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Buffett: Rock star of American capitalism

(chinadaily.com.cn)
Updated: 2009-08-26 14:12

Buffett's approach to investment involves using seventh-grade math and common sense to analyze a company's underlying economics; buying a business not a stock; ignoring the fluctuations of the stock market; and, most importantly, maintaining a margin of safety.

After initially attending business school at Wharton, Buffett got his MBA degree from Columbia University in 1951 so that he could study under Graham. Buffett modified Graham's process of holding a widely diversified portfolio of statistically cheap stocks, and made concentrated investments in a few easy to understand, stable, growing businesses run by good, shareholder-friendly managers.

Buffett's three rules of portfolio management are: 1) Don't lose money; 2) Don't forget rule one and 3) Don't go into debt. His focus, an intellect which is a perpetual learning machine, rationality, confidence and an ambition from childhood to become rich are identified by Schroeder and others as personal traits that drove his success.

Moreover, he attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success.

Buffett freely acknowledges making several errors. The biggest was his purchase of Dexter Shoes for $433 million in 1993, and then compounding the error by paying with 1.6 percent of Berkshire stock, effectively costing shareholders more than $2.2 billion at the current stock price.

Also, following years of losses, Buffett liquidated Berkshire's original textile operations in 1985. While the textile business provided the capital for entry into the insurance business - "the cornerstone of Berkshire," as Buffett puts it - the employees who lost their jobs got minimal severance compensation.

Related readings:  Buffett offers useful advice, while Schwab whines on op-ed pages  Book Review: Dining on the Buffett of wisdom  Buffett's gamble pays off as BYD catches market fancy  Invest like Buffett, not with him for the best results

Obviously Buffett's successes are far more numerous than his failures. In the stock market, notes Schroeder, his strategy has been strict adherence to Graham's main principle of margin of safety.

In frothy bull markets, Buffett is fearful while others are greedy, taking profits on some holdings and piling up the cash generated by Berkshire's businesses.

Then, during severe stock market or industry declines, he is greedy when others are fearful, buying good businesses at attractive prices.

Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.

 

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