Lessons from the world’s richest man

by Henrylito D. Tacio

“(The perfect amount of money to leave children is) enough money so that they would feel they could do anything, but not so much that they could do nothing.” Do you know who is the richest person in the world today?  It’s Warren Edward Buffett, the man who said the statement above.  An American businessman, and philanthropist, he is regarded as one of the world’s greatest stock market investors and is the largest shareholder and chief executive officer of Berkshire Hathaway.  The Forbes reported that as of March 5, 2008, he has an estimated net worth of around US$62 billion. 

Often called the “Oracle of Omaha,” Buffett is noted for his adherence to the value investing philosophy.  In his Chairman’s Letter in 2005, he wrote: “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing:  He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investor as a whole, returns decrease as motion increases.” 

Actually, his philosophy on business investing is a modification of an approach by his mentor, Benjamin Graham, who bought companies because they were cheap compared with their intrinsic value.  He was of the belief that as long as the market undervalued them relative to their intrinsic value he was making a solid investment.  He reasoned that the market will eventually realize it has undervalued the company and will correct its course regardless of what type of business the company was in.  In addition, he believed that the business has to have solid economics behind it. 

Here’s one story shared to him by his mentor: “Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled—we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!” Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of them. There may be some truth to that rumor after all.” 

According to Wikipedia, the free encyclopedia, Buffett also concentrates on when to buy. He does not want to invest in businesses with indiscernible value. He will wait for market corrections or downturns to buy solid businesses at reasonable prices, since stock market downturns present buying opportunities. 

“I call investing the greatest business in the world because you never have to swing,” he once said.  “You stand at the plate, the pitcher throws you General Motors at 47!  U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost.  All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.” 

What makes Buffett so successful and very wealthy?  Perhaps a closer look at his earlier life will give us some glimpse and ideas.  For instance, in his senior year of high school, 15-year-old Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in a barber shop. Within months, they owned three machines in different locations.  

Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well,” he would say later. 

He was determined to do what he wants to do in life.  When he graduated from Columbia  University, he wanted to work on Wall Street.  He offered to work for his would-be mentor Graham for free but the latter refused.  He purchased a Sinclair gas station as a side investment, but that venture did not work out as well as he had hoped.  Meanwhile, he worked as a stockbroker.

During that time, Buffett also took a Dale Carnegie public speaking course. Using what he learned, he felt confident enough to teach a night class at the University of Nebraska. 

In 1960, when he was already 30 years old, he asked one of his partners, a doctor, to find ten other doctors who will be willing to invest $10,000 each into his partnership. Eventually, eleven doctors agreed to invest.  Two years later, he discovered a textile manufacturing firm, Berkshire Hathaway. His partnerships began purchasing shares at $7.60 per share. 

As chairman of Berkshire Hathaway, began writing his now-famous annual letters to shareholders.  One of the most famous letters was penned in 2000.  He wrote: “The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.  

Buffett continued: “After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.” 

In 1973, Berkshire began to acquire stock in the Washington Post Company.  In 1977, Berkshire indirectly purchased the ‘Buffalo Evening News’ for $32.5 million. In 1988, Buffett began buying stock in Coca-Cola Company, eventually purchasing up to 7 percent of the company for $1.02 billion. It would turn out to be one of Berkshire’s most lucrative investments. 

The rest is now history.   

Buffett is also a noted philanthropist. In 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill and Melinda Gates Foundation.  In 2007, Buffett was listed among Time’s 100 Most Influential People in The World. 

I always knew I was going to be rich. I don’t think I ever doubted it for a minute,” he once disclosed. 

For comments, write me at henrytacio@gmail.com

Advertisements

2 responses to “Lessons from the world’s richest man

  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. Pingback: Investments on The Finance World For News and Information Around The World On Finance » Blog Archive » Lessons from the world’s richest man

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s