Warren Buffet: The secret of the billionaire's

success

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Stocks plunge, banks implode, currencies teeter...Amid

theStocks
wreckage
of the
world
financial
system, only one man
plunge,
banks
implode,
currencies
stands
tall. So what's
Warren Buffett's
secret?
Sally Ann
teeter...Amid
the wreckage
of the world
financial
Lasson
finds
theone
answer
his incredible
life story
system,
only
man in
stands
tall. So what's
Warren
Buffett's secret? Sally Ann Lasson finds the answer
in his incredible life story
MONDAY 16 FEBRUARY 2009

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Warren Buffet: The secret of the billionaire's

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MONDAY 16 FEBRUARY 2009
I first heard of Warren Buffett 10 years ago, in an article written by Dominic Lawson. At the time, I did know the
difference between a repayment mortgage and an interest-only mortgage, but that was about the extent of my interest in
financial affairs. Bankers and investors were people you gave a wide berth to at parties, on the grounds that they were
certainly immoral and probably criminal. (Or both, as it turns out.) Anyway, there was an intriguing nugget in this article.
It said that in spite of being richer than God, Buffett has always lived in the house that he bought for $31,500 in 1958. A
Master of the Universe who does not live in a lateral duplex penthouse shrine to his own fabulous ego? What the hell was
going on here?
The publication of the thousand-page official biography of Warren Buffett, The Snowball by Alice Schroeder, couldn't have
come at a better time. It is surely the book of the moment, because a history of Warren Buffett is a history of high finance
from the 1930s to the present day. To know Warren and I think of him as Warren now is to love him. He looks like
George Burns, and he plays the ukulele; plus, he is not a crook. You just want to pick him up and take him home.
The hardback was published towards the end of last year. It is an extremely heavy book, very difficult to prop up in bed.
You have to wedge it against a pillow to read one side, and then turn around and wedge it the other way to see the next
page. It took me more than two months to finish, and I had to read many parts of it over and over again to make sure I'd
understood everything correctly. I'd go to sleep thinking I'd finally cracked the finer points of arbitrage only to find out
that, no, the next night it was all gone again. I took to underlining and writing notes and prompts. I also attempted to
engage anyone I spoke to on the subject. And I mean anyone.
The whole secret of his success can be reduced to this: invest your money in good companies that you think are well run.
Reinvest the profits in other good companies. Never borrow money. Do all this, and your money will compound in value.
There. Sounds simple, doesn't it?
Nonetheless, it took someone special to make it all sound so simple in the first place. Warren's infatuation with numbers
began very early in life, when he started to calculate the odds on which of his marbles would go down the plughole first, in
a game of his own devising. His interests quickly spread to collecting stamps, coins, bottle tops, licence-plate numbers
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and, of
course, reading.
He could memorise whole books of numbers, and when he was six he ran his own business selling chewing gum door to
Stocks
plunge,
currencies
teeter...Amid
door. It wasn't
long before hebanks
had diversifiedimplode,
into Coca-Cola (a brand
he would, many years later,
own a large chunk of)
and used golf balls, which he spent hours collecting. He often used to involve friends in these small enterprises, realising
because he was somewhat
and emotionally
withdrawn himself,
it was essential
to network
within
a
thethat
wreckage
of socially
the awkward
world
financial
system,
only
one
man
group of trusted peers. This would become the template of how he would always do business, and the foundation of the
investment partnership that eventually become Berkshire Hathaway.
stands
tall. So what's Warren Buffett's secret? Sally Ann
By the time he was 10, Warren had pretty much figured out what he was going to do with his life. He wanted money. "It
could make me independent. Then I could do what I wanted with my life. And the biggest thing I wanted was to work for
Lasson
finds the answer in his incredible life story
myself. The idea of doing what I wanted to do every day was important to me."
The funny thing is that what he wanted to do every day was always exactly the same. Unless travelling to board meetings
on his private jet (the famously named Indefensible), his days always follow the same pattern: he drives one and a half
miles from the house he bought in 1958 to the modest office he's always occupied in downtown Omaha, Nebraska, in the
Midwest, and sits down at the desk that had belonged to his father Howard, at exactly 8.30am. He then spends his day
MONDAY
2009
trading16
andFEBRUARY
reading every single
scrap of financial information he can acquire, including daily reports on the performance
of each of the thousands of companies he owns; reports detailing everything down to how many pounds of Peanut Butter
Hearts were sold by See's Candies the day before. He goes home at 5.30pm.100
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Warren Buffet: The secret of the billionaire's

