Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

What's So Great about Warren Buffett, Anyway?

Though most people have heard of Warren Buffett, many only know that he's one of the richest people in the world. Even fewer people can explain exactly why the renowned "Oracle of Omaha" has a reputation as one of the world's greatest investors. So that you aren't one of the ignorant masses, this article is a primer on Buffett and his financial fetish.

Who Is Warren Buffett?

Warren Buffett was born August 30, 1930, in Omaha, Nebraska. He is the grandson of Ernest Buffett, who operated a family grocery store in Omaha, and the son of Howard Homan Buffett, who was a stockbroker, the founder of Buffett-Falk & Company in 1931, and later a U.S. Congressman. His mother, Leila Stahl Buffett, is twice widowed.

As a child, Buffett was interested in math and took on his first business venture by purchasing six-packs of soda and selling them individually to neighbors for a markup. He soon began reading books about the stock market and made his first buy at age 11 (three shares of Cities Service Preferred for $38 per share). Buffett's most well-known childhood job, however, was his paper route. By combining routes and marketing subscription renewals, Buffett amassed about $6,000 by the time he was 16.

Buffett attended the Wharton School of Business at the University of Pennsylvania, but transferred to the University of Nebraska during his junior year and graduated in 1950. After being rejected from Harvard Business School, Buffett applied to and was accepted at Columbia Business School, where studied under renowned finance academic Benjamin Graham, author of The Intelligent Investor.

On April 19, 1952, Buffett married Susan Thompson of Omaha. She was a roommate of Buffett's sister, Bertie. In 1977, Susan moved to San Francisco and the couple remain married. Astrid Menks has lived with Buffett since 1978.

By age 25, Buffett's net worth was soaring, and friends began approaching him for investment advice. He founded the Buffett Partnership in 1956 --  the year in which he began investing with long-time friend Charlie Munger --  pooled about $100,000 from friends and relatives, and began investing. In 1969, Buffett dissolved the partnership, which by then was worth a whopping $100 million. His stake was worth $20 million. He was 38.

Before that, however, through the partnership Buffett purchased in 1965 the controlling interest in a New Bedford, Massachusetts textile mill called Berkshire Hathaway. He used the cash flow from the business to make investments in other companies as well. The textile mill didn't last, but the name did. And the rest is history.

Buffett's Investing Philosophy

One of Buffett's distinctive habits is that he only invests in businesses he intuitively understands. He gives heavy attention to the fundamentals of a company or industry, and he relies on qualitative information as much as he does on quantitative information.

 Another basic Buffett tenet is the idea of long-term investing. He does not day trade, flip houses, try to time the market, or pursue other means of quick profits. He is a patient investor, and as such only makes investments that he believes will be productive for decades. "Our favorite holding period is forever," says Buffett. In general, this means that the investment needs to be profitable and produce timeless, well-loved products.

Buffett is not a big risk-taker. "We've done better by avoiding dragons rather than by slaying them," Buffett once said at the 1991 Berkshire annual meeting.

#-ad_banner_2-#How Can Warren Help You Profit?

There are a few specific things that Buffett looks for when evaluating an investment opportunity.

Easy-to-Understand Businesses
One of Warren Buffett's principles is not unlike Peter Lynch's -- stick with what you understand and choose investments with which you are comfortable. Buffett, arguably one of the greatest and most revered stock-pickers of all time, says investors shouldn't complicate things by seeking out complicated companies.

Along those lines, the world's savviest investor has kept Berkshire Hathaway away from fast-growing technology stocks. Buffett admits that he just doesn't understand technology well.  As such, he avoids the industry altogether. Before investing in any business, Buffett attempts to predict what the company will look like 10 years in the future. High-tech markets change too fast to look that far ahead with any confidence.

High Return on Equity (ROE): Buffett emphasizes return on equity (ROE), a key measure of a company's profitability.  He prefers to invest in companies where he can confidently forecast future ROEs at least 10 years out. He is particularly fond of firms that don't require a lot of capital, as they tend to produce much higher returns on equity.

Consistently Strong Free Cash FlowBuffett also seeks companies with significant free cash flow.  Always mindful of the risks associated with investing, he ensures that his companies have plenty of money left over to invest in their growth after they have paid the bills.

Limited Debt: In the 1990s, Buffett bought insurers Geico and General Re because he liked how the companies limited and managed their debt.

Buffett also likes the "float" that insurance companies offer. Policyholders pay premiums up front, but claims are paid out later -- providing insurance companies with a steady stream of low-cost cash to play with. Until policyholders collect on their policies or claims, the company can invest those billions in stocks/bonds or other areas, and who better to invest that money than Buffett himself?

Quality ManagementAmong the most noteworthy aspects of Buffett's stock-picking expertise is that he looks for quality companies with quality management teams. When Buffett buys a business, he buys its management as well. Buffett looks for people who are as passionate about their business as he is about investing.