Has there ever been a lesspompous billionaire thanWarren Edward Buffett? Itis tempting to wonder not

only how such a man came to measurehis net worth in billions but alsowhether he might not be a time-traveller from another dimension.

To most of the financial communityacross the world, Buffett continues tobe an enigma. His name commands asmuch respect on Main Street as it doeson Wall Street, thanks to his old-fashioned thoughts and methods,which stand in stark contrast to themodern world where decisions areneeded yesterday and prices arechecked every second. Buffett ignoresconventional wisdom and continuesto swim successfully against the tide.

On Farnam Street leading toDowntown Omaha is Buffett’s house:it’s a modest home for a multi-billionaire. He bought it for $31,500 in1957 and has remained there ever since.

It’s the sort of house you would probably seein some Surrey suburb, though this house hasa rather greyish-brown façade. He hasremodelled it, though, and added rooms and ahandball court. A local real estate agent tellsme it is probably worth $500,000 now.

Confirming the Omaha address was not aproblem – Buffett is in the phone book. Orperhaps I should have asked his businesspartner and friend, Berkshire Hathaway vice-president Charlie Munger. For it was the 80-year-old Munger who walked past me while Iwas waiting for a shuttle bus earlier in the day.He was on the way to his car, parked in thesame parking lot as everybody else. I had notexpected to encounter a multi-billionaire insuch casual circumstances.

What a lot of people don’t realise, though, isthat Buffett also owns a house in California – a$150,000 summer home at Laguna Beachbought, it seems, at his wife’s request in 1971.It is worth around $4 million now.

I guess in retrospect not putting too muchmoney into property was probably a good ideafor Buffett, given his investment record: hehas significantly outpaced the equity market,which in turn has beaten the returns availableon property.

Unlike his investments, which he holds forsome time to avoid tax and to compound hisgains, Buffett wants to be taxed on his house.He suggested tax rises to ArnoldSchwarzenegger when the actor campaignedfor election as Governor of California, citingthe imbalance between the property taxes hepays on his homes – $14,401 in Nebraska and$2,264 in California. He was also againstdouble taxation relief agreed by the Senatelast year, indicating that it was the richer partof the population who would gain from thisrelief and not the population in general.

These views tie in with his view oninherited wealth. Buffett is opposed to liberalinheritance tax. ‘Dropping inheritance taxwould be like choosing the 2020 Olympicsteam by picking the eldest sons of the goldmedal winners in the 2000 Olympics,’ he says.He believes that if you remove the driver forcreating wealth, then in the long term you willprobably remove that wealth at a cost tobroader prosperity. It seems Buffett’s aim isnot a dynasty. On another occasion, whenasked what the right amount to leave one’schildren was, Buffett retorted, ‘a few hundredthousand ought to do it’. He argues that iftalent can’t be passed down to latergenerations, neither should money, and heplans on leaving the lion’s share of his fortuneto the Buffett Foundation.

Berkshire Hathaway is about managementwith a small ‘m’. Buffett reminds us on many

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Buffett:the enigmaof OmahaOn a recent visit to Omahafor the Berkshire HathawayAGM, shareholder PeterWebb decided to get somequestions answered aboutbuy-and-hold guru WarrenBuffett’s philosophy ofinvestment and life

PHOTO OF WARREN BUFFETT:MATT GREENSLADE/NEWSCAST

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occasions that head offices should be small,and his has only 16 people working in it. Notmany for a company that turns over $64billion. One reason for this is that he lets thechiefs of the companies Berkshire acquires runtheir businesses as before, except that hemakes them transfer their excess cash toOmaha and they have to clear their capital-spending plans with him. He see his role asBerkshire’s ‘capital allocator’, collecting theenormous cashflow that the subsidiariesproduce and using the money to buy morebusinesses through the stock market.

It sounds like a simple enough process. ‘Wedon’t believe in asset allocation – it’snonsense,’ he says. ‘We buy what makes sensetoday. We have no idea what is happeningtomorrow so we don’t try and make decisionsbased on that.’ Against the conventionalwisdom of most fund managers andinvestment advisers, Buffett and Mungersuggest NOT diversifying your investments,an approach that in the UK would attract thewrath of the FSA.

‘Diversification is wrong,’ says Munger. ‘Ifyou are intelligent enough and have thoughtabout it there is no reason to be timid. Thebest way to minimise risk is to think.