success

He is a creature of habit in most respects. "I like eating the same thing over and over again. I could eat a ham sandwich
every day for 50 days in a row." He eats his food in sequence, one item at a time, and does not like the individual elements
of a meal to touch. His favourite foods are chocolate-chip ice cream, popcorn, hamburgers and Cherry Coke.
His work is his obsession, but his other big interest is bridge. He plays on the internet every night if he is at home, or with
his regular partner and friend of many years, Sharon Osberg, a world champion. In 1993, they entered the mixed pairs at
the World Bridge Championship and unexpectedly qualified for the finals. It was Warren's debut in a serious tournament
and, finding it all rather stressful, he withdrew. Playing bridge is the only thing he knows how to do on his computer,
which is funny, considering that his best friend and mini-me is Bill Gates.
It was love at first sight when Warren met Bill in 1991, and it wasn't a huge surprise when, in 2006, he announced that he
would give most of his fortune to the Bill & Melinda Gates Foundation. After much consideration, he concluded that they
were the only people who knew how to deal with such a fantastic amount of money about $60bn. He was never going to
bequeath it to his children (he has three) as he doesn't believe that to be a morally sound act, but he has been increasingly
generous to them in recent years, when he appears to have mellowed on the subject. Interestingly, when his own father
was dying in 1964, he had himself removed from the will to increase the share left to his two sisters. He felt that the
amount $180,000 would be pretty easy for him to earn himself. And so it turned out.
So, what can we learn from the Sage of Omaha? Should we all be reprogramming our minds to work the Warren way?
Well, we can try. After all, this Master of the Universe has a philosophy for every part of life, not just arbitrage. There are
lessons to be learnt about, say, dieting...
On dieting
Warren diets by numbers how else? He would sometimes limit himself to as little as 1,000 calories a day, but he's
managed the budget however he liked. The central idea behind his strategy is to get the pain of dieting over with fast. "I
reckon I can eat about a million calories a year and maintain my weight. I can spend those calories how I want." When his
children were young, he'd write them cheques for $10,000, payable on a certain date if he weighed more than an agreed
amount. They never got to cash those cheques. He preferred to lose weight rather than money.
On financial derivatives
"Derivatives are like sex," he said in 1998. "It's not who we're sleeping with, it's who they're sleeping with that's the
problem." In 2002, he famously predicted that derivatives would destroy our financial institutions. Warren's predictions
have been
so accurate in recent years that he has been upgraded from the Sage to the Oracle of Omaha.
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On success

Stocks
plunge, banks implode, currencies teeter...Amid
Reassuringly, in these straitened times, even a multibillionaire like Warren knows that not everything comes down to
"Basically, when you get to my age, you'll measure your success in life by how many of the people you want to love
themoney.
wreckage
of
the
only
man
you
actually do love you. If
you get
to myworld
age in life andfinancial
nobody thinks well ofsystem,
you, I don't care how
big your one
bank balance
is, your life is a disaster."
stands
tall. So what's Warren Buffett's secret? Sally Ann
On love
Lasson
finds
answer
inwon't
his
incredible
life
Likewise, there
are somethe
things that
all that filthy lucre
get you:
"The trouble with love
is that story
you can't buy it. You
can buy sex. You can buy testimonial dinners. You can buy pamphlets that say how wonderful you are. But the only way to
get love is to be lovable. It's very irritating if you have a lot of money. You'd like to think you could write a cheque."
On 'the circle of competence'

