What Makes Warren The Oracle Of OmahaChris Welles
The Making of an American Capitalist
By Roger Lowenstein
Random House 512pp $27.50
Is Warren Buffett losing it?
For years, investors and journalists have raised that question whenever Warren E. Buffett, quite possibly the world's most successful investor, slips up. Sooner or later, many stock market experts insist, the so-called Oracle of Omaha will succumb to the law of averages. The market, say these experts, is so efficiently priced that consistently beating averages, even by a few percentage points, is devilishly difficult.
Buffett enjoyed a quick $400 million paper gain on July 31, when his 20 million shares of Capital Cities/ABC Inc. soared after the Walt Disney Co. takeover announcement. But that won't quell a recent resurgence of losing-it speculation stemming from soured stakes in USAir Inc., Buffett's worst investment ever, and Salomon Brothers Inc. Conceding "sloppy analysis," he took a $286.5 million pretax charge to write down 75% of his holdings in USAir. Salomon has been floundering in spite of his efforts to revitalize it.
But beware of betting against Buffett. Between 1957 and 1994, his portfolio racked up a compounded annual gain of 28.6%--almost triple the gains in the major stock averages. He has never had a down year. Shares held by Buffett and his wife, Susie, in Berkshire Hathaway Inc., his investment vehicle, are currently worth almost $13 billion.
For all the people waiting for him to stumble, there are many more trying to figure out how he succeeds. Explaining his success is the central focus of Buffett: The Making of an American Capitalist by Wall Street Journal reporter Roger Lowenstein. Lowenstein is far from the first to probe Buffett's record, and much here will be familiar to Buffett-watchers. As is his usual practice with journalists, Buffett neither assisted nor impeded Lowenstein. The author was able to gain broad access to Buffett's family and friends. Lively, smoothly written, and elaborately researched, Buffett is likely to stand as the definitive biography.
Lowenstein casts a wide net. He details Buffett's investment-obsessed upbringing (he was charting stock prices at age 10), his unorthodox family life (his household includes both a wife and a mistress), and his personality quirks (stinginess, secretiveness, a passion for junk food). But the book's core is Buffett's investment philosophy, research methods, and thought processes.
The source of Buffett's approach to investing, as most of his fans know, was Benjamin Graham, an investor-turned-Columbia University professor who, with colleague David Dodd, wrote the seminal 1934 textbook Security Analysis. Graham taught that any stock had an intrinsic value independent of the market's valuation. The smart investor, thus, should look for issues whose market value is much lower than the intrinsic value, for eventually the former will catch up to the latter. Buffett's 1973 purchase of a big stake in the Washington Post Co. was classic: a stock selling for a fraction of its liquidation value. "The best thing I did was to choose the right heroes," Buffett once said. "It all comes from Graham."
Although Buffett remains a value investor, his views later diverged radically from Graham's. While Graham remained rigorously mechanistic, Buffett became more subjective. He spends much time analyzing management. He seeks out such intangible assets as brand names and other strong franchises--monopolies, if possible--with pricing power. A key example is Coca-Cola Co., one of his most lucrative investments.
Up to this point, Buffett's philosophy parses easily. But the terrain gets murkier. He often violates his own pronouncements. For example, at the same time he was railing against junk bonds in the 1980s, he bought $440 million worth of RJR Nabisco Inc. junk.
And then, there are such elements as sentimentality and serendipity. Buffett buys into lots of companies in part because they are located in Omaha or run by friends. For years, he refused to close Berkshire Hathaway's ailing textile mills, one of his first investments, because, says Lowenstein, "he felt an affection for this relic of a factory." In fact, he doesn't like selling at all. He once told BUSINESS WEEK that selling a familiar stock was "like dumping your wife when she gets old." Asked to explain his purchase of Coca-Cola, Buffett replied: "It's like when you marry a girl. Is it her eyes? Her personality? It's a whole bunch of things you can't separate." Says Lowenstein: "Buffett couldn't derive [Coke's] value from the balance sheet. He couldn't compute the value. But he could see it."
For all of his reporting, Lowenstein gets only so far into Buffett's brain. It's curious: Buffett regularly dispatches letters and reports to Berkshire Hathaway investors. Like Graham, he relishes, at 64, the role of venerable teacher. Yet he hides as much as he reveals. "Much about Buffett remains obscure," concedes Lowenstein, who calls him a "master dissimulator." Ultimately, the man is unknowable. We'll never really get to the bottom of why he has done so well. And, if and when he loses it, we won't really know the reason for that either. My advice? Go back to Graham and do your best to take it from there.