How Banks Earn their Money
Making Profit from Money Banks are businesses: they need to make money and they do this in a number of different ways. Commercial and retails banks raise funds by lending money at a higher rate of interest than they borrow it. This money is borrowed from other banks or from customers who deposit money with them. They also charge customers fees for services to do with managing their accounts, and earn money from bank charges levied on overdrafts which exceed agreed limits. Investment banks earn fees from providing advice to large organisations coming to the City to issue stocks and shares, and for underwriting these issues, as well as trading securities on the financial markets. Main points about how Banks Earn Money:Banks are companies (normally listed on the stock market) and are therefore owned by, and run for, their shareholders. Banks need to make enough money to pay their employees, maintain the buildings and run the business. There are three main ways banks make money: by charging interest on money that they lend, by charging fees for services they provide and by trading financial instruments in the financial markets. Retail and commercial banks need lots of customers to deposit their money with them, as the banks use these deposits to earn enough money to stay in business. To encourage people to keep their money in a bank, the bank will pay them a small amount of money (interest). This interest is paid from the money the bank earns by lending out the deposited money to other customers. Banks also lend to each other on a huge scale. Most of this lending is on a short-term basis, usually no longer than three months, often just overnight If a bank has a surplus of liquid (available) assets then the bank can make money by lending these assets to other banks in the interbank market. As money flows in and out, banks will both lend and borrow money on the interbank market as needs require. The banks lend money to customers at a higher rate than they pay to depositors or than they borrow it. The difference, known as the margin or turn, is kept by the bank. For example, if a bank pays 1% interest on deposits, they may charge 6% interest on loans. Lending takes the form of overdrafts, bank loans, mortgages (loans secured on property) and credit card facilities. The bank will work out the cost of making the funds available to the borrower and add a profit margin. Loans approved by banks will vary in size, and may have fixed or variable interest rates but, in all cases, the bank will lend the money to the customer at a higher rate than they borrow it. Deposits are the banks' liabilities. If everyone was to demand their money back at once, the bank would not be able to pay. Because they lend money out, banks are required to carry a cushion of capital so they have sufficient money to pay those customers likely to withdraw their money at any time. Another way banks make money is through charging fees. Most retail and commercial banks will charge for specific services, for example, for processing cheques, for other transactions and for unauthorised borrowing e.g. if a client exceeds an overdraft limit. Investment banks earn huge fees for advising large companies and public institutions on issuing bonds and shares (securities), and from underwriting these issues. Investment banks charge fees for advising clients wanting to bid for other companies in mergers and acquisitions, or management buy-outs. These deals can be very complex and provide an important source of income as well as an opportunity to underwrite shares related to these deals. Investment banks also make their money by trading securities in the secondary markets. Their aim is to sell these securities for more than they pay for them or purchase them for less than they sold them. The difference, called the turn, is kept by the bank. Banks also buy and sell currencies of all the nations of the world, trying to take advantage of the different prices of these currencies against each other, which are changing all the time.
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Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. The company wholly owns GEICO, BNSF Railway, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, FlightSafety International, Pampered Chef, and NetJets, and also owns 26% of the Kraft Heinz Company,[3][3] an undisclosed percentage of Mars, Incorporated, and significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo, IBM and Restaurant Brands International. Berkshire Hathaway averaged an annual growth in book value of 19.7% to its shareholders for the last 49 years (compared to 9.8% from the S&P 500 with dividends included for the same period), while employing large amounts of capital, and minimal debt.[4]
The company is known for its control and leadership by Warren Buffett, who is the company's Chairman of the Board, President, and Chief Executive Officer, and Charlie Munger, the company's Vice-Chairman of the Board of Directors. In the early part of Buffett's career at Berkshire, he focused on long-term investments in publicly traded companies, but more recently he has more frequently bought whole companies. Berkshire now owns a diverse range of businesses including confectionery, retail, railroad, home furnishings, encyclopedias, manufacturers of vacuum cleaners, jewelry sales, newspaper publishing, manufacture and distribution of uniforms, and several regional electric and gas utilities. According to the Forbes Global 2000 list and formula, Berkshire Hathaway is the fourth largest public company in the world.[5][6] History[edit] Berkshire Cotton Mills, Adams, Mass. Hathaway Mills, New Bedford, Mass.Berkshire Hathaway traces its roots to a textile manufacturing company established by Oliver Chace in 1839 as the Valley Falls Company in Valley Falls, Rhode Island. Chace had previously worked for Samuel Slater, the founder of the first successful textile mill in America. Chace founded his first textile mill in 1806. In 1929 the Valley Falls Company merged with the Berkshire Cotton Manufacturing Company established in 1889, in Adams, Massachusetts. The combined company was known as Berkshire Fine Spinning Associates.[7] In 1955 Berkshire Fine Spinning Associates merged with the Hathaway Manufacturing Company which had been founded in 1888 in New Bedford, Massachusetts by Horatio Hathaway with profits from whaling and the China Trade.[8] Hathaway had been successful in its first decades, but it suffered during a general decline in the textile industry after World War I. At this time, Hathaway was run by Seabury Stanton, whose investment efforts were rewarded with renewed profitability after the Depression. After the merger Berkshire Hathaway had 15 plants employing over 12,000 workers with over $120 million in revenue and was headquartered in New Bedford. However, seven of those locations were closed by the end of the decade, accompanied by large layoffs. In 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company's financial situation was not going to improve. In 1964, Stanton made an oral tender offer of $11 1⁄2 per share for the company to buy back Buffett's shares. Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $11 3⁄8. Buffett later admitted that this lower, undercutting offer made him angry.[9] Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this put Buffett in a situation where he was now majority owner of a textile business that was failing. Buffett initially maintained Berkshire's core business of textiles, but by 1967, he was expanding into the insurance industry and other investments. Berkshire first ventured into the insurance business with the purchase of National Indemnity Company. In the late 1970s, Berkshire acquired an equity stake in the Government Employees Insurance Company (GEICO), which forms the core of its insurance operations today (and is a major source of capital for Berkshire Hathaway's other investments). In 1985, the last textile operations (Hathaway's historic core) were shut down. In 2010, Buffett claimed that purchasing Berkshire Hathaway was the biggest investment mistake he had ever made, and claimed that it had denied him compounded investment returns of about $200 billion over the subsequent 45 years.[9] Buffett claimed that had he invested that money directly in insurance businesses instead of buying out Berkshire Hathaway (due to what he perceived as a slight by an individual), those investments would have paid off several hundredfold. Corporate affairs[edit] Kiewit Tower, the location of Berkshire's corporate offices in Omaha, NebraskaBerkshire's class A shares sold for $212,501 as of July 7, 2016, making them the highest-priced shares on the New York Stock Exchange, in part because they have never had a stock split and have only paid a dividend once since Warren Buffett took over, retaining corporate earnings on its balance sheet in a manner that is impermissible for mutual funds. Shares closed over $100,000 for the first time on October 23, 2006. Despite its size, Berkshire had for many years not been included in broad stock market indices such as the S&P 500 due to the lack of liquidity in its shares; however, following a 50-to-1 split of Berkshire's class B shares in January 2010, and Berkshire's announcement that it would acquire the Burlington Northern Santa Fe Corporation, parent of BNSF Railway, Berkshire replaced BNSF in the S&P 500 on February 16, 2010.[10][11] Berkshire CEO Warren Buffett's annual letters are widely read and quoted. Barron's Magazine named Berkshire the most respected company in the world in 2007 based on a survey of American money managers.[12] In 2008, Berkshire invested in preferred stock of Goldman Sachs as part of a recapitalization of the investment bank.[13] Buffett defended Lloyd Blankfein's decisions as CEO of Goldman Sachs.[14][15][16] As of July 1, 2010, Buffett owned 32.4% aggregate voting power of Berkshire's shares outstanding and 23.3% of the economic value of those shares.[17] Berkshire's vice-chairman, Charlie Munger, also holds a stake big enough to make him a billionaire, and early investments in Berkshire by David Gottesman and Franklin Otis Booth, Jr. resulted in their becoming billionaires as well. Bill Gates' Cascade Investment LLC is the second largest shareholder of Berkshire and owns more than 5% of class B shares. Berkshire Hathaway has never split its Class A shares because of management's desire to attract long-term investors as opposed to short-term speculators. However, Berkshire Hathaway created a Class B stock, with a per-share value originally kept (by specific management rules) close to 1⁄30 of that of the original shares (now Class A) and 1⁄200 of the per-share voting rights, and after the January 2010 split, at 1⁄1,500 the price and 1⁄10,000 the voting rights of the Class-A shares. Holders of class A stock are allowed to convert their stock to Class B, though not vice versa. Buffett was reluctant to create the class B shares, but did so to thwart the creation of unit trusts that would have marketed themselves as Berkshire look-alikes. As Buffett said in his 1995 shareholder letter: "The unit trusts that have recently surfaced fly in the face of these goals. They would be sold by brokers working for big commissions, would impose other burdensome costs on their shareholders, and would be marketed en masse to unsophisticated buyers, apt to be seduced by our past record and beguiled by the publicity Berkshire and I have received in recent years. The sure outcome: a multitude of investors destined to be disappointed." Berkshire's annual shareholders' meetings, taking place in the CenturyLink Center in Omaha, Nebraska, are routinely visited by 20,000 people.[18] The 2007 meeting had an attendance of approximately 27,000. The meetings, nicknamed "Woodstock for Capitalists", are considered Omaha's largest annual event along with the baseball College World Series.[19] Known for their humor and light-heartedness, the meetings typically start with a movie made for Berkshire shareholders. The 2004 movie featured Arnold Schwarzenegger in the role of "The Warrenator" who travels through time to stop Buffett and Munger's attempt to save the world from a "mega" corporation formed by Microsoft-Starbucks-Wal-Mart. Schwarzenegger is later shown arguing in a gym with Buffett regarding Proposition 13.[20] The 2006 movie depicted actresses Jamie Lee Curtis and Nicollette Sheridan lusting after Munger.[21] The meeting, scheduled to last six hours, is an opportunity for investors to ask Buffett questions. The salary for the CEO is $100,000 per year with no stock options, which is among the lowest salaries[22] for CEOs of large companies in the United States.[23] Governance[edit]The current members of the board of directors of Berkshire Hathaway are Warren Buffett (CEO), Charlie Munger, Walter Scott, Jr., Thomas S. Murphy, Howard Graham Buffett (Warren's son), Ronald Olson, Charlotte Guyman, David Gottesman, Bill Gates, Steve Burke, Susan Decker, and Meryl Witmer.[24] Succession plans[edit]In May 2010, Buffett, months away from his 80th birthday, said he would be succeeded at Berkshire Hathaway by a team consisting of a CEO and three or four investment managers; each of the latter would be responsible for a "significant portion of Berkshire's investment portfolio".[25] Five months later, Berkshire announced that Todd Combs, manager of the hedge fund Castle Point Capital, would join them as an investment manager.[26] On September 12, 2011, Berkshire Hathaway announced that 50-year-old Ted Weschler, founder of Peninsula Capital Advisors, will join Berkshire in early 2012 as a second investment manager.[27][28] In Berkshire Hathaway's annual shareholder letter dated February 25, 2012, Buffett said that his successor as CEO had been chosen internally but not named publicly. While the intent of this message was to bolster confidence in the leadership of a "Buffett-less Berkshire", critics have noted that this strategy of choosing a successor without a concrete exit strategy for the sitting CEO often leaves an organization with fewer long term options, while doing little to calm shareholder fear. In June 2014, the firm's cash and cash equivalents rose past $50 billion, the first time it finished a quarter above that level since Buffett became chairman and chief executive officer.[29] Businesses and investments[edit]Insurance group[edit]Insurance and reinsurance business activities are conducted through approximately 70 domestic and foreign-based insurance companies. Berkshire’s insurance businesses provide insurance and reinsurance of property and casualty risks primarily in the United States. In addition, as a result of the General Re acquisition in December 1998, Berkshire’s insurance businesses also includes life, accident, and health reinsurers, as well as internationally based property and casualty reinsurers. Berkshire’s insurance companies maintain capital strength at exceptionally high levels. This strength differentiates Berkshire’s insurance companies from their competitors. Collectively, the aggregate statutory surplus of Berkshire’s U.S. based insurers was approximately $48 billion as of December 31, 2004. All of Berkshire’s major insurance subsidiaries are rated AAA by Standard & Poor’s Corporation, the highest Financial Strength Rating assigned by Standard & Poor’s, and are rated A++ (superior) by A. M. Best with respect to their financial condition and operating performance.