MONDAY
FEBRUARY
2009
Warren16
believes
in operating
within his own limitations in what he called the circle of competence. He has, in effect,

drawn a line around himself and stays within the subjects on which he is an absolute expert. He has never bought
technology stocks, for example, because he doesn't understand the business.100
This caused him to be written off in the 1990s
dotcom boom, which he said wouldn't last (and which, of course, didn't). Only twice has he bought stock outside the US.
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Warren Buffet: The secret of the billionaire's

success

On positive thinking

Even the greatest achievers have to take the occasional step backwards. Even Warren. His message: don't get your less
glorious moments out of proportion. "If you go from the first floor to the 100th floor of a building and then go back to the
98th, you'll feel worse than if you've just gone from the first to the second, you know. But you've got to fight that feeling,
because you're still on the 98th floor."
On ideas
Light-bulb moments of genius aren't the only route to life-changing success. In fact, you're sometimes better off with a less
impressive idea. "You can get in more trouble with a good idea than a bad idea," Warren's mentor Ben Graham taught
him, "because you forget the good idea has limits."
The 'Inner Scorecard'
There are two kinds of people in life, according to Warren: those who care what people think of them, and those who care
how good they really are. Which are you? "The big question about how people behave is whether they've got an Inner
Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always look at it this way. I say,
'Lookit. Would you rather be the world's greatest lover, but have everyone think you're the world's worst lover? Or would
you rather be the world's worst lover but have everyone think you're the world's greatest lover?' Now, that's an interesting
question."
On looking after yourself
Warren has never smoked or drunk alcohol. He is, at 78, extremely healthy. One of his homilies to college students is
about imagining that a genie appears to you at 16 and offers you a car of your choice. There's only one catch; this is the last
car you're ever going to get. "I would read the manual about five times. I would always keep it garaged. If there was the
least little dent or scratch, I'd get it fixed right away because I wouldn't want it rusting. I would baby that car because it
would have to last a lifetime. That's exactly the position you are in concerning your mind and body."
On culture
The Sage of Omaha has excluded culture from his life because it would interfere with his focus on business. For 30 years,
he didn't notice a Picasso hanging in a bathroom at the house of his best friend Kay Graham, former publisher of The
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Washington
Post, until it was pointed out to him.
Dealing with your deficiencies
Stocks
plunge, banks implode, currencies teeter...Amid
Warren was very influenced by the book How To Win Friends and Influence People by Dale Carnegie, first published in
1930s. The book lists 30
of behaviour.
The firstfinancial
is: "Don't criticise, condemn,
or complain."
This idea
riveted man
thethe
wreckage
ofrulesthe
world
system,
only
one
Warren, who hated criticism. In his early twenties, he signed up for a Dale Carnegie course in public speaking. "You can't
believe what I was like if I had to give a talk. I was so terrified that I just couldn't do it. I would throw up. In fact, I
stands
tall.
SoI never
what's
Buffett's
secret?
Sally
arranged my
life so that
had to get upWarren
in front of anybody."
The course was a success
and Warren
has been Ann
teaching, lecturing and explaining everything he can to anyone who will listen ever since. He seems to have viewed
Berkshire Hathaway as a teaching tool right from its inception, and its annual shareholders' reports are pored over like
Lasson
the answer in his incredible life story
tablets fromfinds
Moses.
On politics
Although his father was a Republican Congressman, Warren is a life-long Democrat who supported Barack Obama. He
rails against what he insists is an inequitable tax system whereby he pays a lower rate of tax than his secretary.