‘Asset allocation is nonsense. We keep toshort-term investments until we see anopportunity then we take it. In my view, assetallocation is just more merchandising by thesell side.’

Most of this would appear to be becausethey are confident with their investments andtherefore do not need to diversify away fromwhat they regard as good decisions.

Everybody knows Buffett will only come upwith a price that offers him an attractivereturn. So why do people sell at that pricewhen they know they are being low-balled?Especially in the context of increasing rivalryfrom private equity funds.

Buffett says: ‘Sure, private equity funds are aform of competition to Berkshire. When youare in an auction, market prices can do strangethings. When you buy a business you are

buying at a negotiated price so the prices arealways higher than purchasing stock. But westill prefer to buy a whole business rather thanjust common stock, even if the common stockis slightly cheaper.

‘People sell to us because we are one of akind: we will buy a business and still let theoriginal owners run it like they always have. Ifthey have a tax reason or a family situation andthey need to sell it off, they may not want toauction it like a piece of meat to some guy whowill leverage it up and sell if off in a few years.

‘It’s kind of silly to auction off yourdaughter to the highest bidder. If you haveinvested a lot of time and effort to get to thisstage, why do it? My promises are about asgood you will get in this arena.’

Buffett only takes a salary of $100k forrunning Berkshire Hathaway. With roughly onemillion ‘A’ shares outstanding, he effectivelymanages each $100k (rough current price of an‘A’ share) for 10 cents. A minute fraction of thefees a normal fund manager or investmenttrust would charge. Why doesn’t he accept ahigher salary or adopt a fee structure?

‘I’ve said before I love this job so much Iwould be willing to pay to do it,’ he says.Besides, he holds a very large amount of equityin the company. The core Buffett view is that ifthe owners, like the CEO, have large amountsof equity in the business, then they should nottake a large salary. If they are doing a good job,then their equity will grow enough on its own.

Predictability is everything for Buffett. ‘If wedon’t have earnings and price predictability,we’re not in the stock. You get predictabilityonly from simple companies. Simple stocks arethe only stocks that give you predictability.’

Being predictable compounds to quite a lotover time, and as Buffett holds for longperiods it all adds up. The problem withtechnology companies, and therefore onesthat are not simple to understand, is that theyoften use a lot of cash reinventing themselveson the next product or technology cycle. Thisis something that simple companies do notneed to do. It may be true that elephants don’tgallop but they tend to trample everything intheir path.

Mulling these many thoughts, later in theday I went to downtown Omaha with somefriends for a drink. We found an Irish bar andordered drinks. The phrase of the day was‘What would Warren do?’, so my friend askedthe barmaid, ‘What would Warren drink?’ Shereplied, ‘Err....Warren wouldn’t drink here.’Perhaps we still have much more to learnabout Buffett.

On consideration, it appears thatbusinesses sell to Buffett in deference to theother alternatives they have available, and

that the moral advocacy he espouses is areflection of the way he would like to beviewed and trusted. This extends into prettymuch all aspects of his life: it is part of Buffett.

Sellers of businesses like this, and hispromise never to sell their ‘babies’. Thereforethey are willing to accept a price morefavourable to Buffett on the basis that theirinterests will be well served.

There are two ways you can view this: eitherthat he has to act this way in order to maintainthis mode of operation or that maybe hismode of operation enables him to retain thiscompetitive advantage in an increasinglycompetitive industry.

Whichever view you take, do notunderestimate the skill of somebody who canturn an idea into a $120 billion companyconsistently over the course of many years.Speaking as a shareholder, long may thatcontinue.

If you would like to become a BerkshireHathaway shareholder then the A shares areavailable to purchase at around $90,000, or ifthat is beyond your budget then you can optfor B shares at around $3000. The B shares onlycarry 1/200 of the voting rights but both entitleyou to attend the famous annual generalmeeting in Nebraska.

I look forward to seeing you there nextMay. ■

‘We buy what makessense today. We haveno idea what happenstomorrow so we don’ttry and make decisionsbased on that’

PETER WEBB Peter has been an active private investor for14 years and regularly tutors and presents forGlobal Markets Training. He has spent mostof his career bringing technology products tothe UK and European markets for a variety ofmajor (and not so major) consumer brands.

Having worked at all levels of the supplychain he now balances his time betweenbeing at the cutting edge of businesses andgrowing the depth and breadth of hisinvestments.

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