Warren Buffett (born 1930) is America's most brilliant investor, compiling a year-after-year record of phenomenal returns for the shareholders of his holding company, Berkshire Hathaway, Inc.

For example, Nikki Ross, author of The Legends of Wall Street: How Warren Buffett, Benjamin Graham, Phil Fisher, T. Rowe Price and John Templeton Can Help You Grow Rich, has been quoted as saying, "If you handed Buffett $10,000 in 1965, you had an investment worth $51 million by year-end 1999." Buffett is one of the richest men in America, and he is a success story in the classic mold. In 2001, Forbes ranked Buffet, with a net worth of net worth of $32.3 billion, the second most wealthy person alive, right after his friendBill Gates.

Throughout it all Buffett has retained a seeming simplicity that goes along with his down-home, Midwestern roots. His associates, however, say his hayseed manner disguises a brilliant sophisticate. He shuns New York and Los Angeles, preferring to run his far-flung empire from modest offices in Omaha, Nebraska. The periodic insights into his success that he dispenses are usually witty and simple. However, each time Buffett--known in the financial world as the "Oracle of Omaha"--speaks, just about everyone, from the most accomplished professional prognosticator to the stock-playing hobbyist, pays attention.

Born in 1930 in Omaha, Nebraska, Buffett always "wanted to be very, very rich," as a Time article put it. The boy received an early, close-up look at the stock market: his father Howard was a broker, and young Warren, just nine years old, often visited the shop and charted stock performances. He chalked in stock prices on the big blackboard at his father's office, and at age 13 ran paper routes and published his own horse-racing tip sheet.

In 1942 Buffett's father was elected to the U.S. House of Representatives and the family moved to Fredricksburg, Virginia. Young Warren Buffett expanded his business interests by placing pinball machines in Washington, D.C. barbershops. At age 16, a prodigy in statistics and mathematics, he enrolled at the University of Pennsylvania. He stayed two years, moved to the University of Nebraska to finish up his degree, and emerged from college at age 20 with $9,800 in cash from his childhood businesses. Harvard Business School rejected him, but Columbia University's Graduate School of Business accepted his application.

Finds Niche

Columbia was a key turning point in Buffett's life, for it was there that he met Benjamin Graham, co-author with David Dodd of the landmark textbook Security Analysis. "I don't want to sound like a religious fanatic or anything, but it really did get me," Buffett was quoted as saying in the New York Times Magazine about Graham's writings.

Graham's philosophy has permeated most of Buffett's decision in the 40-plus years since they first met. Essentially, Graham's theory, called value investing, urges stock pickers to buy shares that are much cheaper than a company's net worth would indicate. That is, look for stocks that sell below their "intrinsic value," a measurement Graham calculated by subtracting a company's liabilities from its assets. Eventually, Graham theorized, the stock market will catch on to the true value of a company and its share price will rise; by that time, a savvy investor following Graham's principles already will be locked into the stock at a low price. It's a simple enough theory, but one that requires much research into companies to determine their net worth, their "book value," and other factors. It is research for which Buffett is eminently suited.

After graduate school, at his father's brokerage firm, Buffett would often travel to Lincoln, Nebraska and pore through company reports. As he told Forbes magazine, "I read from page to page. I didn't read brokers' reports or anything. I just looked at raw data. And I would get all excited about these things." Today, he conducts his business the same way. Buffett does not have a stock ticker in his office, nor a computer or calculator. According to numerous published reports, he spends about five to six hours each day reading annual reports and trade publications. Fortune magazine reported that in Omaha, Buffett "does what he pleases, leading an unhurried, unhassled, largely unscheduled life.... He spends hours at a stretch in his office, reading, talking on the phone, and, in the December to March period, agonizing over his annual report, whose fame is one of the profound satisfactions in his life."

Buffett left Omaha and joined Graham's investment firm on Wall Street in 1954. There he was able to view his mentor's work first-hand. Over the next two years, Buffett got married, fathered two children, and made $140,000 by the time he was 25. Graham shut down his investment firm in 1956 and Buffett gladly left New York. When he returned to Omaha family members asked him for advice, so Buffett set up an investment partnership. As he told the New York Times Magazine, he said to his investors, "I'll run it like I run my own money, and I'll take part of the losses and part of the profits. And I won't tell you what I'm doing."

