He is the “Oracle of Omaha”, perhaps the shrewdest investor the world has ever seen. He is the greatest exponent of the art of the “contrarian” – seeing value in business situations invisible to mere mortals. And earlier this week he was hailed by the US stock markets as the saviour who would dig them out of the sub-prime pit.
But Warren Buffett is no soft touch. Any businessman who has amassed a personal fortune of $52 billion, and whose Delphic views and prognostications have the power to move markets on their own, has got to that position through tough number-crunching brain-power, and that does not sit easily beside a casual attitude to cash.
As one of its leading lights, Buffett wants American capitalism to be healthy, for sure, but he would not put his own reputation at risk to salvage it. If he hands out $100, at some stage he will expect $130 back.
Watching the reaction of the US business community this week to the suggestion that Buffett was willing to bail-out the “monolines” – the big insurance groups that prop up the world bond markets – it seemed for a while that some observers had forgotten who Buffett was and how he got to pre-eminence in business.
The US market indices leapt on the news, almost as if Santa Claus had ridden down Wall Street with sacks of dollars to hand out to sub-prime-stressed financiers. When they studied his track record, the cold reality sunk in that Buffett was offering a hard business proposition, not charity.
What else should they have expected? As a teenager, when most kids were wasting their youth in pin-ball halls, Buffett was investing in the machines themselves in small towns in his home state of Nebraska, and began accumulating his first seed capital.
Above all, he knows the insurance industry. His master company, Berkshire Hathaway, began as a run-down textiles operation, but his first big financial plays were in the insurance business. He liked the fact that insurers have pools of liquidity as working capital that could be put to good use as investment funds in non-insurance related sectors. Hence began the life-long investment strategy that confirmed his reputation.
And just in case any of the Wall Street mendicants were under any illusions, Buffett quickly dispelled them by re-stating his long-standing animosity to the financial establishment they represented. The crisis brought on by the sub-prime collapse was “poetic justice” he said, adding: “the people who brewed this toxic Kool-Aid ended up drinking it themselves”.
He believes the financial industry is a self-perpetuating oligopoly which exists to serve its own interests, and cites the increasing volumes of trading on the world markets that are not related to physical, tangible assets, but represent mere shuffling of pieces of paper. This is the diametric opposite of his own investment philosophy, which is based on the fundamental worth of assets – what he calls “intrinsic value”.
This was the rationale behind probably his most famous investment and one of his most profitable – the stake in Coca Cola he began acquiring in 1988, eventually ending up with a seven per cent holding worth $1.2 billion at its peak. He still holds the shares.
Once he is on a company’s share-register, his philosophy is hard-headed. He will not interfere in the operational process of the corporation, but reserves the right to appoint and dismiss senior executives. Capital invested in the firm must satisfy his strict criteria on rate of return, or it will be withdrawn.
But he reassures executives that he is with them for the long-term, and that he will judge their performance by the yardstick of value created over time. In another side-swipe at the financial industry, he has given this advice to the acolytes who gather eagerly at his Omaha annual meeting in the hope that some of the Buffett magic will rub-off: “If you ain’t going to hold the stock for 10 years, don’t hold it for 10 minutes.” No wonder his mere presence on a share register is enough to revive an ailing share price.
Has he ever got it wrong? Some argue that his contrarian stance stopped him making money in the financial sector, which boomed until the sub-prime crash last year. Others suggest that the same cautious approach to “intrinsic value” kept him out of the dotcom sector in the profitable years before that bubble burst in 2001. But these are opportunities, rather than cash lost, and anyone requiring hard proof of wisdom of his long-term strategy need look no further than that $57 billion cash pile.
What the 77-year-old will do with his stash has been the subject of speculation. He has already sunk a large proportion of it with his friend and co-philanthropist Bill Gates, with a $30 billion donation to the Microsoft billionaire’s charitable foundation, and a large chunk of the rest will go to his Buffett Foundation. His three children, however, will be subject to the strict investment rules. “I will give them enough money to do anything” he has stated, “but not enough to do nothing.”
That is the same hard-headed business view that Buffett is now focusing on the American monoline industry. Some believe that his “generous offer” to rescue the distressed bond insurers amounts to no more than a calculated asset play by the “oracle of Omaha”, and if he can make money out of the situation, then so can others.
But it would be foolish to deride his approach as sheer “vulture opportunism.” If it is good for Buffett it will be good for business, and almost certainly good for America.
World markets bounced higher on Tuesday after Warren Buffett said that he had offered to help out bond insurers by offering a second level of insurance on up to $800 billion in municipal bonds.
In an interview to CNBC, Buffett said his Berkshire Hathaway holding company made the offer of reinsurance to Ambac Financial Group Inc, MBIA Inc and Financial Guaranty Insurance Co.
Many have speculated Buffett could step in and help out the troubled industry, though he made clear his offer was not altruistic.
A different capitalist
Billionaire investor Warren Buffett, chief executive of Berkshire Hathaway, is perhaps America’s most-revered capitalist. Here are five facts about Buffett:
1. Buffett, 77, bought Berkshire, a textile maker, in 1965, and built it through acquisitions and investments into a $214 billion (Dh786bn) company. It now owns more than 70 firms, including auto insurer Geico, reinsurer General Re, ice cream maker Dairy Queen, and utility MidAmerican Energy. It also has big stakes in companies with recognisable global brands such as American Express Co, Coca-Cola and Procter & Gamble.
2. Buffett has said most of his wealth, estimated last September at $52bn by Forbes magazine, will go to philanthropies after his death. He has pledged 85 per cent of his net worth to the Bill & Melinda Gates Foundation and four family charities.
3. Despite being one of the world’s richest people, Buffett draws an annual salary of just $100,000 to run Berkshire.
4. Buffett plays ukulele and is a bridge partner of Bill Gates, the Microsoft Corp chairman. Gates is also a Berkshire director.
5. Buffett drinks five cans of Cherry Coke a day. The outdoor shareholder barbecue last May featured beef and chicken tacos, but Buffett said he had enjoyed the hamburgers. “It’s amazing what Cherry Coke and hamburgers will do for a fellow,” he said in the company’s 2006 annual report. (Reuters)
Bernanke sees growth later this year
US Federal Reserve Chairman Ben Bernanke said yesterday he sees “a period of sluggish growth” followed by improvement on interest rate cuts and a stimulus plan, and kept the door open to further cuts.
The remarks offered little new on the economic outlook but were the first by Bernanke since Congress approved and President George W Bush signed a $168-billion economic stimulus plan.
Bernanke told the Senate banking committee that the stimulus plan, which aims to boost consumer and business spending, would help lift economic growth later this year.
“At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt,” said Bernanke.
The Fed has made a series of dramatic cuts in interest rates since September to bring the federal funds rate to 3.0 per cent from 5.25 per cent.
Bernanke said the Fed’s task is complicated by the fact that its monetary policy impact has a lag.
“Although the baseline outlook envisions an improving picture, it is important to recognise that downside risks to growth remain, including the possibilities that the housing or the labour market may deteriorate beyond than currently anticipated.” (AFP)
Shrewd ‘Oracle of Omaha’ is the man America badly needs – for now