Tuesday, May 09, 2006

The Rabbi Warren?

Yesterday, the Israeli shekel hit an 11-month high against the US dollar after Warren Buffett said he was buying a controlling stake in Israel’s Iscar Metalworking Companies for about $4bn.

Ehud Olmert, Israeli prime minister said of Buffett, “He is not Jewish, nor is he a Zionist. The Israeli economy is such that he believes in it and supports it.” Israel’s economy is on the rebound from the dotcom crash and the impact of the intifada and is expected to record gross domestic product growth of about 5 per cent this year.

Warren Buffett deserves to be better known than he is. Buffett is the second wealthiest man in the world with a fortune that Forbes magazine estimated at $44 billion in 2005. Only his friend Bill Gates has more money and he also has an infinitely higher profile. So who is Buffett and how come he so successfully avoids media glare?

Warren Edward Buffett
is a 76 year old American businessman, investor and industrialist. He is an extraordinarily successful player of the world’s stock markets and has earned the nickname the Oracle of Omaha for his ability to unerringly spot trends ahead of the pack. His runs his business from Berkshire Hathaway a holding company that owns subsidiaries engaged in diverse activities, mainly in property, insurance and manufacturing. Buffett has a 40% stake in the company.

His father Howard was a stockbroker who later became a Republican congressman for Nebraska. Warren was a middle child, the only boy of three siblings. He showed an astonishing aptitude for money and business from an early age. He had a freakish ability to calculate columns of numbers unaided - a feat he still impresses business colleagues with today. At age 11, he bought his first shares. He made money on them but learnt the lesson in patience that he would have made vastly more money had he held on to them for longer. He attended business school where he complained he knew more than his teachers. His lifechanging experience came at Columbia University where he was taught by Ben Graham who is now acknowledged to be the “father of modern security analysis” (It never ceases to amaze Woolly Days how many things have fathers these days.) Graham’s 1934 book “Security Analysis” is considered the classic text on the stock market.

After graduating from Columbia, Warren and his family partners created Buffett Associates, Ltd. In 1956, he was managing around $300,000 in capital. In the next five years his partnerships made a 250% profit while the Dow Jones was up only 75% in the same period. By 1962 he was a millionaire with 90 limited partnerships across America. In 1969 he liquidated all his partnerships but kept Berkshire Holdings, a declining textile company, of which he made himself the chairman. Buffett diversified the company purchasing cheap insurance companies using them to buy equities. He chose managers to run the company that had excellent underwriting and cost cutting skills. Throughout the seventies and eighties his empire continued to grow. He lost one quarter of his paper value in the 1987 stock market crash. In 1988 he started investing in Coca-Cola. Within a few months, Berkshire owned 7% of the company, a billion dollars worth of stock. Within three years, Buffett's Coca-Cola stock would be worth more than the entire value of Berkshire when he made the investment. During the remainder of the 1990s, the stock catapulted as high as $80,000 per share. Buffett ignored the dotcom boom causing many to predict the demise of the Oracle. He was proved right when the technology bubble burst in 2000. Berkshire's stock recovered to its previous levels after falling to around $45,000 per share, and the man from Omaha was once again seen as an investment icon. A billion dollar profit on silver bought in 1997 didn’t hurt either.

Politically, Buffett is a liberal. He was involved in abortion rights issues in the sixties and worked to integrate Omaha's segregated country clubs. But he is no philanthropist, the Buffett Foundation dishes out a paltry $12 million a year, mostly to family-planning clinics. It has also helped to finance trials of the abortion pill RU-486. Buffett has said that 99% of his money will eventually go to his foundation. The vast bulk of this wealth is his personal holding in Berkshire Hathaway. Because this business consists of stock insurance companies, many state insurance regulators may have serious qualms about allowing for-profit insurance companies to be controlled by non-profit entities.

Buffett is still hard at work as his Israeli deal shows. But whether this deal fits into his usual risk averse scenarios is very difficult to see from here.

1 comment:

357martini said...

Buffet is a fucking knob....fugghetaboutit