Warren Buffett:

Sources of Success

A Descriptive Analysis Conducted for the International Investment

Management course
Utrecht School of Economics

Course: International Investment Management

Tutor: Judith Beugels
Students:
Peter Angelov 3250377
Heero Hoomans 3110605
Haoyu Teng 3084213
Academic year: 2008/2009
Utrecht School of Economics

“Warren Buffett: Sources of success” 1

 Table of Contents

1.Biography………………………...…...…5
1.1 Childhood……………………………….………. 5
1.2 Education and early career…………………….…6

2.Investing………………….………......….8
2.1 Views on the Market……………………………..8
2.2 Principles of Value Investing…………………….9

3.Warren Buffett‟s managerial skills….…12

4. Summary and Conclusion………..……15
5. Appendix……………………......……..17

“Warren Buffett: Sources of success” 2

Introduction
Investment professionals and academicians have debated for a long time the practical
applicability and relevance of what is now known as the Efficient Market Theory.
According to this theory analyzing stock performance is an activity that does not bring
any additional benefits since current prices reflect all available information. Thus, people
supporting the idea suggest that choosing randomly from a list of index stocks would
generate similar, if not the same, returns as to those obtained after a careful and costly
analysis performed by a professional financial expert. The EMT is an integral part of a
broader theory of Modern Portfolio Theory which goes further by describing the stock
market as a market resembling perfect competitive environment. As known a main
characteristic, among others, of such a market is that there are not excess profits in the
long run since any successful strategies would be easily copied and extra profits crowded
out. The MPT proposes the passive investment strategy, the choice of stocks resembling
the index, as the most successful strategy of all and defines the art of active portfolio
management as a loser‟s game. 1 Therefore, investors who beat the market and generate
higher returns are assumed to be just fortunate.
Yet some individuals appear to persistently outperform the market in many, even
consecutive years. Are those investors just extremely fortunate or are the current theories
just flawed? Is it possible that the stock market follows some alternative pattern from the
currently adopted paradigm? One of those extremely successful investors is Warren
Buffett, CEO of Berkshire Hathaway, a person with peculiar history and individuality,
and a proud owner of wealth currently estimated at 39$ billion, low from the highest of
62$ billion in mid 2008.2
The purpose of this paper is to reveal the sources of success that made the emergence of
Warren Buffett as an extraordinary investor and the accumulation of such and immense
wealth possible. We will investigate whether he was extremely successful only due to
luck and chance or there is something else that contributed to his outstanding
performance as an investor. In this way we will try to find out whether the modern

1
Larry E. Swedroe (2004), What Wall Street Doesn‟t Want you to Know, St. Martin's Griffin
2
Forbes Magazine

“Warren Buffett: Sources of success” 3

market theories could be adjusted in order to provide the necessary means for sustainable
investors‟ performance.
A topic like that has a particular relevance amidst the current financial crisis the world is
witnessing. What if the flaws of the stock market are incorporated in the system itself?
What if overconfidence stems from wrong business valuation techniques and myopias
investors? Moreover, the findings of such an investigation could prove extremely
beneficial to any person who contemplates to deal with any type of investing, either on
the stock market or in real assets.
The paper is structured in several sections with different topics, but each directed at
revealing more and more arguments in support of answering the ultimate question – the
sources behind Warren Buffett‟s success. The paper starts with biographical information
from his childhood years, his education, and early career tracing the most influential
experiences and people in his life. The research continues with a summary of his views
on the market, his top investment principles and methods of valuing a business where
each one will be carefully analyzed and clarified. Any empire of the size created by
Warren Buffett needs a well understood and strictly applied corporate culture, the topic of
the third section.. In the last section we will give a summary of our findings and an
answer to our research question.
Through the paper we will use as our main sources of information and concepts the
works of Robert G. Hagstrom and his book “The Warren Buffett Way”, “The essays of
Warren Buffett: lessons for corporate America” by Lawrence Cunningham, Warren
Buffett‟s own article “The Superinvestors of Graham-and-Doddsville”, Prof. John Price‟s
“Report on Warren Buffett, the nine investing principles of Warren Buffett”, and
Benjamin Graham‟s and David Le Fevre Dodd‟s “Security Analysis”. As a source of wit
and wisdom we will apply some of his most relevant quotes borrowed from his famous
letters to shareholders.

