Page last updated at 14:39 GMT, Sunday, 25 October 2009

Warren Buffett: Crisis, what crisis?


Warren Buffet explains his deal with Goldman Sachs

By Charles Miller
Money Programme

The world's greatest investor is weathering the financial crisis by practising what he preaches.

One of Warren Buffett's favourite sayings about the market is: "be greedy when others are fearful and fearful when others are greedy".

When the market was fearful last September, Mr Buffett was greedy, putting $5bn (£3bn) into the investment bank Goldman Sachs on exceptionally favourable terms.

He says he was only able to negotiate the deal because not many people had $5bn to hand at that particular moment.

But there is no doubt Mr Buffett's public show of confidence in the company was, in itself, a valuable asset to Goldman.

Mind-boggling returns

The deal already looks like a good one for Mr Buffett, with potential profits for him in the billions.

He has always enjoyed himself in a falling market, which, as he sees it, provides him with the best opportunities.

As if to prove his fabled status as the most successful investor ever, Mr Buffett prints his fund's spectacular growth record, all the way back to 1965, in the annual report of his company, Berkshire Hathaway.

It shows he has achieved an extraordinary 20.3% average annual growth in the company's value, which - he helpfully works out - comes to a mind-boggling 336,000% over the years - 84 times that of the standard US index fund, the S&P 500.

The numbers really are off the scale.

Investment returns compared

Life in Nebraska

As the biggest shareholder in Berkshire Hathaway, Mr Buffett's personal stake in that growth made him the richest man in the world last year.

Susie Buffett on being Warren's daughter

This year, he is number two, as Berkshire's share price tumbled in the economic crisis.

His great friend Bill Gates regained his usual position at the top.

But Buffett has never admitted to any interest in such tables, and has trained himself to ignore short-term share price movements, either up or down.

So how has he made his estimated $40bn?

This is a man who has not even started a business. (Berkshire Hathaway was an old textile mill he bought, whose name he kept as the name of his holding company.)

Nor has he invented anything, or come up with a way of making businesses more profitable.

And he still lives in his native Omaha, in the mid-western state of Nebraska, 1,200 miles from the financial whizzkids on Wall Street.

T-bone plays bridge

On the 14th floor of a non-descript office block he has rented for almost 50 years, Mr Buffett works his financial magic, reading newspapers and companies' annual reports, looking for the right business to invest in and the right moment to make a move.

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Over the years, the numbers have grown, as Mr Buffett's financial universe has expanded: from the millions to the hundreds of millions, to today's multibillion-dollar deals.

And yet his modest office remains defiantly low tech.

"I've never had a computer in there, I've never had a calculator in there, I've never had a stock ticker in there," he boasts.

He believes that if a deal needs complicated calculations before you can decide if it is right, then it probably is not. He always leaves a "margin of safety", he says, so that if things don't work out as he'd hoped, he does not lose money.

Mr Buffett has one personal assistant, and hates meetings or having a busy schedule.

He drives himself to work from his house, a few miles along the same street.

His daughter Susie says that most evenings, he will probably have a ham sandwich, and settle down to several hours of online bridge.

If you go online and find yourself playing someone called T-Bone, that is him.

Conglomerate executive

Those who work for companies Mr Buffett owns say when they call him up, he often picks up the phone himself, or if not he will always call back promptly.

You want a dynamic system, and you want a market system that's free to make mistakes to some degree
Warren Buffett

"He seems to have an endless amount of time," says Tony Nicely, chief executive of the Buffett-owned insurance company Geico.

Despite his image as the great stock-picker, for decades Mr Buffett's success has come from more than that.

Today, most of the value of Berkshire Hathaway lies in 70 or so businesses it owns and runs - although it still has billions invested in other companies too.

As Mr Buffett's biographer, Alice Schroeder points out, "the conventional wisdom is that Warren Buffett sits in a room, buying and selling stocks all day. But the reality is that since the 1960s, he's been buying companies".

Mr Buffett is now an executive, running a huge conglomerate.

Be an owner

To Mr Buffett, the difference between owning a business outright and owning shares in it is only one of degree.

He has always bought shares for the long-term and, as a shareholder, thought of himself as buying a part of a business.

Don Graham's debt to Warren Buffett

As he says, you should "think like an owner".

Mr Buffett wants to invest in profitable businesses with good prospects rather than looking for undervalued shares.

Focusing on share prices, he says, makes you a mere speculator, whereas a real investor "looks to the asset itself to produce the return".

He compares his approach to someone buying a farm: they would not worry about the price of the farm every day, but would focus instead on its productivity.

Mr Buffett's brief communications with the chief executives of his businesses exhort them, too, to think long-term, rather than, as in most companies, to worry about the figures for the next quarter.

"They get a letter from me once every two years," he says.

"It's a page and a quarter long. And that letter says 'treat the business like it's the only business your family owns. They can't sell it. They're going to own it for a hundred years'."

The same applies to his shareholders.

He communicates with them in a famous annual letter which, over decades, has given them, and the wider world, an insight into his thinking.

The process has weeded out speculators, and given him shareholders who think like him.

Irrational markets

Mr Buffett says the turnover on Berkshire Hathaway shares is a tenth of that on most stocks.

"We look on our shareholders as partners. They buy into Berkshire to be part of a business. It's something they expect to die with."

The current financial crisis has put Mr Buffett's message about long-term thinking to the test: Berkshire Hathaway's businesses are in a mix of sectors, some of which (construction, confectionery) were more vulnerable to the downturn than others (energy, insurance).

Charlie Munger interview

Berkshire shares lost almost half their peak value - and have since recovered to be about 25% down on their 2008 peak.

At this year's annual shareholder meeting in Omaha, 35,000 shareholders turned up to hear Mr Buffett's take on things.

It looked as if his years of patient training had paid off. He was still smiling, and telling people that the carnage in the markets was just what you should expect once in a while.

"If you take the couple of centuries we've had, the 19th and the 20th, we've had about 15 bad years in both centuries," he told shareholders, "and we'll have fifteen bad years in centuries to come.

"Capitalism overshoots, and market people do get irrationally exuberant sometimes, but that's the nature of it. You want a dynamic system, and you want a market system that's free to make mistakes to some degree."

Secret successor

Mr Buffett will be 80 next year, and is still showing no sign of slowing down or retiring.

Why would he when the financial roller coaster may be starting a slow climb from the bottom of a deep ravine?

In a few years time, when Berkshire's figures may be benefiting from the bargains he's been picking up, well, that part of the cycle might just feel like the moment he and his fellow company directors have been contemplating for years - the day Berkshire faces life without Warren.

There are succession plans, but Mr Buffett, characteristically, wants to keep them simple.

He is not planning to emulate his friend (and fellow director of Berkshire Hathaway) Bill Gates, who arranged a "transition" which lasted a couple of years, as he stepped down from Microsoft to concentrate on his charity work.

Mr Buffett is thinking in terms of splitting his job - between a person to look after investing and another to concentrate on Berkshire's owned businesses.

But he is not planning to name a successor until he is ready to leave.

"I mean, what would they do?" he asks with a twinkle.

"Come and sit in my office all day, so I could chuck them the paper to read when I'd finished with it?"

The World's Greatest Money Maker: Evan Davis meets Warren Buffett, broadcast 2100 Monday 26 October and 1120PM Tuesday 27 October on BBC Two.

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