Until a name change on April 30, 2014, Berkshire Hathaway Energy was known as MidAmerican Energy Holdings Co. Manufacturing, service and retailing[edit]Clothing[edit]Berkshire’s clothing businesses include manufacturers and distributors of a variety of clothing and footwear. Businesses engaged in the manufacture and distribution of clothing include Union Underwear Corp. – Fruit of the Loom, Garan, Fechheimer Brothers and Russell Corporation. Berkshire’s footwear businesses include H.H. Brown Shoe Group, Acme Boots, Brooks Sports and Justin Brands. Justin Brands is made up of Chippewa Boots, Justin Boots, Justin Original Workboots, Nocona Boots, and Tony Lama Boots.[34]Berkshire acquired Fruit of the Loom on April 29, 2002 for $835 million in cash. Fruit of the Loom, headquartered in Bowling Green, Kentucky, is a vertically integrated manufacturer of basic clothing. Berkshire acquired Russell Corporation on August 2, 2006 for $600 million or $18.00 per share. Building products[edit]In August 2000, Berkshire entered the building products business with the acquisition of Acme Building Brands. Acme, headquartered in Fort Worth, Texas, manufactures and distributes clay bricks (Acme Brick), concrete block (Featherlite) and cut limestone (Texas Quarries). It expanded its building products business in December 2000, when it acquired Benjamin Moore & Co. of Montvale, New Jersey. Moore formulates, manufactures and sells architectural coatings that are available primarily in the United States and Canada. In 2001, Berkshire acquired three additional building products companies. In February, it purchased Johns Manville which was established in 1858 and manufactures fiber glass wool insulation products for homes and commercial buildings, as well as pipe, duct and equipment insulation products. In July, Berkshire acquired a 90% equity interest in MiTek Inc., which makes engineered connector products, engineering software and services, and manufacturing machinery for the truss fabrication segment of the building components industry and is headquartered in Chesterfield, Missouri.[35] Finally in 2001, Berkshire acquired 87 percent of Dalton, Georgia-based Shaw Industries, Inc.[36] Shaw is the world’s largest carpet manufacturer based on both revenue and volume of production and designs and manufactures over 3,000 styles of tufted and woven carpet and laminate flooring for residential and commercial use under approximately 30 brand and trade names and under certain private labels. In 2002, Berkshire Acquired the remaining 12.7 percent of Shaw.[37] On August 7, 2003, Berkshire acquired Clayton Homes, Inc. Clayton, headquartered near Knoxville, Tennessee, is a vertically integrated manufactured housing company. At year-end 2004, Clayton operated 32 manufacturing plants in 12 states. Clayton’s homes are marketed in 48 states through a network of 1,540 retailers, 391 of which are company-owned sales centers. On May 1, 2008, Mitek acquired Hohmann & Barnard, a fabricator of anchors and reinforcement systems for masonry and on October 3 of that year, Mitek acquired Blok-Lok, Ltd. of Toronto, Canada. On April 23, 2010, Mitek acquired the assets of Dur-O-Wal from Dayton Superior. Flight services[edit]In 1996, Berkshire acquired FlightSafety International Inc. FSI’s corporate headquarters is located at LaGuardia Airport in Flushing, New York. FSI engages primarily in the business of providing high technology training to operators of aircraft and ships. FlightSafety is the world's leading provider of professional aviation training services. Berkshire acquired NetJets Inc. in 1998. NetJets is the world’s leading provider of fractional ownership programs for general aviation aircraft. In 1986, NetJets created the fractional ownership of aircraft concept and introduced its NetJets program in the United States with one aircraft type. In 2004, the NetJets program operated 15 aircraft types. Retail[edit]The home furnishings businesses are the Nebraska Furniture Mart, RC Willey Home Furnishings, Star Furniture Company, and Jordan’s Furniture, Inc. CORT Business Services Corporation was acquired in 2000 by an 80.1% owned subsidiary of Berkshire and is the leading national provider of rental furniture, accessories and related services in the “rent-to-rent” segment of the furniture rental industry. In May 2000, Berkshire purchased Ben Bridge Jeweler, a chain of jewellery stores established in 1912 with locations primarily in the western United States.[38] This joined Berkshire's other jeweler acquisition, Helzberg Diamonds. Helzberg is a chain of jewelry stores based in Kansas City that began in 1915 and became part of Berkshire in 1995.[39] In 2002, Berkshire acquired The Pampered Chef, Ltd., the largest direct seller of kitchen tools in the United States. Products are researched, designed and tested by The Pampered Chef, and manufactured by third party suppliers. From its Addison, Illinois headquarters, The Pampered Chef utilizes a network of more than 65,000 independent sales representatives to sell its products through home-based party demonstrations, principally in the United States. See's Candies produces boxed chocolates and other confectionery products in two large kitchens in California. See’s revenues are highly seasonal with approximately 50% of total annual revenues being earned in the months of November and December. Dairy Queen, based in Edina, Minnesota, services a system of approximately 6,000 stores operating under the names Dairy Queen, Orange Julius and Karmelkorn that offer various dairy desserts, beverages, prepared foods, blended fruit drinks, popcorn and other snack foods. In November 2012, Berkshire announced they would acquire the Oriental Trading Company, a direct marketing company for novelty items, small toys, and party items.[40][41] Media[edit]In 1977, Berkshire Hathaway purchased the Buffalo Evening News and resumed publication of a Sunday edition of the paper that ceased in 1914. After the morning newspaper Buffalo Courier-Express ceased operation in 1982, the paper began to print morning and evening editions, currently printing only a morning edition.[42] In 2006, the company bought Business Wire, a U.S. press release agency. The company began its BH Media Group subsidiary with a purchase of the Omaha World-Herald in December 2011,[43] which included six other daily newspapers and several weeklies across Nebraska and southwest Iowa.[44] In June 2012, Berkshire purchased 63 newspapers from Media General Inc., including the Richmond Times-Dispatch and Winston-Salem Journal, for $142 million in cash.[45] In 2012, Berkshire bought Texas dailies The Eagle in Bryan-College Station and the Waco Tribune-Herald.[46] In 2013, the company purchased the Tulsa World, the Greensboro, North Carolina-based News & Record, Virginia's Roanoke Times, and Press of Atlantic City. As of March 2013, BH Media owned 28 daily and 42 non-daily newspapers.[47] On March 12, 2014, it was announced that Graham Holdings Company would divest its Miami television station WPLG to BH Media in a cash and stock deal.[48] Other non-insurance[edit]Berkshire Hathaway Energy's HomeServices of America is a residential real estate brokerage firm based in Minneapolis, Minnesota and founded in 1998. HomeServices has operations in 19 states and over 21,000 sales associates. In addition to brokerage services, these real estate companies provide mortgage loan originations, title and closing services, home warranties, property and casualty insurance and other related services. By the end of 2013 Berkshire Hathaway will enter the residential real estate brokerage sector under the name of HomeServices of America.[49] In 2002, Berkshire acquired Albecca Inc. Albecca is headquartered in Norcross, Georgia, and primarily does business under the Larson-Juhl name. Albecca designs, manufactures and distributes custom framing products, including wood and metal molding, matboard, foamboard, glass, equipment and other framing supplies. Berkshire acquired CTB International Corp. in 2002. CTB, headquartered in Milford, Indiana, is a designer, manufacturer and marketer of systems used in the grain industry and in the production of poultry, hogs, and eggs. Products are produced in the United States and Europe and are sold primarily through a global network of independent dealers and distributors, with peak sales occurring in the second and third quarters. Berkshire acquired McLane Company, Inc. in May 2003 from Walmart , which brought on other subsidiaries such as Professional Datasolutions, Inc. and Salado Sales, among others. McLane provides wholesale distribution and logistics services in all 50 states and internationally in Brazil to customers that include discount retailers, convenience stores, quick service restaurants, drug stores and movie theatre complexes. Scott Fetzer Companies–The Scott Fetzer Companies are a diversified group of 21 businesses that manufacture and distribute a wide variety of products for residential, industrial and institutional use. The three most significant of these businesses are Kirby home cleaning systems, Wayne Water Systems and Campbell Hausfeld products. Scott Fetzer also manufactures Ginsu knives. On March 30, 2007, Berkshire Hathaway announced TTI, Inc. to be part of the Berkshire Hathaway Group. Headquartered in Fort Worth, Texas, TTI, Inc. is the largest distributor specialist of passive, interconnect and electromechanical components. TTI’s extensive product line includes: resistors, capacitors, connectors, potentiometers, trimmers, magnetic and circuit protection components, wire and cable, identification products, application tools and electromechanical devices. On December 25, 2007, Berkshire Hathaway acquired Marmon Group. Previously it was a privately held conglomerate owned by the Pritzker family for over fifty years, which owned and operated an assortment of manufacturing companies that produce railroad tank cars, shopping carts, plumbing pipes, metal fasteners, wiring and water treatment products used in residential construction.[50] On October 2, 2014, Berkshire Hathaway Automotive an autodealership subsidiary was created through the acquisition of Van Tuyl Group the remaining largest auto dealer in the nation and independently-owned up to that date and it is the fifth largest with ownership of 81 dealerships and revenues of $8 billion[51][52] On November 14, 2014, Berkshire Hathaway announced that it would acquire Duracell from Procter & Gamble for $4.7 billion in an all-stock deal.