The World's Greatest Money Maker

Blog 7 - Multimedia Blog

08/12/2019 

In this week’s blog I bring to you a memoir of Warren Buffett and his renowned investment portfolio. ‘Known as the ‘Omaha Oracle, Warren Buffett is one of the most successful investors of all time’ (Forbes, 2019). With a current net worth of $87.1bn, he’s got to be doing something right hasn’t he? (Forbes, 2019). I’m going to consider what exactly it is that led Warren Buffett from strength to strength, is it his integrity? His financial investment strategy? His Philanthropy?  Or his loyal ‘disciples’, as his shareholders are titled in the BBC2 Documentary ‘The World’s Greatest Money Maker’ (BBC 2 , 2009)? 

Warren Buffett is a fine example of a rational investor, in the documentary he stated that he has around ‘4000 days left on this planet’ and therefore wishes to use his limited days in the most effective way possible (BBC 2 , 2009). A very logical and rational statement don’t you think? Not the usual way people would number their remaining days on this earth. He famously said ‘Rational people don’t risk what they have and need for what they don’t have and don’t need’ (Forbes, 2019). With a very modest lifestyle, still living in the house he purchased for $31,500 in 1958, Buffett is more than happy with an unboastful lifestyle (BBC 2 , 2009). As demonstrated within the documentary Mr Buffett is very much financially conservative, he explains to his children not to expect to inherit his wealth as he promises to give away 99% of his capital worth, including donating $3.6bn foundations, including Bill Gates’ foundation (Forbes, 2019).  

Often choosing to invest in companies that aren’t seen as a conventionally valuable investment option, ‘the degree to which Buffett has outwitted successive generations of Wall Street rivals almost defies comprehension’ (Armstrong , Platt, & Ralph , 2019). In 54 years Mr Buffett’s shares in his company Berkshire Hathaway have outperformed the S&P 500 by almost 2.5 million percentage points, hence his oracle status (Armstrong , Platt, & Ralph , 2019). His investment strategy illustrated within the BBC documentary induced thoughts in my mind into how Mr Buffett’s approach manages to exceed the markets performance continuously. If we consider Kendal’s theory from 1953 into the ‘Random Walks’ of stock prices, it appears to be something that Mr Buffett would agree with. Kendal’s theory found that prices change in a random fashion and therefore it is near impossible to predict future price movement as past stock prices are independent from each other (Kendal , 1953). As per the documentary, Mr Buffett is described as ‘Everything Wall Street isnt’, he obviously has a very clear understanding of the stock market and its movements however he doesn’t particularly seem to base his investments solely on that, as many investors primarily use (BBC 2 , 2009). Mr Buffett knows what works for him and he sticks by it. 

Now obviously if you were wanting to know how to imitate Mr Buffett and recreate his fortune, the answer is: with great difficulty. Is it naturally engrained in Mr Buffett? As he bought his first stock at age 11, Mr Buffett doesn’t necessarily follow a standard approach to choosing his investments, this isn’t to say he doesn’t look at a company’s balance sheet or thoroughly consider their debt/equity ratio or their current earnings per share, but in many cases Mr Buffett goes entirely against the stock markets patterns. As he says within the documentary ‘The market is there to serve you, not to instruct you’ and an example explained within the documentary was in 2008 after the financial crash, everyone was taking their money out of Goldman Sachs whereas Mr Buffett was starting to invest (BBC 2 , 2009). This is because Mr Buffett has often found the greatest value in the ‘unfashionable stocks’, ‘His stock selection focuses on shares that have low risk and low volatility and companies that have low price-to-book ratios, are profitable, stable, growing and have high pay-out ratios’ (Eley, 2014). Warren has always followed an ‘Intrinsic value approach: one which a security is deemed to be attractive based on the relationship between its price and the value that a knowledgeable buyer would pay for the whole business’ (Mishuris, 2018). For Mr Buffett, long-term investing is much more favourable as he quoted ‘Our favourite holding period is forever’ (Eley, 2014). So not only does Mr Buffett do things on a long-term scale, he also does things often against a usual investor, conducting no audits on the Nebraska furniture store before acquiring it Mr Buffett knew he wanted it, and because of who he is he was able to purchase that company for 1/3 of its actual value (BBC 2 , 2009).  

‘Value, patience and leverage are the keys to the great man’s success’ (Eley, 2014). So how exactly did Warren Buffett create such a successful investing method? Buffett’s ‘Value investing method’ is inspired from Benjamin Graham School of Value Investing. As already illustrated within this blog Mr Buffett doesn’t live a life of extravagance and he encompasses this modest approach within is investing choices too. Mr Buffett is clear not to get into debt, and that he often opts for companies whom have strong balance sheets with very low debts incurred (Eley, 2014). His investment company Berkshire Hathaway has a AAA rating, higher than the US Sovereign in 2014 at the time of this FT article’s time of publication and so he clearly focuses on maintaining that top-class rating (Eley, 2014). Mr Buffett has also been very tactical in investing into insurance companies such as Geico, which offers Mr Buffett, and Berkshire Hathaway as a firm, a ‘Float’ generated from the insurance premiums which of course customers pay up-front when taking an insurance policy out. By doing this Mr Buffett always has immediate cash to employ elsewhere, and one huge takeaway from this documentary was that companies owned by Mr Buffett were more than happy to let him take their retained capital and invest it into another company. This is because he always focuses on allocating capital efficiently, and because his shareholders, and his acquired firms, all see Mr Buffett as a ‘god’ like influence, they’re more than happy to allow Mr Buffett to do what he does best and make money, money and even more money. However, as also mentioned in the documentary, Dick Holland (An early investor) thanked Mr Buffett for making him rich, and Warren’s response was ‘I didn’t make you rich, you didn’t sell’ (BBC 2 , 2009). His constant modesty, and loyal shareholders are what makes Mr Buffett’s successful career so distinguished. 

In conclusion, Mr Buffett has grown his business on trust, modesty and always following a tested method that he knows works for him. He’s well and truly earned the ‘Oracle’ status and his investment career is one that will forever be remembered within the Finance discipline. A combination of his integrity, strong advisors, his loyal shareholders and his unfaltering approach to business is how he’s made his millions…sorry I mean billions! 

Warren Buffett = The man, The myth, The legend!

List of References 

Armstrong , R., Platt, E., & Ralph , O. (2019, April 25). Warren Buffett: 'I'm having more fun than any 88-year-old in the world'. Retrieved from Financial Times : https://www.ft.com/content/40b9b356-661e-11e9-a79d-04f350474d62

BBC 2 (Director). (2009). The World's Greatest Money Maker[Motion Picture].

Eley, J. (2014, February 28). How to invest like Warren Buffett. Retrieved from Financial Times: https://www.ft.com/content/25870c9c-9d69-11e3-a599-00144feab7de

Forbes. (2019, December 2). #3 Warren Buffett. Retrieved from Forbes: https://www.forbes.com/profile/warren-buffett/#d7e378746398

Kendal , M. G. (1953). The analysis of economic time-series-part i: Prices . Journal of the Royal Statistical Society , 11-34.

Mishuris, G. (2018, December 7). What You Can Learn From How Warren Buffett's Investment Process Evolved. Retrieved from Forbes: https://www.forbes.com/sites/garymishuris/2018/12/07/what-you-can-learn-from-how-warren-buffetts-investment-process-evolved/#2370d447c5f7