The Oracle of Omaha -- the world's greatest stock market investor -- lives in a house he bought for $31,500, dines on burgers and quotes Mae West. He's worth $36 billion ... give or take a few mil.
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Donald and Mildred Othmer were hardly a remarkable couple. He was a professor of chemical engineering at Polytechnic University in Brooklyn, with a small consulting business on the side. She was a former teacher who spent most of her time volunteering for New York civic and arts organizations. They had no children.
But when Donald and Mildred Othmer died — he in 1995, she in 1998 — it turned out they were quite remarkable indeed. Polytechnic University, which once faced bankruptcy, unexpectedly found itself heir to $175 million. Planned Parenthood received $65 million. All told, the couple bequeathed $340 million to several perennially cash-strapped Brooklyn institutions.
Few who knew the Othmers had any idea of their enormous wealth, which totaled some $750 million. But the couple’s hometown — Omaha, Neb. — offered a clue. Omaha, as any investor knows, is the headquarters of Warren Buffett, the greatest stock market investor of modern times. He also happened to have been an old friend of the Othmers. After investing $25,000 each in a Buffett-led investment partnership in the early 1960s, in 1970 the couple received thousands of shares of Berkshire Hathaway Inc., Buffett’s insurance and investment holding company, at $42 a share. By the time Donald Othmer died in 1995, the stock had soared to $30,000 a share. Too bad for Brooklyn he didn’t live a few years longer — Berkshire Hathaway currently trades at an astonishing $68,000 a share.
The Othmers were proof of one of the investment world’s oft-repeated legends: Had you put $10,000 into Berkshire Hathaway when Buffett bought control of it in 1965, you’d have more than $50 million today, compared to the just under $500,000 you’d have if you’d invested in the Standard & Poor’s 500 stock index.
Thanks to an ability to spot undervalued companies and purchase them on the cheap, the so-called Oracle of Omaha has made many people very wealthy over the course of his five-decade career. Buffet’s own 38 percent stake in Berkshire Hathaway gives him a net worth of more than $36 billion, making him the second-wealthiest man in the world, behind his friend Bill Gates, and one of the few who has amassed such astonishing riches solely through stock market investments.
Yet in many ways, Buffett remains more like the Othmers than the super-rich. With his tousled white hair and thick, tortoise-shell glasses, his appearance and countenance is most often described as grandfatherly. His annual salary as Berkshire Hathaway’s chairman and CEO is $100,000. At the age of 68, he continues to live on Farnam Street in Omaha, in the same gray stucco house he purchased four decades ago for $31,500. He eats burgers or steaks for lunch and dinner, always washing down his meals with Coca-Cola — a company in which he has invested since 1988. His sole extravagance seems to be a fondness for luxury air travel. In typically self-deprecating style, the frugal Buffett calls his Gulfstream IV-SP jet “The Indefensible.”
If Buffett’s lifestyle seems out of step, so is his investment strategy. At a time when day traders bid up stocks based on nothing but rumor and momentum, when bond investors place pricey and complex bets on such arcane financial instruments as interest-rate futures, it’s hard not to think of Buffett as a kind of museum piece. His approach is simple, even quaint. Ignoring both macroeconomic trends and Wall Street fashions, he looks for undervalued companies with low overhead costs, high growth potential, strong market share and low price-to-earning ratios, and then waits for the rest of the world to catch up.
As often as not, Buffett’s business instincts become conventional wisdom. Consider Coca-Cola Co. In 1988, when Buffett started buying the global soft-drink giant, it was a Wall Street wallflower, trading at $10.96. But Buffett saw two things that were not reflected in the balance sheet: the world’s strongest brand name and untapped sales potential overseas. As Coca-Cola’s earnings grew, so did investor interest. In less than five years, the stock soared to $74.50. Buffett’s current stake is valued at some $13 billion.
