not at all.
Warren Buffett has accomplished this through consistently following fundamentalist investment principles. A lot of young money men who now are turning in miserable performances began with the same investment ideas in the early Sixties but then forgot them in the Great Chase of the Hot Stock. Buffett, however, stayed with his principles. He doesn’t talk about concept companies or story stocks. He has never traded for a fast turn on an earnings report or bought little unknown companies, as Fred Carr does. He doesn’t hedge (i.e., go short) like A. W. Jones, who devised the hedge fund, Buffett is not a simple person, but he has simple tastes. He buys a stock for simple, basic reasons, not tortuous or sophisticated ones. His stocks, you might say, are sort of like Omaha.
His big successes over the years have been in the stocks of ordinary companies: American Express, not Control Data; Cleveland Worsted Mills, not Xerox; Walt Disney, not Kentucky Fried Chicken; Studebaker, not Teledyne. He won’t buy a conglomerate: They don’t make sense to him. Ditto technological companies: “I can’t understand them. They’re not my style.”
Buffett tells a story on himself: “William Morris of Control Data is a relative through marriage, and I could have bought it at 16 cents a share [now $150], but I asked: ‘Who needs another computer company?’”
Besides having no use for glamour stocks or conglomerates, Warren Buffett scorns what might be called the numerology approach to the stock market—charting, resistance points, trend lines and what have you. He’s a fundamentalist. “I’m 15% Phil Fisher,” he says, “and 85% Benjamin Graham.”
For the benefit of those not familiar with stock market literature we had better explain. Fisher and Graham are two of the great stock market fundamentalists. Fisher is what might be called a real-world fundamentalist. That is, he is primarily interested in a company’s products, its people, its relationships with dealers. Graham, the now retired coauthor of the textbook Security Analysis and the more readable The Intelligent Investor, could be called a statistical fundamentalist. That is, he analyzes the basic underlying statistics, assets, sales, capitalization and their relationship to the market price. Obviously neither method is much help in picking hot new stocks because hot new stocks, by definition, don’t have any fundamentals, statistical or otherwise.
Warren Buffett studied under Graham at Columbia, later worked for him at Graham Newman Corp. But let’s start from the beginning.
Born in Omaha in 1929, Buffett was taken to Washington in 1942 after his father, now deceased, was elected to the House of Representatives as a Republican. He lived there most of the time until his father retired permanently from politics in 1952. Back home in Nebraska, he studied at the University of Nebraska and pondered the stock market. “I’d been interested in the stock market from the time I was 11, when I marked the board here at Harris Upham where my father was a broker. I ran the gamut, stock tips, the Magee charting stuff, everything. Then I picked up Graham’s Security Analysis. Reading it was like seeing the light.” The light led Warren Buffett back East where he studied under the Master at Columbia Business School. Then back to Omaha and selling securities for two years. In 1954, when he was 25, he started Buffett Partnership, Ltd. with $100,000 and seven limited partners (he is the only general partner). The arrangement, still in effect, provided for Buffett to get 25% of the annual profits after each partner got 6% on his money. In 12 years this arrangement made Buffett a very rich man indeed. (He made us promise not to use a number, but figure out for yourself what would happen to even a small sum compounded for 13 years at 31%!)
Warren Buffett has applied Graham’s principles quite systematically. Says Graham in The Intelligent Investor: “Investment is most intelligent when it is most business-like”—in other words, not swayed by emotions, hopes, fads. This is Buffett’s most important tenet. “When I buy a stock,” Buffett says, “I think of it in terms of buying a whole company just as if I were buying the store down the street. If I were buying the store, I’d want to know all about it. I mean, look at what Walt Disney was worth on the stock market in the first half of 1966. The price per share was $53, and this didn’t look especially cheap, but on that basis you could buy the whole company for $80 million when Snow White, Swiss Family Robinson and some other cartoons, which had been written off the books, were worth that much. And then you had Disneyland and Walt Disney, a genius, as a partner.”
TEACHER GRAHAM: … to distill the secret of sound investment into three words, we venture the motto: Margin of Safety.
PUPIL BUFFETT: I try to buy a dollar for 60 cents, and if I think I can get that, then I don’t worry too much about when. A perfect example of this is British Columbia Power. In 1962, when it was being nationalized, everyone knew that the provincial government was going to pay at least X dollars and yon could buy it for X minus, say, 5. As it turned out, the government paid a lot more.
GRAHAM: The investor with a portfolio of sound stocks … should neither be concerned by sizable declines nor become excited by sizable advances.
BUFFETT: Imagine if you owned grocery store and you had a manic-depressive partner who one day would offer to sell you his share of the business for a dollar. Then the next day because the sun was shining or for no reason at all wouldn’t sell for any price. That’s what the market is like and why you can’t buy and sell on its terms. You have to buy and sell when you want to.
Almost any of Warren Buffett's investments fall into this category, since he buys them when the price is going down