9 September 2014
I have been reading books about investing since my early twenties. As far as I can recall I first came across the name of Warren Buffett in the mid-1980s but it did not really register with me.
In the late 1990s I read more about him, including several books about his investment methodology. After the company he runs, Berkshire Hathaway Inc, created “B shares” (see below) I became a small shareholder in August 1998 by buying three “B” shares at a total cost of $7,115. Since then I have read his annual shareholders letter at the front of the Berkshire Hathaway annual accounts every year.
The three shares I bought in August 1998, adjusted for the split mentioned below, were worth $20,587.50 on 31 August 2014. That gives me internal rate of return of approximately 6.8%.
While satisfactory, the above rate of return is tiny compared to that experienced by those who have been shareholders of Berkshire Hathaway for longer. The 2013 accounts state that:
“Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually.”
The market value per share has grown even more, since at the beginning the market value was, if anything, less than the book value per share. By the end of 2013 the market value per share was $177,950, far higher than the book value per share of $134,973.
All of the above figures per share relate to the “A” shares.
Berkshire Hathaway has never split its shares since Buffett wanted to avoid attracting small speculators as shareholders. Accordingly shares that in 1962 were quoted at $7.50 per share were, by the beginning of 1998, quoted at about $46,000 per share. This of course made it impossible in practice for small investors to buy them, since you cannot buy less than one share.
Accordingly several financial services firms were planning to launch investment companies, that would own only shares in Berkshire Hathaway, but which would themselves issue much larger numbers of shares, thereby having a much lower price per share.
As a simple example, if an investment company is set up with $46 million, the investment company could buy 1,000 Berkshire Hathaway shares at the 1998 price of $46,000 per share. However if the investment company itself issued 4.6 million shares, those shares would be quoted at about $10 per share, making them purchaseable by small investors. The financial services firms would of course charge for running such investment companies, which would be the point of their setting them up.
Buffett considered this an unconscionable way for such firms to exploit small investors' desire to have a stake in Berkshire Hathaway.
Accordingly he pre-empted them by creating a new class of "B" shares, which had only 1/30 of the economic value per share of the "A" shares, and were therefore quoted at roughly 1/30 of the "A" share price. This put a stop at any attempt to promote such investment companies.
Had the "B" shares not been created, I could never have become a shareholder in Berkshire Hathaway.
The "B" shares were split 50:1 in 2010 so now each "B" share represents 1/1,500 of an "A" share as stated in the memorandum "Comparative Rights and Relative prices of Berkshire Class A and Class B Stock" on the Berkshire Hathaway website..
The investment returns that Warren Buffett has achieved over half a century mean that he is probably the greatest investor who has ever lived. Starting with the kind of small-scale business activities that any American teenager might engage in, Warren Buffett by his own investing talents became the world’s richest or second richest man (depending upon stock market values as they fluctuated).
Alice Schroeder is a certified public accountant who previously worked for Ernst & Young and then became a managing director at Morgan Stanley, first meeting Warren Buffett in 1998. In the early 2000’s she was given extensive access to Warren Buffett, his family and friends and his papers in order to write what is clearly an authorised biography.
It was published in the UK in 2008 and Amazon’s UK website tells me that I bought it on 21 Jan 2009. However the 800 pages looked very daunting and I have a large reading backlog. Accordingly I only read it a few months ago but once I started it, I found it impossible to put down. It is incredibly well written and utterly fascinating.
The author begins with an epigraph:
It is the winter of Warren's ninth year. Outside in the yard, he and his little sister Bertie, are playing in the snow.
Warren is catching snowflakes. One at a time at first. Then he is scooping them up by handfuls. He starts to pack them into a ball. As the snowball grows bigger, he places it on the ground. Slowly it begins to roll. He gives it a push, and it picks up more snow. He pushes the snowball across the lawn, piling snow on snow. Soon he reaches the end of the yard. After a moment of hesitation, he heads off, rolling the snowball through the neighborhood.
And from there, Warren continues onward, casting his eye on a whole world of snow.
Warren's entire life can be summed up by that incident, as his wealth has grown from small beginnings.
With a person like Warren Buffett, it is easy to see them only as the embodiment of their financial success. It is easy to forget that everyone, no matter how rich, is a human being.
The access that Alice Schroeder received allows her to tell us about Buffett’s very difficult relationship with a cold and unemotional mother, and the effect this has had on his entire life. We also see the extent to which his focus on his career affected his relationship with his children and with his late wife Susan.
Reading the book, we learn both about Warren Buffett the businessman of impeccable integrity and Warren Buffett the human being, immensely successful at one aspect of his life, and yet in so many ways an incomplete person.
America has a great tradition of philanthropy. The man who created United States Steel Corporation, Andrew Carnegie, gave away his fortune to endow academic institutions and public libraries. He said “The man who dies rich, dies disgraced.”
Like his friend Bill Gates, Buffett is giving away the overwhelming bulk of his fortune to charity. He is so self-effacing that he is not even creating a “Warren Buffett Foundation.” Instead his vast wealth is being given to the Bill and Melinda Gates Foundation since Bill Gates is much younger than Warren Buffett and will be in a position, hopefully, to oversee its distribution.
Once you start reading this book, it is impossible to stop and to you get to the end. It is a very short 838 pages excluding the notes and index. It is the most complete life of Warren Buffett so far written.
There are few numbers in the book and I believe that it can be read by anyone with a reasonable level of education but without requiring a financial or business background. However it does help to be interested in the business world. I have no hesitation in recommending it.
Kindle edition above