[53] Finance and financial products[edit]Berkshire acquired Clayton Homes, a maker of modular homes, storage trailers, chassis, intermodal piggyback trailers and domestic containers. Clayton's finance business, (loans to manufactured home owners), earned $206 million down from $526 million in 2007. Loan losses remain 3.6% up from 2.9%.[54] Investments[edit]Subsidiaries and Equity holdings[edit]See List of assets owned by Berkshire Hathaway Other[edit]Vandergriff Automotive, the highest selling Honda dealership in the Dallas METROPLEX, contributes 100million $ in revenue every year. In 2003, Pepsi paid Berkshire $10 million to insure against a contest Pepsi held which had a potential $1 billion prize. The prize had a very small chance of being won and it was not won by anyone.[55] In 2006 Berkshire Hathaway Inc. acquired Russell Corporation for $600 million, in fact getting most shares and brands in many sports leagues - like Spalding NBA official basketballs, BIKE Athletic Company protections, AAI (American Athletic) Gymnastics' tables, bars, rings, horses or Dudley softball balls and accessories. In 2008, Berkshire purchased preferred stock in Wrigley, Goldman Sachs, and GE totaling $14.5 billion.[56] On April 28, 2008, Berkshire purchased Wrigley Company with Mars, Incorporated in a $23 billion deal, resulting in Berkshire having an undisclosed piece of ownership in Mars. Berkshire made $3.5 billion on its investment in preferred shares of Goldman Sachs. On November 3, 2009, Berkshire Hathaway announced that, using stock and cash totaling $26 billion, it would acquire the remaining 77.4 percent of the Burlington Northern Santa Fe Corporation, parent of BNSF Railway, that it did not already own.[57] This was the largest acquisition to-date in Berkshire's history.[58] On March 14, 2011, Berkshire Hathaway announced that it would acquire the Lubrizol Corporation for $9 billion in cash, a deal that was described as one of the largest deals ever for Berkshire Hathaway.[59] On March 25, 2011, Berkshire Hathaway made its first foray[60] into the Indian insurance sector with its non-direct subsidiary BerkshireInsurance.com[61] in the presence of Warren Buffett himself.[62] On August 26, 2011, Berkshire Hathaway purchased $5 billion of preferred shares in Bank of America.[63] In 2007, Buffett had also bought 8.7 million shares, quickly increasing the stake to 9.1 million shares in the midst of the subprime crisis.[64] On February 14, 2013, Berkshire Hathaway Inc and 3G Capital announced plans to purchase H.J. Heinz Co. for $72.50 per share, or $28 billion including debt.[65] The company became a majority owner of Heinz on June 18, 2015, after exercising a warrant to acquire 46,195,652 shares of common stock for a total price of $461,956.52 increasing its stake to 52.5%.[3] Berkshire owns 1.74 million shares of Gannett.[66] The company also holds part of newspaper publisher Lee Enterprises after buying some of Lee's debt after its bankruptcy filing.[67] On August 10, 2015, the boards of directors of Berkshire Hathaway Inc. and Precision Castparts Corp. unanimously approved a definitive agreement for Berkshire Hathaway to acquire, for $235 per share in cash, all outstanding PCC shares.[68] In 2016, Berkshire Hathaway added the following stocks to the first quarter of 2016: Liberty Global LiLAC Group Class A Shares, Liberty Global LiLAC Group Class C Shares, Apple, Liberty Global, Phillips 66, Liberty Media. Liberty Global LiLAC Group Class A Shares made up 0.07% of Berkshire Hathaway’s public equity portfolio. Liberty Global LiLAC Group Class C Shares made up 0.03% of Berkshire Hathaway’s public equity portfolio. Apple also compromises about 1.12% of Berkshire Hathaway’s public equity holdings. Liberty Global made up .43% of Berkshire Hathaway portfolio. Phillips 66 made up 4.82% of Berkshire Hathaway’s portfolio.[69] Assets[edit]Main article: List of assets owned by Berkshire HathawaySee also[edit]Notes[edit]
External links[edit]
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Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability). Quality investing supports best overall rather than best-in-class approach.
History[edit]The idea for quality investing originated in the bond and real estate investing, where both the quality and price of potential investments are determined by ratings and expert attestations. Later the concept was applied to investments in enterprises in equity markets.[1] Benjamin Graham, the founding father of value investing, was the first to recognize the quality problem among equities back in the 1930s. Graham classified stocks as either quality or Low quality. He also observed that the greatest losses result not from buying quality at an excessively high price, but from buying Low quality at a price that seems good value.[2] Warren Buffett said that one wants to buy companies that can be run by idiots, because some day they will be.[3] The quality issue in a corporate context attracted particular attention in the management economics literature following the development of the BCG matrix in 1970. Using the two specific dimensions of life cycle and the experience curve concept, the matrix allocates a company's products – and even companies themselves – to one of two quality classes (Cash Cows and Stars) or two Non-quality classes (question Marks and Dogs). Other important works on quality of corporate business can be found primarily among the US management literature. These include, for example, "In Search of Excellence" by Thomas Peters and Robert Waterman,[4] "Competitive Advantage" by Michael Porter,[5] " Built to Last" by Jim Collins and Jerry Porras,[6] and "Good to Great" by Jim Collins.[7] Quality investing gained credence in particular after the burst of the Dot-com bubble in 2001 when investors witnessed the spectacular failures of companies such as Enron and Worldcom. These corporate collapses focused investors’ awareness on quality, which may vary from stock to stock. Investors started to pay more attention to quality of balance sheet, earnings quality, information transparency, corporate governance quality. Identification of Corporate quality[edit]As a rule, systematic quality investors identify quality stocks using a defined set of criteria that they have generally developed themselves and revise continually. Selection criteria that demonstrably influence and/or explain a company's business success or otherwise can be broken down into five categories:[8] 1. Market Positioning: quality company possesses an economic moat, which distinguishes it from peers and allows to conquer leading market position. The company operates in the industry which offers certain growth potential and has global trends (e.g. ageing population for pharmaceuticals industry) as tailwinds. 2. Business model: According to the BCG matrix, the business model of a quality company is usually classified as star (growing business model, large capex) or cash cow (established business model, ample cash flows, attractive dividend yield). Having a competitive advantage, quality company offers good product portfolio, well-established value chain and wide geographical span. 3. Corporate Governance: Evaluation of corporate management execution is mainly based on soft-criteria assessment. Quality company has professional management, which is limited in headcount (6-8 members in top management) and has a low turnover rate. Its corporate governance structure is transparent, plausible and accordingly organized. 4. Financial Strength: Solid balance sheet, high capital and sales profitability, ability to generate ample cash flows are key attributes of quality company. Quality company tends to demonstrate positive financial momentum for several years in a row. Earnings are of high quality, with operating cash flows exceeding net income, inventories and accounts receivables not growing faster than sales etc. 5. Attractive valuation: Valuation ultimately is related to quality, which is similar to investments in real estate. Attractive valuation, which is defined by high discounted cash flow (DCF), low P/E ratio and P/B ratio, becomes an important factor in quality investing process. According to a number of studies the company can sustain its quality for about 11 months in average, which means that quantitative and qualitative monitoring of the company is done systematically. Comparison to other investment models[edit]Quality investing is an investment style that can be viewed independent of value investing and growth Investing.[9] A quality portfolio may therefore also contain stocks with Growth and Value attributes. Nowadays, Value Investing is based first and foremost on stock valuation. Certain valuation coefficients, such as the price/earnings and price/book ratios, are key elements here. Value is defined either by valuation level relative to the overall market or to the sector, or as the opposite of Growth. An analysis of the company's fundamentals is therefore secondary. Consequently, a Value investor will buy a company's stock because he believes that it is undervalued and that the company is a good one. A quality investor, meanwhile, will buy a company's stock because it is an excellent company that is also attractively valued. Modern Growth Investing centers primarily on Growth stocks. The investor's decision rests equally on experts' profit forecasts and the company's earnings per share. Only stocks that are believed to generate high future profits and a strong growth in earnings per share are admitted to a Growth investor's portfolio. The share price at which these anticipated profits are bought, and the fundamental basis for growth, are secondary considerations. Growth investors thus focus on stocks exhibiting strong earnings expansion and high profit expectations, regardless of their valuation. Quality investors, meanwhile, favor stocks whose high earnings growth is rooted in a sound fundamental basis and whose price is justified. See also[edit]References[edit]
This article is about investment in finance. For investment in macroeconomics, see Investment (macroeconomics). For other uses, see Investment (disambiguation).