Americans tend to revile their billionaires as much as they respect them (just look at Gates or Michael Eisner). But somehow, Buffett has managed to emerge as a kind of American folk hero. His famously literate dispatches in Berkshire Hathaway’s annual reports — in which he is as likely to quote the Bible and John Maynard Keynes as Yogi Berra and Mae West — are read as much for their gee-whiz Midwestern wit as they are for their business insights. Berkshire’s Web site is a modest affair, with a few links to some Berkshire-owned businesses and a message from Buffett, a self-described “technophobe,” asking for suggestions how the site might be improved. Dozens of books and hundreds of Web sites dissect his investment decisions. And then there are Berkshire Hathaway’s annual shareholder meetings in Omaha, which Buffett’s biographer Ron Lowenstein compares to “an Elvis concert or a religious revival,” and which Buffett himself calls “Woodstock for Capitalists.” Investors have been known to purchase a single Berkshire share just for the opportunity to pick the master’s brain each spring.
The most recent meeting was held in May. More than 14,000 people crowded into Omaha’s Aksarben (“Nebraska” spelled backward) Coliseum for a six-hour question-and-answer session with Buffett and Berkshire Hathaway Vice Chairman Charles Munger. The news this year, while hardly disastrous, was not nearly as good as Berkshire investors have come to expect. Although the company had posted earnings of $2.8 billion, Berkshire shares were up just 11.4 percent for the year, compared to 20.1 percent for the S&P 500 and 36.1 percent for the technology-heavy NASDAQ Composite Index. The Internet stocks, meanwhile, were on fire. America Online was up more than 600 percent. Amazon.com had risen ten-fold.
Nonetheless, Buffett informed shareholders that he was sticking with companies like Coca-Cola and Gillette, despite the fact that both stocks had taken a beating in recent months. “I think it’s much easier to predict the relative strength that Coke will have in the soft drink world than Microsoft will in the software world,” Buffett said. “That’s not to knock Microsoft. If I had to bet on anyone, I’d bet on Microsoft. But I don’t have to bet.”
That’s Buffett in a nutshell. Amazingly, the world’s savviest investor has sat out the entire stampede over technology stocks, backing away even from proven players like Microsoft or Hewlett-Packard. As for Internet stocks, forget it. Buffett says he won’t invest in a company unless he can “see” it, unless he can imagine what its balance sheet might look like in a decade or two — a shockingly long view, especially at a time when many investors hold stocks for just days, or even minutes, at a time. Such behavior would get many contemporary fund managers fired, but it’s hard to argue with a man whose own holdings have outpaced the Dow Jones Industrial Average for more than 40 years.
Warren Edward Buffett was born in Omaha in 1930, the son of Howard Buffett, a stockbroker and Republican congressman. As a youngster, Warren had an affinity for numbers, impressing his friends by memorizing the population of scores of U.S. cities. At age 11, he began marking the board at his father’s brokerage; that same year, he bought his first stock, three shares of Cities Service Preferred at $38 a share. The price immediately dropped to $27, but then recovered to $40, at which point the young Buffett sold — making a $5 profit, but missing the company’s subsequent rise to $200 a share. It was Buffett’s first lesson in patience.
As an adolescent, he was a tireless entrepreneur. At the age of 14, with savings from his two paper routes, he spent $1,200 on 40 acres of Nebraska farmland, which he leased to a tenant farmer. But Buffett truly caught the investment bug as a senior at the University of Nebraska, when he read Benjamin Graham’s “The Intelligent Investor.” The bible of the so-called value investors, Graham’s book advised investors to ignore the trends that sweep Wall Street and instead hunt for stocks that trade far below their actual value. He called them “cigar butts” — companies the stock market had discarded but that still had a few “puffs” of value left in them.
Finding such companies isn’t easy. It requires tremendous patience and intense balance-sheet analysis. But the challenge appealed to Buffett’s mathematical skills. After graduating, Buffett was rejected from Harvard Business School, so he instead moved to New York to study with Graham at Columbia University. After earning a masters in economics, he began working for his mentor.
But if Graham’s approach was lucrative, it wasn’t a whole lot of fun. By its very nature, value investing means saying no a lot more than saying yes, and Buffett soon felt constrained by Graham’s strict rules. He began to wonder if it made as much sense to buy good businesses at a fair price, rather than dying businesses on the cheap. So in 1957, he returned to Omaha and started his first investment partnership. A group of Omaha investors handed him $25,000 each. Buffett put in $100 of his own money, appointed himself general partner and began to purchase stocks. His goal was to beat the Dow Jones Industrial Average by an average of 10 percent a year. When the partnership dissolved in 1969, Buffett’s investments had ballooned at a compound rate of 29.5 percent, compared to just 7.4 percent for the Dow.
