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December 21, 2012 4:52 pm
Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012, edited by Carol Loomis, Portfolio, RRP£20/$27.95, 368 pages
Warren Buffett, the 82-year-old Sage of Omaha, was once described as a “five-sigma event” – an investor so successful that he defied the laws of probability. The chance of someone steadily boosting the value of his company by 20 per cent a year for half a century was one in 3.5m.
Buffett has not only done so but done it in a beguilingly simple and down-to-earth manner, while describing what he was doing and his philosophy of investing. You would have thought that others would have imitated him but no one has with anything like his success. Berkshire Hathaway, his investment fund, remains sui generis.
Carol Loomis, the Fortune magazine journalist who has followed his career since she wrote an article mentioning him (and misspelling his name) in 1966, is the Sage’s amanuensis. She edits his annual letter to Berkshire shareholders, a treasure of wit and investment wisdom, and has chronicled many of the biggest incidents in his life, such as his rescue of Salomon Brothers in 1987.
Curiously, given her privileged access, Loomis has never written a book on Buffett, although plenty of others have. This collection of pieces, mainly by her and other Fortune journalists with some by Buffett, is the closest she has got. That makes for a sometimes patchy and incoherent work but one stuffed with nuggets and insights – a Christmas fruitcake for the investor.
The virtue of these collected snapshots is that they demonstrate just how consistent Buffett has been – with no possibility of history having been affected by hindsight. What she saw from the early days of Berkshire, when it could be bought for $22 a share, compared with $130,000 today, was Buffett’s extraordinary iconoclasm.
Buffett’s appeal has always spread beyond his investment brilliance, helped by his sense of humour and ability to explain complex investment matters in a down-to-earth, witty manner. There is something Hollywood-like about his success – the decent, no-nonsense Nebraskan with a heart of gold who somehow triumphs over the soulless traders of Wall Street.
Some of that is a well-polished illusion. Buffett has always been tougher and more ruthless than he tends to present himself – the managers of the businesses he owns must return every scrap of spare capital to headquarters, and cost-cutting at Berkshire is a way of life. But his version of capitalism is the one we all want to believe in.
The most striking piece is the first one, in which Buffett appears offstage as “a $45m Omaha operation that uses hedge principles to some extent but that has mainly, and very successfully, concentrated on long-term investment”. Nearly 50 years later, the description stands (with the exception of its value).
It is unusual for setting Buffett’s investment fund in the context of the hedge funds that were then starting to be set up, with the most successful run by Alfred Winslow Jones. Even then, Loomis writes, “the weight Jones swings on Wall Street is many times magnified by the fact that, like all hedge-fund operators, he is a prodigious producer of commissions”.
One can see the fork in the road even then. Three years later, in 1969, Buffett shut his investment partnership to focus on his unique approach to investing – something between a hedge fund, a private equity fund, and old-fashioned investment in the backbone of American business – while Jones’ successors went on to wrap Wall Street around their fingers with money.
Buffett’s insight was so straightforward as to be mundane – that he would make more money in the long run by buying companies (or shares in companies) with solid earnings potential and good management than by trading wizardry. It was the gospel taught by Benjamin Graham, the father of “value” investing, and Buffett was his finest disciple.
Put like that – you buy cheap, hold on to the shares, and then sell (if at all) high – it is hardly rocket science. Yet it is striking how much the world has shifted in the other direction in Buffett’s time – towards derivatives, leverage, high-frequency trading and momentum investing in whizz-bang technology stocks. It has shifted from doggedness to excitement.
What Buffett did was hard, though, and it has got harder. Indeed, one school of academic research – the efficient markets hypothesis – held it to be impossible. Since information is freely available in the public stock market, where Buffett has mostly invested, and there are plenty of intelligent people, the price of a stock should reflect its true value.
Buffett defied this by working hard to find companies that were sufficiently undervalued to be a bargain, and by ignoring the rush towards those that glittered. He bought into a lot of companies that sounded boring and past it – department stores, railways, newspapers, Coca-Cola.
“Although Graham and Buffett did not agree in all things,” writes Andrew Tobias in a piece collected by Loomis, “their common perception was to buy assets so cheaply that, over time, they could hardly fail to profit. This approach calls for a level head and hard work. ‘The market, like the Lord,’ Buffett writes, ‘helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.’ ”
The “level head” is probably his biggest asset. Loomis tells of Charlie Munger, Buffett’s business partner, being asked at a dinner party about the secret of his success. “I’m rational. That’s the answer, I’m rational,” he replied. Perhaps it has always helped to work in Omaha, far from the madding crowd of investment analysts and get-rich-quick ideas, and to follow their own path.
In 1963, when American Express was involved in a scandal over fake salad oil (now long forgotten), Buffett went to Ross’s Steak House in Omaha to see if it was stopping people using their American Express green cards. It turned out that Nebraskans weren’t that bothered, so he bought the shares.
In the end, the thing that made Buffett a one in 3.5m figure, it appears from Loomis’s account, was not his acuity with figures – the ability to reckon in his head the correct premium of catastrophe insurance – but this all-American rootedness. He had faith in what he knew.
John Gapper is the FT’s chief business commentator
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