“Warren Buffett: Sources of success” 4

 1. Biography

For a tree to grow strong the roots have to be deep. In this section we will dig deep into
Buffett‟s childhood experiences, the role of his father in his life, his passions, and the
education he has undergone. Further on a succinct profile of his mentor Benjamin
Graham will be provided and his first steps as a professional will be traced. In this way
we would like to show that the path to success has its origins much earlier than the
financial statements could account for.

1.1 Childhood
Warren Edward Buffett was born in 1930 in Omaha, Nebraska. He is the son of Howard
and Leila Buffett. The figure of his mother has some ambiguity as to the influence she
had in Warren‟s life but the same can‟t be said for that of his father. Howard Buffett was
a local stock broker, a banker, and served as a four-term US Congress representative from
the conservative wing of the Republican Party. From an early age Warren became fond of
his father and often spent his spare time choking stock prices in his office or reading his
books on investment. The young Buffett even moved to Washington D.C when his father
got elected in the Congress. 3 The figure of Howard Buffett definitely served as a role
model of a leader and of entrepreneurial skills to Warren, characteristics clearly
recognized in his later years.
Warren‟s life is full of stories of childhood entrepreneurship. At the age of six he bought
six packs of Coca-Cola bottles, a company with great significance in his mature business
ventures, and resoled them for a profit. He made his first stock market investment at the
age of eleven when he bought three shares of City Services stock for the price of 38$ and
waited till they rose to 40$ when Warren sold them. But the stocks went on rising and
reached 200$ in two years, an event that served him as a good lesson to stay on the
market. Upon moving to Washington, while his father was busy with politics, he took
two routes as a paper delivery boy of The Washington Post, another major investment of
him, and Washington‟s Times-Herald. At this occupation he filed his first tax income
return being only thirteen. With the money he earned as a paperboy he and a partner of
3
Robert G. Hagstrom (1997), “The Warren Buffett Way”, John Wiley and sons Publishing

“Warren Buffett: Sources of success” 5

him bought reconditioned pinball machines and placed them in barbershops soon ending
up owning seven of those securing them some 50$ each weekly. But Buffett did not like
to spend; he was a gatherer and a holder and enjoyed much more seeing his money grow
than contribute to somebody else‟s wealth by spending them. Later on with the same
partner of him they bought a 1934 Rolls-Royce for 350$ and leased it for 35$ a day.
Upon graduation from high school at the age of sixteen, he had close to 6000$ of savings
and decided to invest it by buying 40 acres of land for 1200$ renting it to farmers. In
home Omaha Warren became a big fan of horse racing and the statistics of weights,
speed, and past performance fascinated him to the extent that he formed a partnership to
issue the “Stable Boy‟s Tip Sheet”. 4 None of these would be possible without Warren‟s
fascination by the magic of numbers and money. He could easily perform calculation in
his mind and keep track of them while having a conversation on a topic. What especially
was intriguing to him was the idea of money growing at a compound interest, a passion
he would keep for a lifetime.

1.2 Education and early career

After graduating high school Warren Buffett enrolled at the University of Pennsylvania in
1947, and more specifically the Wharton School of Business. However, after two years of
studies he became convinced that most lecturers knew less about finance than he did.
This made him return back home to Omaha where he obtained Bachelor of Science in
Economics from University of Nebraska. During those years he got acquainted with the
works of Benjamin Graham by reading “The Intelligent Investor”. This classic book
influenced him so much that he became determined to study under Graham and he did so.
Warren left home to move to New York where he graduated Columbia University with a
Master in Business in 1951. During those years Graham and Buffett formed a bond
between each other that would last for decades and would determine the investment
philosophy of Warren once and forever.
The significance of Graham in Buffett‟s career and the role of a mentor he would have in
future deserve a few words to be mentioned about his teachings. Benjamin Graham is
known as “the father of value investing”. He stressed the importance of trading on the