"Invest" redirects here. For the term in meteorology, see Invest (meteorology).To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future. In finance, the benefit from investment is called a return. The return may consist of capital gain and/or investment income, including dividends, interest, rental income etc. The projected economic return is the appropriately discounted value of the future returns. The historic return comprises the actual capital gain (or loss) and/or income over a period of time. Investment generally results in acquiring an asset, also called an investment. If the asset is available at a price worth investing, it is normally expected either to generate income, or to appreciate in value, so that it can be sold at a higher price (or both). Investors generally expect higher returns from riskier investments. Financial assets range from low-risk, low-return investments, such as high-grade government bonds, to those with higher risk and higher expected commensurate reward, such as emerging markets stock investments. Investors, particularly novices, are often advised to adopt an investment strategy and diversify their portfolio. Diversification has the statistical effect of reducing overall risk. Related terms[edit]Investment differs from arbitrage, in which profit is generated without investing capital or bearing risk. An investor may bear a risk of loss of some or all of their capital invested, whereas in saving (such as in a bank deposit) the risk of loss in nominal value is normally remote.[1](Note that if the currency of a savings account differs from the account holder's home currency, then there is the risk that the exchange rate between the two currencies will move unfavorably, so that the value in the account holder's home currency of the savings account decreases.) Speculation involves a level of risk which is greater than most investors would generally consider justified by the expected return.[2] An alternative characterization of speculation is its short-term, opportunistic nature. Famous investors[edit]Investors famous for their success include Warren Buffett. In March 2013 Forbes magazine, Warren Buffett ranked number 2 in their Forbes 400 list.[3] Buffett has advised in numerous articles and interviews that a good investment strategy is long term and choosing the right assets to invest in requires due diligence. Edward O. Thorp was a highly successful hedge fund manager in the 1970s and 1980s who spoke of a similar approach.[4] The investment principles of both of these investors have points in common with the Kelly criterion for money management.[5] Numerous interactive calculators which use the Kelly criterion can be found online.[6] Intermediaries and collective investments[edit]Investments are often made indirectly through intermediary financial institutions. These intermediaries include pension funds, banks, and insurance companies. They may pool money received from a number of individual end investors into funds such as investment trusts, unit trusts, SICAVs etc. to make large scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied. Approaches to investment sometimes referred to in marketing of collective investments include dollar cost averaging and market timing. History[edit]The Code of Hammurabi (around 1700 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death.[7] In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. By the 1950s, the term investment had come to denote the more conservative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures. Value investment[edit]Main article: value investingA value investor buys undervalued securities (and sells overvalued ones). To identify undervalued securities, a value investor uses analysis of the financial reports of the issuer to evaluate the security. Value investors employ accounting ratios, such as earnings per share and sales growth, to identify securities trading at prices below their worth. Warren Buffett and Benjamin Graham are notable examples of value investors. Graham and Dodd's seminal work Security Analysis was written in the wake of the Wall Street Crash of 1929. The price to earnings ratio (P/E), or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of stock, by its earnings per share. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share, than one with a higher P/E, taking into account the same level of financial performance; therefore, it essentially means a low P/E is the preferred option.[8] An instance, in which the price to earnings ratio has a lesser significance, is when companies in different industries are compared. An example; although, it is reasonable for a telecommunications stock to show a P/E in the low teens; in the case of hi-tech stock, a P/E in the 40s range, is not unusual. When making comparisons the P/E ratio can give you a refined view of a particular stock valuation. For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the price-to-book ratio (P/B) is also a reliable indication of how much investors are willing to spend on each dollar of company assets. In the process of the P/B ratio, the share price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation, of intangibles. Accordingly, the P/B could be considered a comparatively, conservative metric. Free cash flow and capital structure[edit]Free cash flow measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in working capital and capital expenditure. High and rising free cash flow therefore tend to make a company more attractive to investors. The debt-to-equity ratio is an indicator of capital structure. A high proportion of debt, reflected in a high debt-to-equity ratio, tends to make a company's earnings, free cash flow, and ultimately the returns to its investors, more risky or volatile. Investors compare a company's debt-to-equity ratio with those of other companies in the same industry, and examine trends in debt-to-equity ratios and free cash flow. EBITDA[edit]A popular valuation metric is Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), with application for example to valuing unlisted companies and mergers and acquisitions.[9] For an attractive investment, for example a company competing in a high growth industry, an investor might expect a significant acquisition premium above book value or current market value, which values the company at several times the most recent EBITDA. A private equity fund for example may buy a target company for a multiple of its historical or forecasted EBITDA, perhaps as much as 6 or 8 times. In certain cases, an EBITDA may be sacrificed by a company, in order for the pursuance of future growth; a strategy frequently used by corporate giants, such as, Amazon, Google and Microsoft, among others. This is a business decision that can impact negatively on buyout offers, founded on EBITDA and can be the cause of many negotiations, failing. It may be recognized as a valuation breach, with many investors maintaining that sellers are too demanding, while buyers are regarded as failing to realize the long-term potential of, expenditure or acquisitions. Capital gains taxes[edit]The amount to pay in taxes for long term investments, investments that span over a year long term, and short term investments such as those that are below a year are different. The long term investments range from Zero to twenty percent for capital gains and they are regulated by what tax bracket you are in for income taxes. For the zero to fifteen percent income tax bracket you could qualify for the zero percent long-term capital gains rate. The next bracket is the fifteen to twenty percent income tax bracket where you are set at fifteen percent capital gains tax for long term investments. The next bracket is between twenty and 39.6 percent and that leads to a twenty percent capital gains tax however with these numbers you should add 3.8 percent for the health care surtax. The short term capital gains tax is also related to your total taxable income and is taxed at the same rate as your income and ranges from ten to 39.6 percent.[10] Types of financial investment[edit]Types of financial investments include: Types of financial investment[edit]Types of financial investments include: See also[edit]
For other people with the same name, see Ben Graham (disambiguation). Benjamin Graham BornBenjamin Grossbaum May 9, 1894 London, England DiedSeptember 21, 1976 (aged 82) Aix-en-Provence, France NationalityUnited States InstitutionColumbia Business School, Graham-Newman Partnership, UCLA Anderson School of Management FieldFinance Investment Alma materColumbia University InfluencedWarren Buffett William J. Ruane Irving Kahn Walter J. Schloss David Dodd Jean-Marie Eveillard Seth Klarman ContributionsSecurity Analysis (1934) The Intelligent Investor (1949)Benjamin Graham (/ɡræm/; born Benjamin Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist and professional investor. Graham is considered the father of value investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book Security Analysis. Graham had many disciples in his lifetime, a number of whom went on to become successful investors themselves. Graham's most well-known disciples include Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss, among others. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons Howard Graham Buffett and Thomas Graham Kahn after him. Graham also taught at the UCLA Anderson School of Management. Life and career[edit]Early life[edit]Benjamin Graham was born Benjamin Grossbaum in London, England,[1] to Jewish parents.[2][3] He moved to New York City with his family when he was one year old. After the death of his father and experiencing poverty, he became a good student, graduating from Columbia University, as salutatorian of his class, at the age of 20. He received an invitation for employment as an instructor in English, mathematics, and philosophy, but took a job on Wall Street eventually starting the Graham-Newman Partnership. Early in his professional life, Graham made a name for himself with "The Northern Pipeline Affair", involving John D. Rockefeller.[4] Career[edit] Benjamin Graham and his memoirsHis first book, Security Analysis, with David Dodd, was published in 1934. [5] [6] [7] [8] [9] Security Analysis and The Intelligent Investor, published in 1949 (4th revision, with Jason Zweig, 2003), are his two most widely acclaimed books. Warren Buffett describes The Intelligent Investor as "the best book about investing ever written."[10] Graham exhorted the stock market participant to first draw a fundamental distinction between investment and speculation. In Security Analysis, he proposed a clear definition of investment that was distinguished from what he deemed speculation. It read, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."[11] Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will be reflected in its stock price in the long run). Graham distinguished between the passive and the active investor. The passive investor, often referred to as a defensive investor, invests cautiously, looks for value stocks, and buys for the long term. The active investor, on the other hand, is one who has more time, interest, and possibly more specialized knowledge to seek out exceptional buys in the market.[12] Graham recommended that investors spend time and effort to analyze the financial state of companies. When a company is available on the market at a price which is at a discount to its intrinsic value, a "margin of safety" exists, which makes it suitable for investment. Graham wrote that investment is most intelligent when it is most businesslike. By that he meant that the stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.[13] Graham's favorite allegory is that of Mr. Market, a fellow who turns up every day at the stock holder's door offering to buy or sell his shares at a different price. Usually, the price quoted by Mr. Market seems plausible, but occasionally it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is best off concentrating on the real life performance of his companies and receiving dividends, rather than being too concerned with Mr. Market's often irrational behavior.[14] Graham was critical of the corporations of his day for obfuscated and irregular financial reporting that made it difficult for investors to discern the true state of the business's finances. He was an advocate of dividend payments to shareholders rather than businesses keeping all of their profits as retained earnings. He also criticized those who advised that some types of stocks were a good buy at any price, because of the prospect of sustained stock price growth, without a good analysis of the business's actual financial condition. These observations remain relevant today.[15] Legacy[edit]Graham's most famous student is Warren Buffett. According to Buffett, Graham said that he wished every day to do something foolish, something creative, and something generous.[16] Buffett said that Graham excelled most at the last.[17] Some of Graham’s most famous disciples include Value Investors such as Warren Buffett, Charlie Munger, Philip Fisher, Walter Schloss, Peter Lynch, John Templeton, Mohnish Pabrai, Whitney Tilson, Prem Watsa, Jerome Chazen, and Joel Greenblatt among others. Alongside his revolutionary work in investment finance, Graham also made significant contributions to economic theory. Most notably, he devised a new basis for both U.S. and global currency.