While he might have kept investors in the dark about his methods, Buffet's bottom-line returns were crystal clear: over the next 13 years Buffett Partnership Ltd. generated a 29.5 percent compounded annual return. He raised $105,000 from investors to start the partnership, and when he closed it 13 years later, the partnership was worth $105 million, and Buffett worth $25 million.

One of the investments along the way was Berkshire Hathaway, a textile manufacturer in Massachusetts. Buffett would create his multibillion-dollar empire around that business, although the textile company itself remains--in Buffett's opinion--one of the biggest investment mistakes he made. Sure, Berkshire Hathaway's stock price was cheap, satisfying a requirement of the Graham strategy. But the textile industry as a whole, and the company itself, was weak. In one of his much-anticipated annual reports, quoted in Fortune magazine, Buffett summed up part of his philosophy in the wake of that mistaken textile purchase: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." (He would shut down the textile mill in the mid-1980s.)

Buffett ended the lucrative partnership in 1969. As the New York Times Magazine reported, "The partnership's capital had grown so large that small investments were no longer reasonable, and he could find no big investments to his liking. In addition, the market was too speculative for his taste." He then focused on Berkshire Hathaway, buying up companies under its umbrella, investing "where and when he pleased," according to the Times.

Buffett's holdings, and his strategies, from the late 1960s on are clear. He first bought a series of insurance companies, which are considered excellent sources of cash. (People regularly pay insurance premiums; insurance companies usually pay claims on those insurance policies--if they have to pay them at all--years down the line. Therefore, there is usually a great amount of cash on hand for the company owners.) Buffett used that cash to buy a series of businesses, which have remained at the core of his investments.

His so-called "Sainted Seven Plus One" are sizeable, profitable companies that, according to the Wall Street Journal, "provide a steady stream of profits and capital to fund the investments that bring him renown." Among the eight core businesses are: the Buffalo News, World Books, Kirby vacuum cleaners, Fechheimer Brothers uniform company, and See's Candies. According to Money magazine, those businesses alone generated $173 million in cash in 1990, and the New York Times estimated in 1991 that their combined worth was approximately $1.6 billion. The cash generated by the eight companies is, in turn, invested in other corporations, which comprise the other core chunk of Berkshire Hathaway's holdings.

All of the companies in which Buffett invested are businesses he understands, underlining one of Buffett's main rules: "Stick to what you know." Forbes once quoted him as explaining why he had not invested in the immensely profitable computer company, Microsoft: "Bill Gates is a good friend, and I think he may be the smartest guy I ever met. But I don't know what those little things do."

According to financial advisor Tom Wolf, Buffett once told his corporate shareholders that if he were teaching a class on security analysis, he might ask his students to determine a value for Internet stocks that had no earnings but sold at high price-to-earnings ratios. And, he added, if any of the students did, he would fail them.

Instead Buffett has bought into what the New York Times Magazine called his "permanent holdings": The Washington Post, Geico (an insurance company), Capital Cities/ABC, and Coca Cola. He bought $45 million of Geico stock, which by 1989, according to the New York Times, was worth $1.4 billion. His $10.6 million investment in the Washington Post group of publications ballooned to an investment worth $486 million 16 years later. When he purchased seven percent of Coca Cola for $1 billion in 1988, some said he had bought too high, too late. But Buffett predicted Coke's expansion into foreign markets and thought the company could grow. It did, more than doubling his investment.

Investments in the big, brand-name companies is an example of how Buffett's buying strategy has evolved from the teachings of his mentor, Graham. Buffett became interested in what he called "franchise" businesses, or companies that are well-managed, with an established product line, and which are not subject to low-cost competition. His strategy changed because the market changed. The companies that Graham liked--companies trading far below their actual value--are rarer.