MONDAY 16 FEBRUARY 2009

On career selection

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Warren Buffet: The secret of the billionaire's

success

Find something you are passionate about. Only work with people you like. If you go to work every morning with your
stomach churning, you're in the wrong business.
On golf

The love of golf is another thing he has in common with Bill Gates. Warren attended the Gates's wedding on New Year's
Day in 1994, which was held on the 12th tee of the Four Seasons golf course in Hawaii.
On the 'bathtub memory'
Warren never dwelled on anything unpleasant. He came to think of his memory as functioning like a bathtub. The tub
filled with ideas and experiences and matters that interested him. When he had no more use for the information, whoosh
the plug popped up, and the memory drained away. Painful memories were the first to be flushed, along with anything
that might detract him from his goal: to become a millionaire.
On the rules of investment
Rule No 1: don't lose money. Rule No 2: don't forget Rule No 1. Rule No 3: don't get into debt.
And finally...
In case you have any doubt as to the wisdom of any of these points, it is worth one last reminder that Warren is indeed a
man worth listening to. (You may need to ask your financial adviser to explain the finer points of the following tale. And if
he or she doesn't understand it either, you may need a new financial adviser.)
Long-Term Capital Management was the largest hedge-fund start-up in history when it launched in 1994. Warren was
approached to invest in it, but declined he didn't think it had the margin of safety within which he liked to operate,
although the highest loss LTCM contemplated was 20 per cent of its assets.
The fund was astonishingly successful and amassed $7bn of capital in just three years. The investors specialised in buying
risky positions in such large amounts that they couldn't fail. Or they thought they couldn't. But then Russia defaulted on
its rouble debt in 1998, and the Dow dropped in a global margin call, with investors panicking and selling. Soon, LTCM
was forced into leveraging the leverage that was already leveraged. Finally, the Federal Reserve was forced into taking the
unprecedented step of bailing out a private investment firm.

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So, yes, Warren was right. The risk was there after all. It's a sorry story worth checking out, as it provides a model of our
current situation. The moral of the story? Warren would never have gotten us into this mess.

Stocks plunge, banks implode, currencies teeter...Amid

Hathaway: His empire in numbers
theBerkshire
wreckage
of the world financial system, only one man
$62bn
stands
tall. So what's Warren Buffett's secret? Sally Ann
Warren Buffett's net worth, making him the world's richest man.
Lasson
$100,000finds the answer in his incredible life story
The salary paid to Buffett, one of the lowest-paid CEOs of a large company in America.
1962

MONDAY
16Buffett
FEBRUARY
2009
The year
began buying
stock in Berkshire Hathaway, which began as a textile manufacturing company in 1839. By
1967, Buffett, now controlling the business, had moved into insurance and other investments. By 1985, BH had ceased its
100
textiles operations.
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Warren Buffet: The secret of the billionaire's

success

58 million

The number of shares in Tesco bought by Buffett in 2006, making him a top shareholder.
$89,000
The current value of Berkshire Hathaway's shares, listed on the New York Stock Exchange; they peaked at $148,000 in
2008.
32,000
The number of people who attended the BH AGM in 2008. Held in Omaha, Nebraska, it is known as "the Woodstock of
capitalism".
13
Age at which Buffett filed his first tax return, deducting $35 for his bicycle (he had a newspaper round).
3bn
In Swiss francs, the fresh capital Berkshire Hathaway injected into the insurer Swiss Re last week. In 2008, Buffett
invested $5bn in Goldman Sachs and $3bn in General Electric.
19%
The stake, worth just over 2bn, that Buffett holds in Wrigley, the chewing-gum maker.
$13.73
The value to which Harley-Davidson shares soared when Buffett bought a $300m tranche of debt in the company this
month.
$32

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The price of a Berkshire Hathaway branded men's polo shirt in 'Espresso brown', sold on the company website.