[18] Personal life[edit]According to The Snowball, after his son's death, Graham had an affair with his deceased son's girlfriend Marie Louise "Malou" Amingues (who was several years older than his son[19]) and used to travel to France frequently to visit her. He later separated from his wife Estey in New York, after she refused his offer of living in New York for six months and France for six months. Amingues was content to live with Graham without marriage.[20] Value investing is an investment paradigm that derives from the ideas on investment that Ben Graham and David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying securities that appear underpriced by some form of fundamental analysis.[1] As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value.[2] The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.[citation needed] However, the future distributions and the appropriate discount rate can only be assumptions. ([citation needed] Graham never recommended using future numbers, only past ones). For the last 25 years, Warren Buffett has taken the value investing concept even further with a focus on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.[citation needed] Graham never used the phrase, "value investing" — the term was coined later to help describe his ideas and has resulted in significant misinterpretation of his principles, the foremost being that Graham simply recommended cheap stocks. History[edit]Benjamin Graham[edit] Benjamin GrahamValue investing was established by Benjamin Graham and David Dodd, both professors at Columbia Business School and teachers of many famous investors. In Graham's book The Intelligent Investor, he advocated the important concept of margin of safety — first introduced in Security Analysis, a 1934 book he co-authored with David Dodd — which calls for a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard to adverse future developments often encountered in the stock market.[citation needed] Further evolution[edit]However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is most useful in industries where most assets are tangible. Intangible assets such as patents, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF), where the value of an asset is the sum of its future cash flows, discounted back to the present.[citation needed] Value investing performance[edit]Performance of value strategies[edit]Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.[3][4][5] Performance of value investors[edit]Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in his May 17, 1984 speech that was published as The Superinvestors of Graham-and-Doddsville. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies—value investing is, on average, successful in the long run. During about a 25-year period (1965–90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you thought that the world was flat."[6] Well-known value investors[edit]Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote Security Analysis, first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote The Intelligent Investor, a book that brought value investing to individual investors. Aside from Buffett, many of Graham's other students, such as William J. Ruane, Irving Kahn and Charles Brandes have gone on to become successful investors in their own right. Graham's most famous student, however, is Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running Berkshire Hathaway. Charlie Munger joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company. Buffett has credited Munger with encouraging him to focus on long-term sustainable growth rather than on simply the valuation of current cash flows or assets.[7] Columbia Business School has played a significant role in shaping the principles of the Value Investor, with professors and students making their mark on history and on each other. Ben Graham’s book, The Intelligent Investor, was Warren Buffett’s bible and he referred to it as "the greatest book on investing ever written.” A young Warren Buffett studied under Ben Graham, took his course and worked for his small investment firm, Graham Newman, from 1954 to 1956. Twenty years after Ben Graham, Roger Murray arrived and taught value investing to a young student named Mario Gabelli. About a decade or so later, Bruce Greenwald arrived and produced his own protégés, including Paul Sonkin—just as Ben Graham had Buffett as a protégé, and Roger Murray had Gabelli. Laurence Tisch, who led Loews Corporation with his brother, Robert Tisch, for more than half a century, also embraced value investing. Shortly after his death in 2003 at age 80, Fortune wrote, “Larry Tisch was the ultimate value investor. He was a brilliant contrarian: He saw value where other investors didn't -- and he was usually right.” By 2012, Loews Corporation, which continues to follow the principles of value investing, had revenues of $14.6 billion and assets of more than $75 billion.[8] Mutual Series has a well-known reputation of producing top value managers and analysts in this modern era. This tradition stems from two individuals: Max Heine, founder of the well regarded value investment firm Mutual Shares fund in 1949 and his protégé legendary value investor Michael F. Price. Mutual Series was sold to Franklin Templeton Investments in 1996. The disciples of Heine and Price quietly practice value investing at some of the most successful investment firms in the country. Seth Klarman is a Mutual Series alum and the founder and president of The Baupost Group, a Boston-based private investment partnership, authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000.[9] Another famous value investor is John Templeton. Irving Kahn was one of Graham's teaching assistants at Columbia University in the 1930s. He was a close friend and confidant of Graham's for decades and made research contributions to Graham's texts Security Analysis, Storage and Stability, World Commodities and World Currencies and The Intelligent Investor. Kahn was a partner at various finance firms until 1978 when he and his sons, Thomas Graham Kahn and Alan Kahn, started the value investing firm, Kahn Brothers & Company. Irving Kahn remained chairman of the firm until his death at age 109.[10] Michael Larson is the Chief Investment Officer of Cascade Investment, which is the investment vehicle for the Bill & Melinda Gates Foundation and the Gates personal fortune. Cascade is a diversified investment shop established in 1994 by Gates and Larson. Larson graduated from Claremont McKenna College in 1980 and the Booth School of Business at the University of Chicago in 1981. Larson is a well known value investor but his specific investment and diversification strategies are not known. Larson has consistently outperformed the market since the establishment of Cascade and has rivaled or outperformed Berkshire Hathaway's returns as well as other funds based on the value investing strategy. Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Martin Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) because they are not as important and attempts to predict their movement are almost always futile. Martin Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by another famous investor Joel Greenblatt in his book on special-situation investment You Can Be a Stock Market Genius (ISBN 0-684-84007-3, pp 247). Joel Greenblatt achieved annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures. Charles de Vaulx and Jean-Marie Eveillard are well known global value managers. For a time, these two were paired up at the First Eagle Funds, compiling an enviable track record of risk-adjusted outperformance. For example, Morningstar designated them the 2001 "International Stock Manager of the Year" and de Vaulx earned second place from Morningstar for 2006. Eveillard is known for his Bloomberg appearances where he insists that securities investors never use margin or leverage. The point made is that margin should be considered the anathema of value investing, since a negative price move could prematurely force a sale. In contrast, a value investor must be able and willing to be patient for the rest of the market to recognize and correct whatever pricing issue created the momentary value. Eveillard correctly labels the use of margin or leverage as speculation, the opposite of value investing. Christopher H. Browne of Tweedy, Browne was well known for value investing. According to the Wall Street Journal, Tweedy, Browne was the favorite brokerage firm of Benjamin Graham during his lifetime; also, the Tweedy, Browne Value Fund and Global Value Fund have both beat market averages since their inception in 1993.[2] In 2006, Christopher H. Browne wrote The Little Book of Value Investing in order to teach ordinary investors how to value invest.[3] Peter Cundill was a well-known Canadian value investor who followed the Graham teachings. His flagship Cundill Value Fund allowed Canadian investors access to fund management according to the strict principles of Graham and Dodd.[11] Warren Buffett had indicated that Cundill had the credentials he's looking for in a chief investment officer.[12] Other notable value investors include: Mason Hawkins, Whitney Tilson,[13] Mohnish Pabrai, Li Lu, Guy Spier[14] and Tom Gayner who manages the investment portfolio of Markel Insurance. Criticism[edit]Value stocks do not always beat growth stocks, as demonstrated in the late 1990s.[15] Moreover, when value stocks perform well, it may not mean that the market is inefficient, though it may imply that value stocks are simply riskier and thus require greater returns.[15] An issue with buying shares in a bear market is that despite appearing undervalued at one time, prices can still drop along with the market.[16] Conversely, an issue with not buying shares in a bull market is that despite appearing overvalued at one time, prices can still rise along with the market. Also, one of the biggest criticisms of price centric Value Investing is that an emphasis on low prices (and recently depressed prices) regularly misleads retail investors; because fundamentally low (and recently depressed) prices often represent a fundamentally sound difference (or change) in a company's relative financial health. To that end, Warren Buffett (the most famous Value Investor in history) has regularly emphasized that "it's far better to buy a wonderful company at a fair price, than to buy a fair company at a wonderful price." Similarly, Stanford accounting professor Joseph Piotroski developed a collection of metrics — which he termed the "F-Score" — to help weed out both under performers and winners in advance. To determine which companies are in the best financial health, Professor Piotroski screens each stock based on an accounting-based checklist, awarding one point if the company met the pre-determined criteria. The results of this 'F-Score' proved interesting: in his paper, Professor Piotroski showed that over a 20-year test period, the returns earned by a value investor could be increased by 7.5% each year.[17] These results were also validated by an external source: according to the American Association of Individual Investors,[18] Piotroski's F-Score was the only one among its 56 screening methodologies that had positive results during the financial crisis of 2008. Another issue is the method of calculating the "intrinsic value". Some analysts believe that two investors can analyze the same information and reach different conclusions regarding the intrinsic value of the company, and that there is no systematic or standard way to value a stock.[19][not in citation given] In other words, a value investing strategy can only be considered successful if it delivers excess returns after allowing for the risk involved, where risk may be defined in many different ways, including market risk, multi-factor models or idiosyncratic risk.[20] See also[edit]
References[edit]
Further reading[edit]
