In the
annals of investing, Warren Buffett stands alone. He dismissed stock
speculation as a matter of A trying to think of what B, C and D are trying to
think and the latter trying to second guess A. Ever since he invested his first
dime, Buffett has outperformed the stock market by a stunning margin without
undue risks; a feat market savants had long proclaimed impossible and in the
process acquiring an epochal net worth of over $15 billion by the close of 1995
and currently is the richest guy on the planet having surpassed Bill Gates, the
IT wizard. So how did he do it?
Simple. A
genius largely of character that saw him ride the waves of Wall Street-in the
opposite direction. The second born of three children, Warren was born with a
thirst for numbers that saw him start a business at five: selling Chiclets to
passers-by and later on lemonade. He was introduced into the world of investing
by his father Howard Buffett, who also instilled in him independence of
thought. It can be argued that he inherited business acumen from Earnest, his
grandfather, but perhaps his desire to grow rich was honed by the great
depression of the Roosevelt years.
A Graham
disciple, he applied definitive stock analysis of investing in under-valued
stock of cheap companies (cigar butts) and with the tendency of the stock
market to correct the stock price in the long run he managed to top the Dow
Industrial Average by several points. His secret is to analyze companies using
benchmarks such as enterprise value, price to earnings ratio which tends to
give the intrinsic value of a company as well as factors like growth prospects,
market share, and intellectual capital. His first buying was Home protective at
$15 which later winged to $70. His debut arbitrage was on the Rockwood and Co
platform in 1954. As at the time he dissolved his partnerships, he had amassed
$25 million and at the start of 1970 he put his money in Berkshire Hathaway.
The climb to
the vertex had begun. With fund managers f the go-go era consolidating their
stock in the top nifty-fifty like Xerox, Kodak Eastman, Polaroid, Avon and Texas
instruments, the stock market began looking exciting again for bargains
especially after the 1973 crack of the nifty-fifty and wall-street lapsing into
a malaise.
Buffett went
on to acquire an insurance unit, a bank, a stock portfolio and majority stakes
in Blue Chip, See’s Candy and Wesco. In his bailout of GEICO, Buffett clearly
had evolved from Graham’s methodology and evaluated a business’s potential: a
good well-managed company is distinct from a statistically cheap one.
Perhaps his
greatest strength has been his disagreement with Wall Street’s intellectual approach
of extreme ‘’diversification’’: eggs-in-a-thousand-baskets approach. Indeed his
favourite aphorism is: put all your eggs in one basket, and then watch that
basket. His metamorphosis away from ‘value stock’ to ‘growth companies’ marked
his distinction from a brilliant Graham student ( the only one to have got an
A+ from the professor) to the Buffett genius of investment.
His advice
on getting rich in Wall Street (and the various stock markets)? ‘’be greedy
when others are fearful, and very fearful when others are greedy’’