4
Kilpatrick, Andrew (1994), Of Permanent Value: The Story of Warren Buffett, Birmingham, Ala.: APKE

“Warren Buffett: Sources of success” 6

market as one would trade with a business partner that offers you the chance to buy you
or sell you his interest on a daily basis. This imaginary partner, to whom he referred as
Mr. Market, would sometimes offer fair deals but often his price would be either
undervalued or overvalued given the characteristics of a specific business, which created
the possibility of speculation. For him having a margin of safety on an investment,
meaning to buy a stock only if its price is lower than the conservative value of he
business, was essential. In this way he ensured any investment from fluctuations on the
negative side. For this purpose an investor has to determine the intrinsic value of a
company. In his believes a company that was well managed and firm in its belief about
the value of its product could and should prosper as an investment. 5 The mathematical
simplicity of Graham‟s methods appealed much to Warren‟s feeling of numbers.
After graduating Columbia University, Buffett returned to Omaha where he had a short
traineeship at his father‟s brokerage firm. During this time he didn‟t cut his contacts with
Graham but on the contrary, informing him for various investments he made and
discussing common topics of interest. Graham was generous with his time and thoughts
and this relationship between a professor and a former student eventually brought them
working under the same roof. In 1954 responding to a invitation of Graham, Warren
Buffett ended up as a security analyst at Graham-Newton Corporation. These two years
working side-by-side with Graham and the other analysts analyzing hundreds of
companies proved decisive for the future successive investment style of Buffett.
Apart from Buffett, Graham employed several other bright youngsters coming from
various fields of study and backgrounds. What unified them all was their common
understanding of the value investing approach and the willingness to apply it
unconditionally. Among them were Walter Schloss manager of WSJ Ltd Partners, Tom
Knap, founding partner of Tweedy, Browne Partnerships, and the founder of Sequoia
Fund Bill Ruane. All of them became very successful investors in their careers after the
liquidation of Graham-Newman which proves the fact that the success of Buffett was not
just a pure miracle but grounded to a big extent in his adopted investing methods. 6

5
B. Graham, D. Dodd (1934), Security Analysis, McGraw-Hill Professional
6
Warren Buffett (1984), The Superinvestors of Graham-and Doddsville Hermes Magazine

“Warren Buffett: Sources of success” 7

In this way, after almost two decades of business entrepreneurship, excellent education,
inspiring role models to follow and mentors to learn from, armed with bright mind and
proven successfully expertise, and friends to cooperate with, Warren Buffett became
ready to take it on his own. 1956 was the last year he worked under someone else‟s
supervision. From then on it would only be him on the steering board.

2. Investing7
After digging into Warren Buffett‟s early years its time to see what was inherited and
adopted by him in his investment style.In this section the focus will be on Buffett‟s views
on the market, thus his investing principles will be discussed as well as his criteria for a
business worthwhile buying. References to and comparisons with EMT and MPT
mentioned in the introduction will be made when talking about his personal believes and
principles.

2.1 Views on the Market

"I'd be a bum on the street with a tin cup if the markets were always efficient."
In his views on the market Buffett is influenced greatly by his friend and teacher Graham,
both directly challenging the EMT and the contemporary academic teachings and market
views on Wall Street. Buffett uses the same attitude towards it dealing as if the market
was a business partner from where the name Mr. Market stems. According to their view
Mr. Market often suffers from incurable emotional problems. In times of growth he is
very optimistic and euphoric about the business opportunities so he offers very high buy-
sell prices in fear that the investor will reap all his imminent gains. On the contrary, when
Mr. Market is depressed he sees only the pessimistic picture and his lower expectations
of future lucrative opportunities, not say that even losses are anticipated, makes him set
very low prices in fear that an investor will unload his interest on him. In both cases

7
For much of this part insights and notions have been imported from two sources and for convenience of
the reader reference is made only in the beginning of the section:
Lawrence Cunningham (1997), The Essays of Warren Buffett: Lessons for Corporate America, and
Prof John Price (2004), The Warren Buffet Report The Nine Investing Principles of Warren Buffett – and
how to profit from them, Roxburgh Securities Pty Ltd

“Warren Buffett: Sources of success” 8

prices deviate from the real value of a business. Moreover, Mr. Market is a partner that
does not mind being ignored, meaning that transactions are fully optional and whenever
an investor does not like the proposed price, he can wait until Mr. Market offers a new
one in hope that it will be more suitable. Thus Mr. Market‟s emotionality fully favors the
investor, as long as one uses the market as a servant not as a guide. For this purpose one
should be sure that one understands Mr. Market or else better not deal with him since
falling into his influence can be disastrous. Buffett synthesize all that very clearly –
“profit from folly rather than participate in it. Be fearful when others are greedy and
greedy when others are fearful.”