External links[edit] Warren Edward Buffett (/ˈbʌfᵻt/; born August 30, 1930)[3] is an American business magnate, investor and philanthropist. He is considered by some to be one of the most successful investors in the world.[4][5] Buffett is the chairman, CEO and largest shareholder of Berkshire Hathaway,[6] and is consistently ranked among the world's wealthiest people. He was ranked as the world's wealthiest person in 2008[7] and as the second wealthiest in 2016.[2] In 2012 Time named Buffett one of the world's most influential people.[8] Buffett is often referred to as the "Wizard of Omaha" or "Oracle of Omaha,"[9] or the "Sage of Omaha,"[10] and is noted for his adherence to value investing and for his personal frugality despite his immense wealth.[11] Buffett is a notable philanthropist, having pledged to give away 99 percent[12] of his fortune to philanthropic causes, primarily via the Gates Foundation. On April 11, 2012, he was diagnosed with prostate cancer,[13] for which his doctors successfully completed treatment in September 2012.[14] Buffett is also active in contributing to political causes, having endorsed Democratic candidate Hillary Clinton for president during the 2016 campaign season.[15]In February 2013, Warren Buffett was the key player in a $28 billion bid to buy the food manufacturer Heinz.[16] Early lifeBuffett was born in 1930 in Omaha, Nebraska. He was the second of three children and the only son of Leila (née Stahl) and Congressman Howard Buffett,[17] Buffett began his education at Rose Hill Elementary School. In 1942, his father was elected to the first of four terms in the United States Congress, and after moving with his family to Washington, D.C., Warren finished elementary school, attended Alice Deal Junior High School and graduated from Woodrow Wilson High School in 1947, where his senior yearbook picture reads: "likes math; a future stockbroker."[18] After finishing high school and finding success with his side entrepreneurial and investment ventures, Buffett wanted to skip college to go directly into business but was overruled by his father.[19][20] Buffett displayed an interest in business and investing at a young age. Much of Buffett's early childhood years were enlivened with entrepreneurial ventures. One of his first business ventures, Buffett sold chewing gum, Coca-Cola bottles, or weekly magazines door to door. He worked in his grandfather's grocery store. While still in high school, he made money delivering newspapers, selling golf balls and stamps, and detailing cars, among other means. On his first income tax return in 1944, Buffett took a $35 deduction for the use of his bicycle and watch on his paper route.[21] In 1945, as a high school sophomore, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in three different barber shops across Omaha. The business was sold later in the year for $1,200 to a war veteran.[22] Buffett's interest in the stock market and investing dated to schoolboy days he spent in the customers' lounge of a regional stock brokerage near his father's own brokerage office. On a trip to New York City at age ten, he made a point to visit the New York Stock Exchange. At 11, he bought three shares of Cities Service Preferred for himself, and three for his sister Doris Buffett (founder of The Sunshine Lady Foundation[23]).[24][25] At the age of 15, Warren made more than $175 monthly delivering Washington Post newspapers. In high school, he invested in a business owned by his father and bought a 40-acre farm worked by a tenant farmer. He bought the land when he was 14 years old with $1,200 of his savings. By the time he finished college, Buffett had accumulated more than $90,000 in savings measured in 2009 dollars.[22][26] In 1947, Buffett entered the Wharton School of the University of Pennsylvania. He would have preferred to focus on his business ventures; however, he enrolled due to pressure from his father.[22] Warren studied there for two years and joined the Alpha Sigma Phi fraternity.[27] He then transferred to the University of Nebraska–Lincoln where at 19, he graduated with a Bachelor of Science in Business Administration. After being rejected by Harvard Business School, Buffett enrolled at Columbia Business School of Columbia University upon learning that Benjamin Graham taught there. He earned a Master of Science in Economics from Columbia in 1951. After graduating, Buffett attended the New York Institute of Finance.[28] The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety. That's what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing.[29][30][31] — Warren Buffett Business careerSee also: List of assets owned by Berkshire HathawayBuffett worked from 1951 to 1954 at Buffett-Falk & Co. as an investment salesman; from 1954 to 1956 at Graham-Newman Corp. as a securities analyst; from 1956 to 1969 at Buffett Partnership, Ltd. as a general partner and from 1970, as Chairman and CEO of Berkshire Hathaway Inc. By 1950, at 20, Buffett had made and saved $9,800 (over $96,000 inflation adjusted for the 2014 USD[32]).[33] In April 1952, Buffett discovered that Graham was on the board of GEICO insurance. Taking a train to Washington, D.C. on a Saturday, he knocked on the door of GEICO's headquarters until a janitor admitted him. There he met Lorimer Davidson, Geico's Vice President, and the two discussed the insurance business for hours. Davidson would eventually become Buffett's lifelong friend and a lasting influence,[34]and would later recall that he found Buffett to be an "extraordinary man" after only fifteen minutes. Buffett wanted to work on Wall Street; however, both his father and Ben Graham urged him not to. He offered to work for Graham for free, but Graham refused.[35] Buffett returned to Omaha and worked as a stockbroker while taking a Dale Carnegie public speaking course.[36] Using what he learned, he felt confident enough to teach an "Investment Principles" night class at the University of Nebraska-Omaha. The average age of his students was more than twice his own. During this time he also purchased a Sinclair Texaco gas station as a side investment. However, this was not successful.[citation needed] In 1952,[37] Buffett married Susan Thompson at Dundee Presbyterian Church. The next year they had their first child, Susan Alice. In 1954, Buffett accepted a job at Benjamin Graham's partnership. His starting salary was $12,000 a year (approximately $105,000 inflation adjusted for the 2012 USD[32]). There he worked closely with Walter Schloss. Graham was a tough boss. He was adamant that stocks provide a wide margin of safety after weighing the trade-off between their price and their intrinsic value. The argument made sense to Buffett but he questioned whether the criteria were too stringent and caused the company to miss out on big winners that had other appealing features.[citation needed] That same year the Buffetts had their second child, Howard Graham. In 1956, Benjamin Graham retired and closed his partnership. At this time Buffett's personal savings were over $174,000 ($1.47 million 2012 USD[32]) and he started Buffett Partnership Ltd.. Buffett's home in OmahaIn 1957, Buffett operated three partnerships. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500. [38][39] In 1958 the Buffetts' third child, Peter Andrew, was born. Buffett operated five partnerships that year. In 1959, the company grew to six partnerships and Buffett met future partner Charlie Munger. By 1960, Buffett operated seven partnerships.[citation needed] He asked one of his partners, a doctor, to find ten other doctors willing to invest $10,000 each in his partnership.[citation needed] Eventually eleven agreed, and Buffett pooled their money with a mere $100 original investment of his own.[citation needed] In 1961, Buffett revealed that Sanborn Map Company accounted for 35% of the partnership's assets.[citation needed] He explained that in 1958 Sanborn stock sold at only $45 per share when the value of the Sanborn investment portfolio was $65 per share.[citation needed] This meant that buyers valued Sanborn stock at "minus $20" per share and were unwilling to pay more than 70 cents on the dollar for an investment portfolio with a map business thrown in for nothing which earned him a spot on Sanborn's board.[citation needed] As a millionaireIn 1962, Buffett became a millionaire because of his partnerships, which in January 1962 had an excess of $7,178,500, of which over $1,025,000 belonged to Buffett. He merged these partnerships into one. Buffett invested in and eventually took control of a textile manufacturing firm, Berkshire Hathaway. He began buying shares in Berkshire from Seabury Stanton, the owner, whom he later fired. Buffett's partnerships began purchasing shares at $7.60 per share. In 1965, when Buffett's partnerships began purchasing Berkshire aggressively, they paid $14.86 per share while the company had working capital of $19 per share. This did not include the value of fixed assets (factory and equipment). Buffett took control of Berkshire Hathaway at a board meeting and named a new president, Ken Chace, to run the company. In 1966, Buffett closed the partnership to new money. He later claimed that the textile business had been his worst trade.[40] He then moved the business into the insurance sector, and, in 1985, the last of the mills that had been the core business of Berkshire Hathaway was sold. Buffett wrote in his letter: "... unless it appears that circumstances have changed (under some conditions added capital would improve results) or unless new partners can bring some asset to the partnership other than simply capital, I intend to admit no additional partners to BPL."[citation needed] In a second letter, Buffett announced his first investment in a private business — Hochschild, Kohn and Co, a privately owned Baltimore department store. In 1967, Berkshire paid out its first and only dividend of 10 cents. In 1969, following his most successful year, Buffett liquidated the partnership and transferred their assets to his partners. Among the assets paid out were shares of Berkshire Hathaway. In 1970, Buffett began writing his now-famous annual letters to shareholders. However, he lived solely on his salary of $50,000 per year and his outside investment income. In 1979, Berkshire began the year trading at $775 per share, and ended at $1,310. Buffett's net worth reached $620 million.[citation needed] In 1973, Berkshire began to acquire stock in the Washington Post Company. Buffett became close friends with Katharine Graham, who controlled the company and its flagship newspaper, and joined its board. In 1974, the SEC opened a formal investigation into Buffett and Berkshire's acquisition of WESCO, due to possible conflict of interest. No charges were brought. In 1977, Berkshire indirectly purchased the Buffalo Evening News for $32.5 million. Antitrust charges started, instigated by its rival, the Buffalo Courier-Express. Both papers lost money, until the Courier-Express folded in 1982.[citation needed] In 1979, Berkshire began to acquire stock in ABC. Capital Cities announced a $3.5 billion purchase of ABC on March 18, 1985 surprising the media industry, as ABC was four times bigger than Capital Cities at the time. Buffett helped finance the deal in return for a 25% stake in the combined company.[41] The newly merged company, known as Capital Cities/ABC (or CapCities/ABC), was forced to sell some stations due to U.S. Federal Communications Commission ownership rules. The two companies also owned several radio stations in the same markets.[42] In 1987, Berkshire Hathaway purchased a 12% stake in Salomon Inc., making it the largest shareholder and Buffett a director. In 1990, a scandal involving John Gutfreund (former CEO of Salomon Brothers) surfaced. A rogue trader, Paul Mozer, was submitting bids in excess of what was allowed by Treasury rules. When this was brought to Gutfreund's attention, he did not immediately suspend the rogue trader. Gutfreund left the company in August 1991.[43] Buffett became Chairman of Salomon until the crisis passed.[44] In 1988, Buffett began buying The Coca-Cola Company stock, eventually purchasing up to 7% of the company for $1.02 billion. It would turn out to be one of Berkshire's most lucrative investments, and one which it still holds.[citation needed] As a billionaireBuffett became a paper billionaire when Berkshire Hathaway began selling class A shares on May 29, 1990, with the market closing at US$7,175 a share.[45] In 1998 he acquired General Re (Gen Re) as a subsidiary in a deal that presented difficulties—according to the Rational Walk investment website, "underwriting standards proved to be inadequate," while a "problematic derivatives book" was resolved after numerous years and a significant loss.[46] Gen Re later provided reinsurance after Buffett became involved with Maurice R. Greenberg at AIG in 2002.[47] During a 2005 investigation of an accounting fraud case involving AIG, Gen Re executives became implicated. On March 15, 2005, the AIG board forced Greenberg to resign from his post as Chairman and CEO after New York state regulators claimed that AIG had engaged in questionable transactions and improper accounting.[48] On February 9, 2006, AIG agreed to pay a US$1.6 billion fine.[49] In 2010 the U.S. government agreed to a US$92 million settlement with Gen Re, allowing the Berkshire Hathaway subsidiary to avoid prosecution in the AIG case. Gen Re also made a commitment to implement "corporate governance concessions," which required Berkshire Hathaway’s Chief Financial Officer to attend General Re’s audit committee meetings and mandated the appointment of an independent director.[46] In 2002, Buffett entered in US$11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his total gain on these contracts was over US$2 billion. In 2006, Buffett announced in June that he gradually would give away 85% of his Berkshire holdings to five foundations in annual gifts of stock, starting in July 2006—the largest contribution would go to the Bill and Melinda Gates Foundation.[50] In 2007, in a letter to shareholders, Buffett announced that he was looking for a younger successor, or perhaps successors, to run his investment business.[51] Buffett had previously selected Lou Simpson, who runs investments at Geico, to fill the role; however, Simpson is only six years younger than Buffett.[citation needed] On August 14, 2014, the price of Berkshire Hathaway's shares hit US$200,000 a share for the first time, capitalizing the company at US$328 billion. While Buffett had given away much of his stock to charities by this time, he still held 321,000 shares worth US$64.2 billion. On August 20, 2014, Berkshire Hathaway was fined $896,000 for failing to report December 9, 2013 purchase of shares in USG Corporation as required.[52] Great RecessionBuffett ran into criticism[53] during the subprime crisis of 2007–2008, part of the recession that started in 2007, that he had allocated capital too early resulting in suboptimal deals. "Buy American. I am." he wrote for an opinion piece published in the New York Times in 2008.[54] Buffett called the downturn in the financial sector that started in 2007 "poetic justice".