Warren Buffett

[boomer029]

Alright, so...

I'm doing a research paper on Warren Buffett, explaining why I believe he is a visionary. Unfortunately, I feel it may have been a bad choice because there is just so much material to dig through and comprehend. I also don't have much expertise in the finance field, but I've wanted to learn about him for a while, so I figured it'd be interesting and fun. However, there's just so much information! So, on to my question...

I'm about half-way done now, and my girlfriend proposed a question to me. She said, "I understand that Warren Buffett is a billionaire, but I don't get how. Where does his money come from? Does he just sell his shares in the companies he owns, or even the companies themselves, to get cash in his pocket? How is he just as rich as Bill Gates if he doesn't actually sell a product??"

After doing, hours of research and reading books, I felt foolish that I couldn't give her an answer. I understand he pays himself $100k a year, but where does this money come from. So my question is, I understand he owns all these companies through Berkshire Hathaway, but how does he actually put money in his pocket? The answer is probably obvious, and I may be thinking to deeply about it, but I'm also giving a presentation on this, so I'd like to be able to explain it to the class in an easy to understand manner.

Thanks in advance to anyone who gets back to me on this.

[dczech09]

Warren Buffett is the Chief Executive Officer of Berkshire Hathaway which is a property and casualty insurance company. As the CEO, he pays himself $100,000 per year, which would make him one of the lower paid CEO's of large publicly traded corporations.

Where Warren Buffett gets his real call to fame is through investing. Buffett started investing in companies when he was a kid. He has owned shares in Coke since he was like 10 years old or something.

Today, he owns shares in A LOT of different businesses. Actually, he completely owns Dairy Queen.

Most of Buffett's money is in stocks. So while is net worth is like $30 billion or so, his wealth is not all in liquid cash. In fact, I would be willing to bet that a very small portion of his wealth is in cash or bank deposits. The majority is company stock and real estate.

So where does his money come from? The ownership in many different businesses. He has bought shares in companies that he thought were profitable, he risked some of his money, and ended up being right. The companies he invested in were indeed profitable companies, so the shares he bought originally became worth more money.

While Bill Gates made his fortune by creating and selling a product, Buffett made his by investing in companies that create and sell products. Both are legitimate ways of making money. Buffett had the foresight to see which companies were profitable and worthy of his investment. His investments in those companies allowed those companies to expand, grow, and build their brand.

Personally, I have a little bit of a "beef" with him because of the so called "Buffett Rule." But nevertheless, Buffett is definitely a visionary when it comes to investing. Himself and Benjamin Graham (Buffett's teacher) are true examples of what it means to be a value investor.

[disneysteve]

I understand he pays himself $100k a year, but where does this money come from.

It comes from the operating income of the business, just like anybody else's salary.

Most of Buffett's money is in stocks. So while is net worth is like $30 billion or so, his wealth is not all in liquid cash. In fact, I would be willing to bet that a very small portion of his wealth is in cash or bank deposits.

True, though many of us who aren't quite as wealthy could say the same thing. The vast majority of my wealth isn't in cash or bank deposits either.

[boomer029]

dczech09, thanks for the long reply. It really helped put a lot of what I've read in a simple light. Also, disneysteve, thanks for your input as well.

As far as being a visionary, I completely agree Buffett and Graham are true examples of what value investing is. However, the other angle I was shooting for was his philanthropic contributions. Do you think it would be better to center the idea of him being more of a legendary value investor, or his philanthropic contributions? I mean, he's giving like $30 billion to philanthropic foundations, specifically, the Bill and Melinda Gates Foundation.

Also, what % of the country would you say favors the new Buffett rule? Is the general population against it, or is this somewhat unanswerable?

The research paper is for English class, so I guess it makes a little bit of a difference. If it were for a business class, then I would definitely choose to talk about his contributions to value investing.

[jpg7n16]

Do you think it would be better to center the idea of him being more of a legendary value investor, or his philanthropic contributions?

This is your research paper not ours. Which aspect of his life would you rather research and learn about?

You picked him for a reason. What was that reason?

[dczech09]

I agree that this is your paper, so you choose the theme.

But one thing you should remember...

Warren Buffett had the money to contribute to charities because he made it first. If he never made the money in the first place, he would never have been able to donate. So the magical goose came first, the golden eggs came second.

As far as the Buffett rule, it is very divided. Like the Occupy Wall Street movement, I would say our country is divided about 30% in favor and 70% not in favor. It is a divided issue because a lot of people's viewpoints are driven entirely by emotion. For example, most millionaires are against it because they would lose more money. Most poor people are for it because they see more handouts.

[EEinNJ]

Since you say this paper is for an English class, rather than business, I would guess that the focus would be more biographical. I would also guess that what you'll be graded on is how well written and researched it is, rather than how he made his billions.

There was a book written about him by one of his daughter-in-laws, partly about him, partly his investing style, which would be a great source. He's famous for his taste for ice cream, Coca-Cola, and hamburgers, which he attribute to a childhood birthday party. Despite being a billionaire, he's known for living a middle-class lifestyle (though that probably doesn't count the private jet).