White Knight

Also in the 1980s, Buffett engaged in a series of transactions that are available only to someone with enormous wealth. He stepped in as a so-called "white knight" to help companies fend off hostile takeovers by other corporations. Buffett's strategy works like this: a company, such as Gillette, faces a takeover and needs an infusion of cash. Buffett invests in the company's "preferred stock." According to the Wall Street Journal, the preferred stock options are "not available to other investors. Typically [Buffett] gets preferred stock bearing a healthy dividend--assuring a modest return no matter what happens--and the ability to convert to common stock if the company's fortunes rise." In the case of Gillette, Buffett invested $600 million in 1989, and in converting the stock two years later, received 11 percent of the company, which was worth, at the time, $1.05 billion.

In 1991 Buffett stepped in as interim chairman of Solomon Brothers brokerage firm after that it was accused of making false bids at Treasury auctions. Buffett, who had invested $700 million of Berkshire Hathaway cash in Solomon Brothers, was its largest shareholder. He is credited with streamlining the company and, over his six-month tenure as interim chairman, helping to rebuild its reputation after the scandal.

But the shareholders are not complaining. Berkshire Hathaway stock was trading for $12 a share in 1965. As of December, 1994, a single share of the investment company was the most expensive traded on the New York Stock Exchange: it cost $19,900 a share. Buffett owns over 40 percent of Berkshire Hathaway, which accounts for his $8.3 billion net worth. (Incidentally, Buffett does his own taxes.) And in August 1995, Buffett brokered a spectacular deal when his Berkshire Hathaway arranged the $19 billion purchase of Cap Cities/ABC by the Walt Disney Company. While the brokerage already had a $345 million in investments, this one merger raised the value to $2.3 billion.

In 2001, while technology stocks were dropping like flies, Berkshire's stock was setting a series of new highs. Unlike the dot-coms, Berkshire was comfortably cushioned from short-term pressures by its insurance businesses, which accounted for roughly half of its profits. That year, Buffett reportedly sent a newsletter to shareholders stating, "We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement."

Those not fortunate enough to own Berkshire Hathaway often mimic Buffett's buys. Fortune reported that when the general public learns Buffett has bought a particular stock, the public also buys the stock, running up the price. That led the magazine to quip: "Now there are two ways to make a killing in the stock market. The first, goes the old saw, is to shoot your broker. The second, it seems, is to shadow Warren Buffett."

The strategy doesn't always work, as a 1995 Money article warned. "Awe-inspiring though Buffett's record is, he's had a few clunkers. The $322 million investment he made last spring in Salomon common stock is down roughly 26%, and an albeit tiny (for him) $38.7 million stake in [an aircraft leasing company] has plummeted 68% since 1990." Prior to that, Buffett had bought Disney low and sold it later for a small profit; but that company rose spectacularly after Buffett's sale. He bought a $358-million chunk of USAir only to see the investment sour. (He was later quoted in Fortune as telling a group of business students at Columbia, "Don't invest in airlines.") In his 1989 annual report, quoted in Fortune, Buffett candidly wrote, "It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge."

Aside from his business acumen and opinions, many people are interested in Buffett himself, asking: What's a billionaire like? He does not give frequent interviews, preferring to let his corporate report speak for him. He lives in the same Omaha home he bought in 1958 for $31,500. He lives in that home with his girlfriend and former housekeeper, Astrid Menks, 17 years his junior. His wife of 40-plus years lives in California and is friends with his girlfriend. (Mrs. Buffett is the second largest shareholder of Berkshire Hathaway and is slated to take over the company after Buffett's death.)

One of his few extravagances is his corporate jet, and playing bridge by computer with friends from around the country. According to the Wall Street Journal, he wears rumpled suits, although very expensive Italian ones, and drinks about five cherry Cokes a day. He says he is an agnostic. As Roger Lowenstein related in his unauthorized biography Buffett: The Making of an American Capitalist, the investor once promised his young daughter a $10,000 check if he didn't lose a certain number of pounds by a certain date. He lost the weight, and kept the cash.

"He is a standard bearer for long-term investing, the perfect antidote to the get-rich-quick schemers of Wall Street," the Wall Street Journal said of Buffett. Forbes opined that "He has not the psychological need for the constant wheeling and dealing, buying and selling that afflicts so many successful business and financial people." His philosophy--as well as his enormous wealth--allows him to be pickier and choosier. As he stated in his 1989 annual report, "We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person."