[55] Buffett's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his later deals suffered large mark-to-market losses.[56] Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs.[57] Some of Buffett's put options (European exercise at expiry only) that he wrote (sold) were running at around $6.73 billion mark-to-market losses as of late 2008.[58] The scale of the potential loss prompted the SEC to demand that Berkshire produce, "a more robust disclosure" of factors used to value the contracts.[58] Buffett also helped Dow Chemical pay for its $18.8 billion takeover of Rohm & Haas. He thus became the single largest shareholder in the enlarged group with his Berkshire Hathaway, which provided $3 billion, underlining his instrumental role during the crisis in debt and equity markets.[59] In 2008, Buffett became the richest person in the world, with a total net worth estimated at $62 billion[60] by Forbes and at $58 billion[61] by Yahoo, overtaking Bill Gates, who had been number one on the Forbes list for 13 consecutive years.[62] In 2009, Gates regained the top position on the Forbes list, with Buffett shifted to second place. Both of the men's values dropped, to $40 billion and $37 billion respectively—according to Forbes, Buffett lost $25 billion over a 12-month period during 2008/2009.[63] In October 2008, the media reported that Buffett had agreed to buy General Electric (GE) preferred stock.[64] The operation included special incentives: He received an option to buy three billion shares of GE stock, at $22.25, over the five years following the agreement, and Buffett also received a 10% dividend (callable within three years). In February 2009, Buffett sold some Procter & Gamble Co. and Johnson & Johnson shares from his personal portfolio.[65] In addition to suggestions of mistiming, the wisdom in keeping some of Berkshire's major holdings, including The Coca-Cola Company, which in 1998 peaked at $86, raised questions. Buffett discussed the difficulties of knowing when to sell in the company's 2004 annual report: That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it's the windshield through which investors must peer, and that glass is invariably fogged.[66] In March 2009, Buffett said in a cable television interview that the economy had "fallen off a cliff ... Not only has the economy slowed down a lot, but people have really changed their habits like I haven't seen". Additionally, Buffett feared that inflation levels that occurred in the 1970s—which led to years of painful stagflation—might re-emerge.[67][68] In 2009, Buffett invested $2.6 billion as a part of Swiss Re's campaign to raise equity capital.[69][70] Berkshire Hathaway already owned a 3% stake, with rights to own more than 20%.[71] Also in 2009, Buffett acquired Burlington Northern Santa Fe Corp. for $34 billion in cash and stock. Alice Schroeder, author of Snowball, said that a key reason for the purchase was to diversify Berkshire Hathaway from the financial industry.[72] Measured by market capitalization in the Financial Times Global 500, Berkshire Hathaway was the eighteenth largest corporation in the world as of June 2009.[73] In 2009, Buffett divested his failed investment in ConocoPhillips, saying to his Berkshire investors, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40–$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.[74] The merger with the Burlington Northern Santa Fe Railway (BNSF) closed upon BNSF shareholder approval in 1Q2010. This deal was valued at approximately $34 billion and represented an increase of the previously existing stake of 22%.[citation needed] In June 2010, Buffett defended the credit-rating agencies for their role in the US financial crisis, claiming: Very, very few people could appreciate the bubble. That's the nature of bubbles – they're mass delusions.[75] On March 18, 2011, Goldman Sachs was given Federal Reserve approval to buy back Berkshire's preferred stock in Goldman. Buffett had been reluctant to give up the stock, which averaged $1.4 million in dividends per day,[76][77] saying: I'm going to be the Osama bin Laden of capitalism. I'm on my way to an unknown destination in Asia where I'm going to look for a cave. If the U.S. Armed forces can't find Osama bin Laden in 10 years, let Goldman Sachs try to find me.[78] In November 2011, it was announced that over the course of the previous eight months, Buffett had bought 64 million shares of International Business Machine Corp (IBM) stock, worth around $11 billion. This unanticipated investment raised his stake in the company to around 5.5 percent—the largest stake in IBM alongside that of State Street Global Advisors. Buffett had said on numerous prior occasions that he would not invest in technology because he did not fully understand it, so the move came as a surprise to many investors and observers. During the interview, in which he revealed the investment to the public, Buffett stated that he was impressed by the company's ability to retain corporate clients and said, "I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM."[79] In May 2012, Buffett's acquisition of Media General, consisting of 63 newspapers in the south-eastern U.S., was announced.[80] The company was the second news print purchase made by Buffett in one year.[81] Interim publisher James W. Hopson announced on July 18, 2013 that the Press of Atlantic City would be sold to Buffett’s BH Media Group by ABARTA, a private holding company based in Pittsburgh, U.S. At the Berkshire shareholders meeting in May 2013, Buffett explained that he did not expect to "move the needle" at Berkshire with newspaper acquisitions, but he anticipates an annual return of 10 percent. The Press of Atlantic City became Berkshire's 30th daily newspaper, following other purchases such as Virginia, U.S.' Roanoke Times and The Tulsa World in Oklahoma, U.S.[82] During a presentation to Georgetown University students in Washington, D.C. in late September 2013, Buffett compared the U.S. Federal Reserve to a hedge fund and stated that the bank is generating "$80 billion or $90 billion a year probably" in revenue for the U.S. government. Buffett also advocated further on the issue of wealth equality in society: We have learned to turn out lots of goods and services, but we haven’t learned as well how to have everybody share in the bounty. The obligation of a society as prosperous as ours is to figure out how nobody gets left too far behind.[83] After the difficulties of the economic crisis, Buffett managed to bring its company back to its pre-recession standards: in Q2 2014, Berkshire Hathaway made $6.4 billion in net profit, the most it had ever made in a three-month period.[84] Personal lifeIn 1949, Buffett was infatuated by a young woman whose current boyfriend had a ukulele. In an attempt to compete, he bought one of the diminutive instruments and has been playing it ever since. Though the attempt was unsuccessful, his music interest was a key part of his becoming a part of Susan Thompson's life and led to their marriage. Buffett often plays the instrument at stock holder meetings and other opportunities. His love of the instrument led to the commissioning of two custom Dairy Queen ukuleles by Dave Talsma, one of which was auctioned for charity.[85] Buffett married Susan Buffett (née Thompson) in 1952. They had three children, Susie, Howard and Peter. The couple began living separately in 1977, although they remained married until Susan Buffett's death in July 2004. Their daughter, Susie, lives in Omaha, is a national board member of Girls, Inc., and does charitable work through the Susan A. Buffett Foundation.[citation needed] In 2006, on his 76th birthday, Buffett married his longtime companion, Astrid Menks, who was then 60 years old—she had lived with him since his wife's departure to San Francisco in 1977.[86][87] Susan had arranged for the two to meet before she left Omaha to pursue her singing career. All three were close and Christmas cards to friends were signed "Warren, Susie and Astrid".[88] Susan briefly discussed this relationship in an interview on the Charlie Rose Show shortly before her death, in a rare glimpse into Buffett's personal life.[89] Buffett disowned his son Peter's adopted daughter, Nicole, in 2006 after she participated in the Jamie Johnson documentary The One Percent. Although his first wife referred to Nicole as one of her "adored grandchildren",[90] Buffett wrote her a letter stating, "I have not emotionally or legally adopted you as a grandchild, nor have the rest of my family adopted you as a niece or a cousin."[91][92][93] His 2006 annual salary was about US$100,000, which is small compared to senior executive remuneration in comparable companies.[94] In 2007[citation needed] and 2008, he earned a total compensation of $175,000, which included a base salary of just $100,000.[95] He continued to live in the same house in the central Dundee neighborhood of Omaha that he bought in 1958 for $31,500, a fraction of today's value. He also owns a $4 million house in Laguna Beach, California.[96] In 1989, after spending nearly $6.7 million of Berkshire's funds on a private jet, Buffett named it "The Indefensible". This act was a break from his past condemnation of extravagant purchases by other CEOs and his history of using more public transportation.[97] “Bridge is such a sensational game that I wouldn't mind being in jail if I had three cellmates who were decent players and who were willing to keep the game going twenty-four hours a day.” — Buffett on bridge[98]Buffett is an avid bridge player, which he plays with fellow fan Gates[99]—he allegedly spends 12 hours a week playing the game.[100] In 2006, he sponsored a bridge match for the Buffett Cup. Modeled on the Ryder Cup in golf—held immediately before it in the same city—the teams are chosen by invitation, with a female team and five male teams provided by each country.[101] He is a dedicated, lifelong follower of Nebraska football, and attends as many games as his schedule permits. He supported the hire of Bo Pelini, following the 2007 season, stating, "It was getting kind of desperate around here".[102] He watched the 2009 game against Oklahoma from the Nebraska sideline, after being named an honorary assistant coach.[103] Buffett worked with Christopher Webber on an animated series called "Secret Millionaires Club" with chief Andy Heyward of DiC Entertainment. The series features Buffett and Munger, and teaches children healthy financial habits.[104][105] Buffett was raised as a Presbyterian, but has since described himself as agnostic.[106] In December 2006, it was reported that Buffett does not carry a mobile phone, does not have a computer at his desk, and drives his own automobile,[107] a Cadillac DTS.[108] In 2013 he had an old Nokia flip phone and had sent one email in his entire life.[109] Buffett reads five newspapers every day, beginning with the Omaha World Herald, which his company acquired in 2011. A September 2014 Fast Company article featured Buffett's “avoid at all cost” practice, used to prioritize personal goals. Buffett advises people to first create a list of the top 25 accomplishments that they would like to complete over the next few years of their life, and to then pick the five most-important list items. Buffett stated that people need to “avoid at all cost” the initial, longer list, as it would hinder the achievement of the top-five.[110] HealthOn April 11, 2012, Buffett was diagnosed with stage I prostate cancer during a routine test.[111] He announced he would begin two months of daily radiation treatment from mid-July; however, in a letter to shareholders, Buffett said he felt "great - as if I were in my normal excellent health - and my energy level is 100 percent". On September 15, 2012, Buffett announced that he had completed the full 44-day radiation treatment cycle, saying "it's a great day for me" and "I am so glad to say that's over".[112] RecognitionIn 1999, Buffett was named the top money manager of the Twentieth Century in a survey by the Carson Group, ahead of Peter Lynch and John Templeton.[113] In 2007, he was listed among Time's 100 Most Influential People in the world.[114] In 2011, President Barack Obama awarded him the Presidential Medal of Freedom.[115] Most recently, Buffett, along with Bill Gates, was named the most influential global thinker in Foreign Policy's 2010 report.[116] Politics Buffett and President Obama in the Oval Office, July 14, 2010In addition to political contributions over the years, Buffett endorsed and made campaign contributions to Barack Obama's presidential campaign. On July 2, 2008, Buffett attended a $28,500 per plate fundraiser for Obama's campaign in Chicago.[117] Buffett intimated that John McCain's views on social justice were so far from his own that McCain would need a "lobotomy" for Buffett to change his endorsement.[118] During the second 2008 U.S. presidential debate, McCain and Obama, after being asked first by presidential debate mediator Tom Brokaw, both mentioned Buffett as a possible future Secretary of the Treasury.[119] Later, in the third and final presidential debate, Obama mentioned Buffett as a potential economic advisor.[120] Buffett was also finance advisor to California Republican Governor Arnold Schwarzenegger during his 2003 election campaign.[121] On December 16, 2015, Buffett endorsed Democratic candidate Hillary Clinton for president.[15] On August 1, 2016, Buffett challenged Donald Trump to release his tax returns.