Stocks
plunge, banks implode, currencies teeter...Amid
Sources: ft.com; Forbes
theThey
wreckage
of the
world
financial system, only one man
did it their way: Wisdom
of the
self-made moguls
Steve Jobs
is the co-founder
of Apple, Warren
the computer manufacturer
whosesecret?
revenues topped
$32bn inAnn
stands
tall.
So what's
Buffett's
Sally
2008, and digital animation studio Pixar, whose last movie 'Wall-E' has grossed $533,692,120 worldwide.
Lasson
finds
the
answer
his
incredible
life
"Don't be trapped
by dogma,
which
is living with thein
results
of other
people's thinking. Don't
let thestory
noise of other's
opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They
somehow already know what you truly want to become."

John Paul Getty (1892-1976) was the oil magnate named the richest living American by 'Fortune'
magazine in 1957. His net worth was approximately $50bn at his death. This is the first of his "10 secrets
of success"
from his book
'How To Be Rich'.
MONDAY
16 FEBRUARY
2009

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Warren Buffet: The secret of the billionaire's

success

"The man who wants to go into business for himself should choose a field which he knows and understands. Obviously, he
can't know everything there is to know from the very beginning, but he should not start until he has acquired a good, solid
working knowledge of the business."
John D Rockefeller (1839-1937), founder of Standard Oil, revolutionised the oil industry and became the
model for modern philanthropy. His estimated net worth at his death was more than $300bn.
"A friendship founded on business is a good deal better than a business founded on friendship."
Richard Branson founded Virgin Enterprises, which now encompasses more than 350 companies. He
has an estimated net worth of $4.4bn.
"Business opportunities are like buses: there's always another one coming."
Russell Simmons founded Def Jam records in 1984. Def Jam artists include LL Cool J, Beastie Boys,
Public Enemy and Jay-Z. Universal bought out Simmons in 1998 for a reported $100m.
"I've been blessed to find people who are smarter than I am, and they help me to execute the vision I have."
Sam Walton (1918-1992) founded the department store chain Wal-Mart, which, according to the 2008
Fortune Global 500, is the world's largest public corporation, with annual revenues of more than
$400bn.
"High expectations are the key to everything."
Martha Stewart, TV host and founder of the Omnimedia business empire. In 2003, she was convicted of
securities fraud and sentenced to five months in prison. Her net worth was, none the less, estimated at
$638m in 2007.

"I think it's very important that whatever you're trying to make or sell or teach has to be basically good. A bad product and
you know what? You won't be here in 10 years."
Harvey Firestone (1868-1938) was the founder of the Firestone Tire & Rubber Company, whose
international
success was a boon to the entire US economy during the 20th century.
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"Capital isn't that important in business. Experience isn't that important. You can get both of these things. What is
important is ideas."

Stocks plunge, banks implode, currencies teeter...Amid

magnate Aristotle Onassis (1906-1975) left Greece for Argentina at the age of 17 with just $63.
theShipping
the
world
Hewreckage
had made his first of
million
within
two years. financial system, only one man
"After a certain
pointSo
moneywhat's
is meaningless.Warren
It ceases to be the goal
the game is what
counts."
stands
tall.
Buffett's
secret?
Sally Ann
Donald Trump, the real estate developer, was valued at $3bn in 2007. The economic crisis has hurt his
Lasson
finds
the answer
incredible
life story
finances, but
he is countersuing
his creditorsin
andhis
says the
crisis is an act of God.
"Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The
second is that you're generally better off sticking with what you know. And the third is that sometimes your best
investments are the ones you don't make."

MONDAY
16Edison
FEBRUARY
2009
Thomas
(1847-1931)
was the inventor of the electric light bulb and founder of General Electric,
one of the original 12 companies listed on the 1896 Dow Jones Industrial Average. GE is the world's tenth
100
largest company.
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Warren Buffet: The secret of the billionaire's

success

"Genius is one per cent inspiration, and 99 per cent perspiration."

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Stocks plunge, banks implode, currencies teeter...Amid

the wreckage of the world financial system, only one man
stands tall. So what's Warren Buffett's secret? Sally Ann
Lasson finds the answer in his incredible life story
MONDAY 16 FEBRUARY 2009
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