Which leads to the obvious question he is often asked: How do you succeed in the stock market? Throughout the years Buffett has offered bits of advice, such as: 1) If you buy into a great business, stick with it no matter how high the stock price goes; 2) avoid staggering debt; 3) think long term and don't hop in and out of the market; 4) in a bidding war between companies, buy stock in the side you think will lose; 5) easy does it (meaning, avoid businesses with big problems), and 6) concentrate on a small number of stocks.

Buffett has already made preparations for his money when he dies. He set up the philanthropic Buffett Foundation which, given the 23 percent annual rate of return he has averaged throughout his career, could generate a multibillion-dollar legacy to put the Ford and Rockefeller foundations to shame. Buffett's former son-in-law Allen Greenberg, director of the foundation since 1987, will continue in that post after Buffett's death. Buffett wants the fund's trustees to focus on halting population growth and nuclear proliferation. His three children will not make out that well; Buffett has said he plans to leave them "only" about $5 million apiece. He was quoted in Esquire as saying, "I think kids should have enough money to be able to do what they want to do, to learn what they want to do, but not enough money to do nothing."

Associated Organizations

Historical Context

• The Life and Times of Warren Buffett (1930-)
• At the time of Buffett's birth:
• The Detroit-Windsor Tunnel opened under the Detroit River
• Birdseye Frozen Foods were sold for the first time
• Frank Whittle patented the basic designs for the turbojet engine
• Herbert C. Hoover was president of the U.S.
• The times:
• 1939-1945: World War II
• 1950-1953: Korean War
• 1957-1975: Vietnam War
• 1983: American invasion of Grenada
• 1991: Persian Gulf War
• Buffett's contemporaries:
• Dick Van Dyke (1925-) American actor
• Miles Davis (1926-1991) American jazz musician
• John Tower (1926-1991) American senator
• David Dinkins (1927-) American politician
• Sidney Poitier (1927-) American actor
• Neil Simon (1927-) American playwright
• Neil Armstrong (1930-) American astronaut
• H. Ross Perot (1930-) American tycoon
• Rupert Murdoch (1931-) American businessman
• Carl Sagan (1934-1996) American astronomer
• Selected world events:
• 1934: Clyde Barrow and Bonnie Parker were killed in a shootout with lawmen
• 1945: Adolf Hitler committed suicide in Berlin
• 1949: George Orwell's Nineteen Eighty-Four was published
• 1955: Rosa Parks refused to give up her seat on a bus in Montgomery, Alabama
• 1960: Harper Lee's To Kill a Mockingbird was published
• 1969: Neil Armstrong was the first person to walk on the moon
• 1978: Louise Brown, the first "test tube baby," was born
• 1982: Argentina invaded the Falkland Islands
• 1986: The Iran-Contra scandal began in the U.S.
• 1992: Riots erupted in Los Angeles following the Rodney King court decision

Further Reading

• Lowenstein, Roger, Buffett: The Making of an American Capitalist (unauthorized biography), Random House, 1995.

• Business Week, May 10, 1993, p. 30; July 18, 1994, p. 46.
• Economist, May 23, 1992, p. 86.
• The Economist (U.S.), March 17, 2001, p. 7.
• Esquire, October 1988, p. 103.
• Forbes, March 19, 1990, p. 92; October 18, 1993, p. 40, p. 112.
• Fortune, April 11, 1988, p. 26; April 9, 1990, p. 95; January 11, 1993, p. 101; November 29, 1993, p. 10; April 18, 1994, p. 14; July 25, 1994, p. 17.
• FWN Select, June 8, 2001, p. 1008364r7897.
• Knight-Ridder/Tribune Business News, June 22, 2001, p. ITEM01173008.
• Money, November 1990, p. 72; August 1991, p. 70; April 1995, p. 106.
• New York Times, March 26, 1992, p. D1.
• New York Times Magazine, April 1, 1990, part 2, p. 16.
• 123 Jump, May 17, 2001, p1008093u5552.
• Time, August 21, 1995.
• U.S. News & World Report, June 20, 1994, p. 58.
• Wall Street Journal, November 8, 1991, p. A1.