2.2 Principles of Value Investing

„Intelligent investing is not complex, though that is far from saying it is easy. What an
investor needs is the ability to correctly evaluate selected business. Note that word
„selected’, you don’t have to be an expert on every company, or even many.”

Warren Buffett has some very intelligent investment principles which are not very
complex and one probably does not have to be a mathematical or a social science genius
to understand them. But applying them would require a very conservative, clear and
analytical character. Acquaintance with the idea of value investing by Graham and Dodd
is almost obligatory. Here a synthesis of his most prominent principles will be presented
but the full grasp and diversity of strategies, especially concerning arbitrage and trading
of bonds, is beyond the scope of this modest paper.

Be an investor, not a trader

Probably principle number one of Buffett is to buy stocks as if he is buying a part of the
business not just a piece of paper he will sell tomorrow for a profit. He says he never tries
to make money from a business on the stock market but buys on the assumption that the
markets could be closed the day after and stay so for five years. He is often quoted for
saying “Our favorite holding period is forever”.

“Warren Buffett: Sources of success” 9

Buy the boring not the pompous ones.

Warren Buffett invests in companies only if he understands their business model which
means that he can value the foundations of the company and predict its future
performance. Then he picks up the ones with favorable future economics, the ones for
which there will always be need by the world so their growth is secured by the overall
population and demand growth. Examples of such businesses Warren has invested in are
producers of clay-bricks, soft drink producers, and insurers as the world will always
remain risk-averse.

Watch out for fortresses.

Mr. Buffett says you should buy “castles with a big castle moat”. Translated that means
Warren Buffett buys companies with a very good business model which cannot be copied
so easily. The reason for that is that the main problem of the capitalism is the erosion of
the profit margin - when the margin is too high it attracts more competitors who also
want to participate in the lucrative business and the margin falls. In order to circumvent
that Buffet buys companies with unique products, brands or organizational characteristics
so that barriers to entry are created.

Beware a cool head and have patience.

Many would guess that when the price of a share drops Buffett would get rid of it
immediately to avoid further losses. Actually it‟s quite on the contrary. Buffett searches
and buys predominantly undervalued stocks so when the price falls further the short term
losses seem negligible compared to future perspectives so he uses the opportunity to buy
even more and strengthens his position on the market. Grounded in the belief that the
intrinsic value of a company would secure its long term sustainable growth, short term
fluctuations are not a sign of increased risk for Warren but just that the market is myopic.

“Warren Buffett: Sources of success” 10

Concentration instead of diversification

Deeply grounded in the principles of MPT is the notion that diversification is the best
insurer against risk. Warren Buffett is in the opinion that strategies like that are
performed only by people that do not know what they do. In his view concentration raises
the intensity with which an investor is involved into a business as well as the level of
comfort with its incorporated economic characteristics therefore decreasing the risk of
losses by correctly identifying and valuing businesses. Under these premises he denies
the method of estimating betas most academics defend, the relative volatility of a stock
compared to a large universe of stocks based on historical data, and judging about risk
from them. Warren Buffet accuses those academics that they forget an essential principle
– “It is better to be approximately right than precisely wrong”. The beta theory even
produces some absurdities like the fact that if a stock drops dramatically lower than the
market, it becomes riskier than it was on the higher price. Such constructors of betas
often don‟t know anything about the product of a company, the competition it faces or the
leverage it uses, sometimes even the name of the company is irrelevant, but they praise
the importance of historical price fluctuations. On the opposite bank is Warren Buffett
who forgoes all the history for a bit of information that could improve his understanding
of the business.

Make your own decisions

The principle of self reliance when making an investment decision highly correlates to
the attitude towards Mr. Market. Warren Buffett says that “what you need is the
temperament to control the urges that get other people into trouble”. The fact that
people will be full of greed, fear or folly is predictable. The sequence is not predictable.
You are neither right nor wrong because the crowd disagrees with you. You are right
because your data and reasoning are right. Look at the market fluctuations as your friend,
rather than your enemy”.