[122][123] On October 10, 2016, after another reference to him in the 2nd 2016 presidential debate, Buffet released his own tax return. [124][125] He said he had paid $1.85 million in federal income taxes in 2015 on an adjusted gross income of $11.6 million, meaning he had an effective federal income tax rate of around 16 percent. Buffett also said he had made more than $2.8 billion worth of donations last year.[125]Buffett said, "I have been audited by the IRS multiple times and am currently being audited. I have no problem in releasing my tax information while under audit. Neither would Mr. Trump -- at least he would have no legal problem." This was a measured response to Trump saying he was unable to release his tax information due to being under audit. [125] WritingsWarren Buffett's writings include his annual reports and various articles. Buffett is recognized by communicators[126] as a great story-teller, as evidenced by his annual letters to shareholders. He warned about the pernicious effects of inflation:[127] The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. — Buffett, Fortune (1977)In his article "The Superinvestors of Graham-and-Doddsville", Buffett rebutted the academic efficient-market hypothesis, that beating the S&P 500 was "pure chance", by highlighting the results achieved by a number of students of the Graham and Dodd value investing school of thought. In addition to himself, Buffett named Walter J. Schloss, Tom Knapp, Ed Anderson (Tweedy, Brown Inc.), William J. Ruane (Sequoia Fund, Inc.), Charles Munger (Buffett's own business partner at Berkshire), Rick Guerin (Pacific Partners, Ltd.), and Stan Perlmeter (Perlmeter Investments).[128] In his November 1999 Fortune article, he warned of investors' unrealistic expectations:[129] Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%! — Buffett, Fortune (1999) StyleBuffett's speeches are known for mixing business discussions with attempts at humor. Each year, Buffett presides over Berkshire Hathaway's annual shareholder meeting in the Qwest Center in Omaha, Nebraska, an event drawing over 20,000 visitors from both United States and abroad, giving it the nickname "Woodstock of Capitalism". Berkshire's annual reports and letters to shareholders, prepared by Buffett, frequently receive coverage by the financial media. Buffett's writings are known for containing quotations from sources as varied as the Bible and Mae West,[130] as well as advice in a folksy Midwestern style and numerous jokes. Wealth Buffett, Kathy Ireland and Bill Gates at the 2015 Berkshire Hathaway shareholders meetingIn 2008 he was ranked by Forbes as the richest person in the world with an estimated net worth of approximately US$62 billion.[131] In 2009, after donating billions of dollars to charity, Buffett was ranked as the second richest man in the United States with a net worth of US$37 billion[132][133] with only Bill Gates ranked higher than Buffett. His net worth had risen to $58.5 billion as of September 2013.[134] PhilanthropyBuffett has written several times of his belief that, in a market economy, the rich earn outsized rewards for their talents.[135] His children will not inherit a significant proportion of his wealth. He once commented, "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing".[136] Buffett had long stated his intention to give away his fortune to charity, and in June 2006, he announced a new plan to give 83% of it to the Bill & Melinda Gates Foundation.[137] He pledged about the equivalent of 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation (worth approximately US$30.7 billion as of June 23, 2006),[138] making it the largest charitable donation in history, and Buffett one of the leaders of philanthrocapitalism.[139] The foundation will receive 5% of the total each July, beginning in 2006. (The pledge is conditional upon the foundation's giving away each year, beginning in 2009, an amount that is at least equal to the value of the entire previous year's gift from Buffett, in addition to 5% of the foundation's net assets.) Buffett joined the Gates Foundation's board, but did not plan to be actively involved in the foundation's investments.[140][141] This represented a significant shift from Buffett's previous statements, to the effect that most of his fortune would pass to his Buffett Foundation.[142] The bulk of the estate of his wife, valued at $2.6 billion, went there when she died in 2004.[143] He also pledged $50 million to the Nuclear Threat Initiative, in Washington, where he began serving as an adviser in 2002.[144] In 2006, he auctioned his 2001 Lincoln Town Car[145] on eBay to raise money for Girls, Inc.[146] In 2007, he auctioned a luncheon with himself that raised a final bid of $650,100 for the Glide Foundation.[147] Later auctions raised $2,110,100,[148][149] $1.68 million[150] and $3,456,789. The winners traditionally dine with Buffett at New York's Smith and Wollensky steak house. The restaurant donates at least $10,000 to Glide each year to host the meal.[151] On December 9, 2010, Buffett, Bill Gates, and Facebook CEO Mark Zuckerberg signed a promise they called the "Gates-Buffett Giving Pledge", in which they promise to donate to charity at least half of their wealth, and invite other wealthy people to follow suit.[152][153] Public policyHealth careBuffett described the health care reform under President Barack Obama as insufficient to deal with the costs of health care in the US, though he supports its aim of expanding health insurance coverage.[154] Buffett compared health care costs to a tapeworm, saying that they compromise US economic competitiveness by increasing manufacturing costs.[154] Buffett thinks health care costs should head towards 13 to 14% of GDP.[155] (Under the Patient Protection and Affordable Care Act, the CMS actuary has projected health care costs will reach almost 20% of GDP by 2020.)[156] Buffett said "If you want the very best, I mean if you want to spend a million dollars to prolong your life 3 months in a coma or something then the US is probably the best", but he also said that other countries spend much less and receive much more in health care value (visits, hospital beds, doctors and nurses per capita).[157] Buffett faults the incentives in the US medical industry, that payers reimburse doctors for procedures (fee-for-service) leading to unnecessary care (overutilization), instead of paying for results.[158] He cited Atul Gawande's 2009 article in the New Yorker[159] as a useful consideration of US health care, with its documentation of unwarranted variation in Medicare expenditures between McAllen, Texas and El Paso, Texas.[158] Buffett raised the problem of lobbying by the medical industry, saying that they are very focused on maintaining their income.[160] TaxesSee also: Buffett RuleBuffett stated that he only paid 19% of his income for 2006 ($48.1 million) in total federal taxes (due to their source as dividends and capital gains, although the figure excluded the taxes on that income paid by the corporations that provided it), while his employees paid 33% of theirs, despite making much less money.[161] “How can this be fair?” Buffett asked, regarding how little he pays in taxes compared to his employees. "How can this be right?" He also added, "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning."[162][163] After Donald Trump accused him of taking "massive deductions," Buffet countered, "I have copies of all 72 of my returns and none uses a carryforward."[164] Buffett favors the inheritance tax, saying that repealing it would be like "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics".[165] In 2007, Buffett testified before the Senate and urged them to preserve the estate tax so as to avoid a plutocracy.[166] Some critics argued that Buffett (through Berkshire Hathaway) has a personal interest in the continuation of the estate tax, since Berkshire Hathaway benefited from the estate tax in past business dealings and had developed and marketed insurance policies to protect policy holders against future estate tax payments.[167] Buffett believes government should not be in the business of gambling, or legalizing casinos, calling it a tax on ignorance.[168] Trade deficitBuffett viewed the United States' expanding trade deficit as a trend that will devalue the US dollar and US assets. He predicted that the US dollar will lose value in the long run, as a result of putting a larger portion of ownership of US assets in the hands of foreigners. In his letter to shareholders in March 2005, he predicted that in another ten years' time the net ownership of the U.S. by outsiders would amount to $11 trillion. Americans ... would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an 'ownership society' will not find happiness in – and I'll use hyperbole here for emphasis – a 'sharecropping society’. Dollar and goldThe trade deficit induced Buffett to enter the foreign currency market for the first time in 2002. He substantially reduced his stake in 2005 as changing interest rates increased the costs of holding currency contracts. Buffett remained bearish on the dollar, stating that he was looking to acquire companies with substantial foreign revenues. Buffett emphasized the non-productive aspect of a gold standard for the USD in 1998 at Harvard: It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. In 1977, about stocks, gold, farmland and inflation, he stated: Stocks are probably still the best of all the poor alternatives in an era of inflation – at least they are if you buy in at appropriate prices.[169] ChinaBuffett invested in PetroChina Company Limited and in a rare move, posted a commentary[170] on Berkshire Hathaway's website stating why he would not divest over its connection with the Sudanese civil war that caused Harvard to divest. He sold this stake soon afterwards, sparing him the billions of dollars he would have lost had he held on to the company in the midst of the steep drop in oil prices beginning in the summer of 2008. In October 2008, Buffett invested $230 million for 10% of battery maker BYD Company (SEHK: 1211), which runs a subsidiary of electric automobile manufacturer BYD Auto. In less than one year, the investment reaped over 500% return.[171] TobaccoDuring the RJR Nabisco, Inc. hostile takeover fight in 1987, Buffett was quoted as telling John Gutfreund:[172] I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty. — Buffett, quoted in Barbarians at the Gate: The Fall of RJR NabiscoSpeaking at Berkshire Hathaway Inc.'s 1994 annual meeting, Buffett said investments in tobacco are:[173] fraught with questions that relate to societal attitudes and those of the present administration. I would not like to have a significant percentage of my net worth invested in tobacco businesses. The economy of the business may be fine, but that doesn't mean it has a bright future. — Buffett, Berkshire Hathaway annual meetingCoalIn 2007, Buffett's PacifiCorp, a subsidiary of his MidAmerican Energy Company, canceled six proposed coal-fired power plants. These included Utah's Intermountain Power Project Unit 3, Jim Bridger Unit 5, and four proposed plants previously included in PacifiCorp's Integrated Resource Plan. The cancellations came in the wake of pressure from regulators and citizen groups.[174] Renewable energyAmerican Indian tribes and salmon fishermen sought to win support from Buffett for a proposal to remove four hydroelectric dams from the Klamath River. David Sokol responded on Buffett's behalf, stating that the FERC would decide the question.[175][176] In December 2011, Buffett's MidAmerican Energy Holdings agreed to buy a $2 billion solar energy project under development in California and a 49 percent stake in a $1.8 billion plant in Arizona, his first investments in solar power. He already owned wind farms.[177] Expensing of stock optionsHe has been a strong proponent of stock option expensing on corporate Income Statements. At the 2004 annual meeting, he lambasted a bill before the United States Congress that would consider only some company-issued stock options compensation as an expense, likening the bill to one that was almost passed by the Indiana House of Representatives to change the value of Pi from 3.14159 to 3.2 through legislative fiat.[178] When a company gives something of value to its employees in return for their services, it is clearly a compensation expense. And if expenses don't belong in the earnings statement, where in the world do they belong?[179] Google and FacebookIn May 2012, Buffett said he had avoided buying stock in new social media companies such as Facebook and Google because it is hard to estimate future value. He also stated that initial public offering (IPO) of stock are almost always bad investments. Investors should be looking to companies that will have good value in ten years.[180] Books about BuffettIn October 2008, USA Today reported at least 47 books were in print with Buffett's name in the title. The article quoted the CEO of Borders Books, George Jones, as saying that the only other living persons named in as many book titles were U.S. presidents, world political figures and the Dalai Lama.[181] Buffett said that his own personal favorite is a collection of his essays called The Essays of Warren Buffett,[182] which he described as "a coherent rearrangement of ideas from my annual report letters".[181] Some best-selling, or otherwise notable, books about Buffett:
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