In 1962, Buffett began purchasing stock in a struggling New Bedford, Mass., textile mill called Berkshire Hathaway. With a price of less than $8 a share, Berkshire was a classic cigar butt. But it turned out that this old stogie had more than a few puffs of life in it. As the U.S. textile industry withered in the face of foreign competition, Buffett began redeploying Berkshire’s capital into an array of other businesses, including insurance.
It turned out to be a classic Buffett move. While some insurance companies are better investments than others, all of them are good investment vehicles. Policyholders pay premiums up front and claims are only paid out later, providing insurers with a steady stream of low-cost cash to play with. Such funds are known as “float,” and soon, Berkshire was generating millions of dollars of it. As it happened, the insurance-generated cash came along just as the financial markets went into their deepest swoon since the 1930s. Buffett, always on the lookout for values, went on a shopping spree, filling his portfolio with solid companies that began to rise once the market regained its footing.
Of course, the same qualities that have made Buffett a legendary investor have played havoc with his personal life. His wife, Susan T. Buffett, accompanies him on almost all of his public appearances, serves on Berkshire’s board and is one of the firm’s largest shareholders. But in fact, the couple have not lived together since 1977, when Susan — a sometime cabaret singer and passionate abortion-rights activist — moved from Omaha to an apartment in San Francisco. Making things even weirder, it was Susan who introduced her husband to Astrid Menks, a Latvian-born waitress at the French Cafe in Omaha, who ended up moving in with Buffett and has been his companion ever since. Susan and Astrid remain friends, and the three send presents to relatives from “Warren, Susie and Astrid.”
His relations with his three children — all of whom have had difficulties living up to their father’s high standards — have been equally unusual. His children have hardly been the typically spoiled scions of the ultra rich. When his son Howard told his father he wanted to purchase a farm, Buffett offered to help, albeit under the same exacting terms he might offer a business partner — he told Howie he would buy the farm and rent it to him, requiring his son to fork over a percentage of his farm income and pay the taxes. Howie agreed to the terms. But even then, his father visited the farm only twice in six years. And that’s far from the only example of Buffett’s tightfistedness. Once, when his daughter Susie needed $20 to get her car out of the airport garage, he made her write him a check.
That same attitude characterizes Buffett’s approach to philanthropy. Despite his immense personal wealth, Buffett has not been particularly charitable — even now, late in his life, a time when many moguls, with their eyes on the history books, seem suddenly to develop an urge to share. He often is criticized as a tightwad. Politically, he seems to be a liberal. In the late 1960s, he became involved in abortion rights issues and worked to integrate Omaha’s segregated country clubs. But the Buffett Foundation, which was established in the mid-1960s, disburses a pittance of his wealth — just $11 million to $12 million a year, mostly to family-planning clinics. Although he has three children, his wife is his sole heir, and Buffett has said that he intends for 99 percent of his money to eventually go to his foundation, which will likely become the largest endowment in the country.
Indeed, even the world’s greatest investor will die someday. And what happens to Berkshire Hathaway in his absence is certain to be one of Wall Street’s great dramas. The company’s lofty share price, after all, has as much to do with its bottom line as it does with the so-called Buffett premium. Buffett claims to have chosen a successor, but he has told neither the public nor his anointed. Most expect the top spot to go to his longtime associate Charlie Munger or Lou Simpson, chairman of Government Employees Insurance Co., or GEICO, which Buffett invested in for decades before buying the company outright in 1996.
Whatever happens to Berkshire Hathaway, Buffett’s legacy is bound to live on in ways the investor never intended. Even in these speculative times, his investment decisions are scrutinized by would-be Buffetts the world over. And then there are the tens of thousands of Berkshire shareholders out there who owe a hefty chunk of their personal wealth to the man’s investing acumen.
Remember Donald and Mildred Othmer, the modest-living but financially well-endowed couple from Brooklyn? They’re not alone — not by a longshot. “There are more coming,” Buffett told the New York Times in 1998. “There are going to be some bigger ones than this.”
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