“Warren Buffett: Sources of success” 11

Leave a margin of safety

The reduction of risk of a portfolio or an investment Buffett constructs does not stem
from the ordinary method of diversification, as explained earlier, but from the margin of
safety he leaves on each stock. To achieve this he buys only on a price that considerably
underestimates the value of the common stock he has estimated through the method of
value investing. In this way he assures that future volatility will bring only gains.
Again to make this clearer Buffett uses one of his many practical examples:
“When you build a bridge, you insist it can carry 30,000 pounds, but you only drive
10,000 pound trucks across It”. And that same principle works in investing. “It’s not
risky to buy securities at a fraction of what they’re worth.”
Clearly Warren Buffett‟s believes highly depart from the dogma accepted in the academic
circles. Nevertheless, his integrity and consistence of following his principles, and
discipline and conservatism when making an investment have made him the most
successful practitioner and definitely a person capable of proving theories wrong,
moreover proposing alternatives.

3. Warren‟s Buffet managerial skills

After having looked for sources of success in Warren Buffett‟s childhood and his earlier
career, and further analysing his successful investment principles its time to find out what
kind of corporate culture is needed to manage his empire. In this part the focus will be on
Warren Buffett‟s managerial skills and how a management team functions optimal
according to Warren Buffett. Of course one man can not run companies on his own, but
needs to create management teams that will perform according a certain philosophy. This
need stems from the fact that Berkshire Hathaway owns 79 subsidiaries with a total of
246,083 employees8.

8
Appendix 1: BKH subsidiaries

“Warren Buffett: Sources of success” 12

For Warren Buffettt, “managers are stewards of shareholder capital. The best managers
think like owners in making business decisions.” 9 However as economic theory predicts,
manager will not always pursue the same interests as shareholders, which is reflected in
the classical agent-principal problem. According to Warren Buffett it is important to
select employees who are “able, honest and hard-working”10 Having those people in a
management team is more important than “designing hierarchies and clarifying who
reports to whom about what and at what times”. 11

For subsidiaries and portfolio companies, Warren Buffett sees their shareholders as
partners. He considers them as owner-partners and himself and other managers at
Berkshire Hathaway as managing-partners. This is not just a simple way to convince
shareholders and potential shareholders to invest in the company, since Warren Buffett
invested 99% of his net worth in Berkshire Hathaway and Charlie Munger‟s (Vice-
Chairman of Berkshire Hathaway) family fortune is for more than 90% invested in the
company. Furthermore relatives of Warren Buffett also considerably invested in stocks of
the company. These facts show that the top-mangers of Berkshire Hathaway have a lot of
long term confidence in the company, since a lot of their wealth is invested in stocks of
the company, and that are not looking for some short-term return, which regularly occurs
when managers are given large stock options as bonuses.
Berkshire Hathaway owns a lot of subsidiaries, but for Warren Buffetts there is no need
to intervene in every detail, he argues the following: “they were managerial stars long
before they knew us, and our main contribution has been to not get in their way”12.
Managers of those subsidiaries are given considerable freedom to carry out their
businesses. Warren Buffett is not intervening as much as he would like, because he
knows better, according to him there are two kind of jobs; running the business, and
running the people who do it, so managers should be given the freedom to perform.

9
Buffett, W, “The Essays of Warren Buffett: Lessons for Corporate America“, 1997-1998, p. 8
10
Buffett, W, “The Essays of Warren Buffett: Lessons for Corporate America“, 1997-1998, p. 10
11
Buffett, W, “The Essays of Warren Buffett: Lessons for Corporate America“, 1997-1998, p. 10
12
Buffett, W, “The Essays of Warren Buffett: Lessons for Corporate America“, 1997-1998, p. 42

“Warren Buffett: Sources of success” 13

The managers earnings also depend on the performance of their subsidiary instead of the
overall performance of Berkshire Hathaway, according to Warren Buffett a very
important stimulus to excel at their occupation. As an associate says, 'somehow Warren
has been able to keep a diverse cast of characters working harder for him than they did
for themselves. I see it every day - and I still don't know how he does it'. But I do know
that all of us feel this incredible responsibility to him.”13 Warren Buffett's ways make the
managers of Berkshire Hathaway feel proud to be affiliated with the company, feel
valued as human beings and feel they can communicate openly and honestly with Buffett
14
. Berkshire Hathaway has in 34 years never lost an operating chief except to death.
Even, a majority of its subsidiaries are still under control by the same managers, which
shows the managers great devotion to their company and their loyalty to Warren Buffett
as a person. This might be the result the good judgement of character by Warren Buffett
or a great corporate culture in which everyone is pushing their limits.