[bjl584]

I agree with EEinNJ. This paper is for an English class not an Economics class, so it probably isn't necessary to get into the mechanics of his investings and holdings. Maybe more of a timeline biography style paper. Giving more detail about him as a man, his childhood, his upbringing, his current state.

[feh]

As far as the Buffett rule, it is very divided. Like the Occupy Wall Street movement, I would say our country is divided about 30% in favor and 70% not in favor.

Actually, I think the percentages are just about the opposite of what is stated here; 70% in favor.

But, there have been polls done on this subject. The OP should use google instead of asking us.

[maat55]

It is possible that Buffet is a corrupt hypocrit. While he claims he should pay higher taxes, he is in no hurry to pay the taxes he already owes. Not to mention he earns most of his money in dividends and capital gains.

Warren Buffett's Berkshire Hathaway Owes Taxes Going Back To 2002

Is there back scratching going on here?

Buffett’s Burlington Northern Among Pipeline Winners - Bloomberg

Did Nebraska Sen. Ben Nelson and Warren Buffett Help Obama Kill Keystone Pipeline to Benefit Burlington Northern Railroad? | Video | TheBlaze.com

[woodie96]

I think like EEinNJ and BJL...
Since this is an English paper, I would try to cover his entire life.
Childhood, rearing, maybe some of his early dreams and visions of investing and how some of those ideas paid off.
JMHO

[elessar78]

I'd read The Warren Buffet Way, by Hagstrom

That will give you a great idea of how WB built his wealth.

In his own words, he has a gift for "allocating capital," in plain speak he takes money that people give him to invest and he gives it to companies that are simple to understand (Coca Cola, Geico, Dairy Queen, and the Washington Post to name a few), have sound fundamentals (they turn a REAL profit and have little or no debt), and have a good leadership team in place. These three things (I may have left out one or two) are the basis for his philosophy on which companies he invests in. He doesn't believe in buying low and selling high—if you research a company and believe in it, why kill the golden goose? Just let the company keep paying you or increasing your wealth.

What is interesting about him from a human standpoint is that he has very little interest in what money can buy. In my perspective, he enjoys the puzzle of how to make more money. He lives in a modest house and still drives a modest car.

All this is in stark contrast to how the "investment business" is done today for the vast majority.

When we talk about "wealth" it's in terms of Net Worth: the value of ALL your worldly possessions put together. A teenager might have a couple of hundred dollars in net worth. But once you buy a house, have some money in the bank, have a retirement account, jewelry—you add all these up to come up with your net worth. Now WB his net worth is the total value of all the companies he owns. So while Berkshire-Hathaway has a lot of cash, it probably represents something like 10% of B-H's total assets

He is a visionary because he's doing simple things, following simple rules, and acting like a contrarian in a field that is obsessed with the complexity of algorithms, market trends, employment figures.

Did I just write your paper for you? I admire Warren Buffet and I can't help but ramble on about him.

[elessar78]

dczech09, thanks for the long reply. It really helped put a lot of what I've read in a simple light. Also, disneysteve, thanks for your input as well.

As far as being a visionary, I completely agree Buffett and Graham are true examples of what value investing is. However, the other angle I was shooting for was his philanthropic contributions. Do you think it would be better to center the idea of him being more of a legendary value investor, or his philanthropic contributions? I mean, he's giving like $30 billion to philanthropic foundations, specifically, the Bill and Melinda Gates Foundation.

Also, what % of the country would you say favors the new Buffett rule? Is the general population against it, or is this somewhat unanswerable?

The research paper is for English class, so I guess it makes a little bit of a difference. If it were for a business class, then I would definitely choose to talk about his contributions to value investing.

Philanthropists are a dime a dozen. Sorry, they are. There's more of a story about a guy who is obssessed about accumulating wealth but has no more than a passing interest in what that fantastic wealth can buy. We're living in an age of the Capitalist society, one that (arguably) started in the Italian renaissance and this is one of the men that has mastered the system some 500 years later.

He has a quote about how he's fortunate to be born when and where he did. If he had been born in cave man times, he'd be utterly useless.

[BuffettLover]

Great Capital Allocator

Indeed Buffett is a great capital allocator, no doubt about this. But I think it is more than about buying great companies with great moats. How do I know this? Because I check the quarterly filings of BRKA and it shows that he isn't really buying and holding stocks forever. There must be more to it than that. It nags the heck out of me because I felt there was something else missing. And lo and behold, after I read Chris Beanie's "The Best Trading System" investing book (check it out on Amazon.com) I start to see the complete picture. The quarterly reports indicates he is not a buy-and-holder, clearly.

[elessar78]

Indeed Buffett is a great capital allocator, no doubt about this. But I think it is more than about buying great companies with great moats. How do I know this? Because I check the quarterly filings of BRKA and it shows that he isn't really buying and holding stocks forever. There must be more to it than that. It nags the heck out of me because I felt there was something else missing. And lo and behold, after I read Chris Beanie's "The Best Trading System" investing book (check it out on Amazon.com) I start to see the complete picture. The quarterly reports indicates he is not a buy-and-holder, clearly.

Out of curiousity what percentage of the entire portfolio do the "sells" represent?

What's the back story of the companies he sells? How long has he held them? Have their fundamentals changed? Management change?