So what makes Warren Buffett a good leader? First of all the personality of him, which
comes close to the social cognitive level 15, because he puts effort in understanding and
making sense of people around him, meaning that in an organisation he is one that can
place himself in another‟s persons shoes.
Furthermore an important fact is that he remains loyal to his partners and employees. He
is considered to be a self empowered leader, because he is loyal, sets goals, plans a
strategy for achievement, and stays committed until he accomplishes his purpose 16.
Leadership is one of the most important factors to perform in an organisation and to be
successful, Warren Buffett is a good example what a leader should be like.
Next he is good listener and can transfer his knowledge and information quite easily.
And he has the understanding of the people he is trying to reach and what he can and
cannot hear from the people. Communication can be considered as one of the most
important abilities a leader should have. Warren Buffet communicates well with his
managers and other employees. Concluding it can be seen that Warren Buffett has been a

13
Heller, R., “Management styles & leadership styles of Warren Buffet & Bill Gates”, 07-08-2006
14
Stallard, M., “More Than an Oracle - The Employee Engagement Practices of Warren Buffett”
15
Spindler, M., “Superior leader: Warren Buffett”
16
Spindler, M. “Superior leader: Warren Buffett”

“Warren Buffett: Sources of success” 14

very successful leader over the last four decades, he manages Berkshire Hathaway and its
subsidiaries with almost 250,000 satisfied employees.

4. Summary and Conclusion

In this paper we took on a journey through the personality and expertise of Warren
Buffett, one of the richest men in the world and by far the most praised investor, in a
pursuit to reveal whether his success is based on luck or the sources of this success are to
be found within some individual characteristics. During this journey we returned to his
childhood and youth years in order to look at the laying of the foundations. Then an
analysis and depiction of his view on the market and of selected investment principles
was conducted. What followed next was to take a look at Buffett‟s managerial style and
the created corporate culture needed to run and control his business empire. Moreover,
various statistical data was collected, deliberately omitted it in the text and placed as an
appendix, in order to test the luck hypothesis for his success.
The luck hypothesis of such an extraordinary performance17 is easily rejected as it is
statistically impossible to base seventeen consecutive years of beating the market and a
compound interest higher with more than 10% above S&P500 over more than forty years
span on luck. Moreover, all of the early associates of Buffett in Graham-Newman became
very successful investors as well implying that the causes are somewhere else.
The foundations of success were laid in very early age. Buffett was undoubtedly a
prodigy. This coupled with the figure of his father who served Buffett as an inspiring role
model of leadership and entrepreneurship to follow. The determination and persistence of
Buffett synergized these two in several ventures he established before finishing high
school, gaining valuable experience and information on the principles of doing business
and deeply incorporating the pursuit of success in him. His university education only
built up on things he already knew but also was the time to get acquainted with the ideas
of and meet his lifetime mentor Benjamin Graham who thought him the principles of

17
Appendix 1

“Warren Buffett: Sources of success” 15

value investing. The gained knowledge and experience combined with a suitable
character to excel at life made success already a big part of Warren‟s history.
What made Warren Buffett really successful investor was the firm application of the
principles he adopted. His alternative views on the market allowed him to exploit its
flows and gain advantage over the mainstream investors. Moreover, his extreme ability to
spot valuable businesses granted him the crown of the long-term sustainable growth.
But would this success be possible without his innate ability to inspire people and earn
their respect? Quite doubtful, indeed. By creating trust and loyalty in his shareholders and
managers Buffett secured himself the needed capital to perform his lucrative investments
and moreover to sustain, if not accelerate, their growth.
To conclude we may undoubtedly say that the major sources of Warren Buffett success
have been his inborn analytical abilities, the human factor of having inspiring and
generous with their thoughts people like his father and his mentor around him, the
conservative style of investment and his integrity as a person, and the time as he had the
opportunity to witness unprecedented growth in financial markets. This is a mixture of
subjective and objective factors but all of them are present at certain points in one‟s life,
and the ones that are not are obtainable and learnable. So there is no obstacle for Warren
Buffett‟s success to be repeated again.

“We(Buffett and Munger) were born in America, had terrific parents who saw that we
got good educations, have enjoyed wonderful families and great health, and came
equipped with a 'business' gene that allows us to prosper in a manner hugely
disproportionate to that experienced by many people who contribute as much or more to
our society's well-being”

“You only have to do a very few things right in your life so long as you don't do too many
things wrong.”

“Warren Buffett: Sources of success” 16

 4. Appendix
Appendix 1: Statistics performance Berkshire Hathaway
In this part several statistics will be given to show the performance of Berkshire
Hathaway relatively to the S&P 500. Furthermore it will be shown how Berkshire
Hathaway has been performing in times of crisis and recessions.

In this graph it is shown how much you would have earned in 2005 if you had invested
$1 in 1965.
Berkshire Hathaway had a compounded return of 20.3% in the period 1965 – 2008 while
the S&P 500 index had a compounded return of 8.9%. So Berkshire Hathaway had more
than twice the compounded return of the S&P 500 index. Within this 43 years, the S&P
500 index only outperformed Berkshire Hathaway only 4 years and Berkshire Hathaway
only had two years with a negative return while the S&P 500 index had 11 years with a
negative return in the period 1965-2008.
0.35

0.3

0.25
y = 0.5652x
2
R = 0.1613 0.2

0.15

0.1

0.05

0
-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
-0.05

-0.1

-0.15

-0.2

Series1 Linear (Series1)

“Warren Buffett: Sources of success” 17

This graph on the previous page shows the beta calculation of Berkshire Hathaway share
price by regressing it with the S&P 500 over the last ten years. The beta of the company
calculated is 0.57. This means that the stock of Berkshire Hathaway is less volatile than
the S&P 500. But still the company managed to outperform the S&P500 while having a
beta of 0.57, still comes from the fact that Berkshire Hathaway only faced 2 years with a
negative return while the S&P had much more years with negative return, which were
much more severe than those of Berkshire Hathaway. Concluding that the S&P 500 has
much more market risk than Berkshire, because the company is well diversified.

Even in times of recession and crisis, Warren Buffett managed to perform better than the
S&P 500. For instance in the oil crises in the seventies, which led the stock market
collapse due enormous inflation pressure. Berkshire Hathaway did not face any year of
having a negative return, while the S&P 500 faced 3 years with a negative return in the
seventies.
However in this decade Berkshire Hathaway had 2 years with a negative return. In 2001,
when 9/11 took place, the stock market collapsed as a result of a loss of confidence in the
economy and the vulnerability of America. And Berkshire Hathaway faced high
insurance pay outs, as a direct result of the terrorist attacks. The second year of having a
negative return was in 2008, the credit crunch. Even Berkshire Hathaway faced the direct
consequences of the financial crisis; it made some investments that did not turned out to
be successful.
So it can be concluded that Berkshire Hathaway managed to overcome the stock market
collapse in the seventies, but did not manage to overcome two crises in this decade. Even
a great performing company and a top investor like Warren Buffett are not always
capable to overcome stock market collapses.

“Warren Buffett: Sources of success” 18

Appendix 2: Investments Berkshire Hathaway 18

18
Annual report 2008 Berkshire Hathaway p.15

“Warren Buffett: Sources of success” 19

Appendix 3: Berkshire Hathaway’s Subsidiaries 19

19
Annual report 2008 Berkshire Hathaway p. 98

“Warren Buffett: Sources of success” 20

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http://www.berkshirehathaway.com/2008ar/2008ar.pdf , 2008, retrieved on 12 March
2008.

Buffett W. (1984), The Superinvestors of Graham-and Doddsville Hermes Magazine

Buffett, W, “The Essays of Warren Buffett: Lessons for Corporate America“, 1997-1998,
p. 8

Graham B., Dodd D., (1934), Security Analysis, McGraw-Hill Professional

Heller, R., (2006) “Management styles & leadership styles of Warren Buffet & Bill
Gates”,

Kilpatrick, Andrew (1994), Of Permanent Value: The Story of Warren Buffett,

Birmingham, Ala.: APKE

Robert G. Hagstrom (1997), “The Warren Buffett Way”, John Wiley and sons Publishing

Spindler, M. (2008) Article, “Superior leader: Warren Buffett”

Stallard, M., “More Than an Oracle - The Employee Engagement Practices of Warren
Buffett”

“Warren Buffett: Sources of success” 21