Profile: Warren Buffett

The one true sage in a world of market madness

Not so long ago, they said Warren Buffett was history. They said that he was missing out on the hi-tech boom and the wonders of dot.commery, that the man billed as "the world's most successful investor" had lost his touch. That was 1999, when AOL stock rose six-fold and Amazon had rocketed by 1,000 per cent in a year, while shares in Berkshire Hathaway, the investment company Buffett had built from virtually scratch had climbed – wait for it – only 11 per cent.

Right now, they'd kill for 11 per cent. Indeed they'd kill for anything, as AOL (now augmented by Time Warner), facing a government probe into accounting irregularities during those go-go times, has watched its share price crash by 70 per cent in the last year. Wise old Warren ("a life long technophobe" as he confesses on the BH website) meanwhile stuck with boring bluechips like Gillette, Coca-Cola and American Express, saying he couldn't understand these newfangled companies. Oh, the massed ranks of impoverished investors lament in this year of market misery, "if only we hadn't thought that we did understand them."

Warren Buffett's story is quintessentially American. He is by most counts the second richest man in America (the richest is Bill Gates) with a fortune estimated by Forbes Magazine at $32.3bn (£20bn) last year. He is the only US billionaire to have made his money entirely through investing, and today, along with Alan Greenspan and Paul Volcker, the present and former chairmen of the Federal Reserve, he is arguably the most respected voice of financial America.

His natural habitat is not Wall Street or Washington, but the unpretentious Midwest heartlands. Buffett is known, inevitably, as the Oracle of Omaha – the latter being the pleasant but largely unremarkable Nebraska city on the banks of the Missouri river where he he was born and raised, where he made his fortune and where he lives to this day, in the same grey stucco house he bought for $31,500 back in 1956.

Buffett is today the best-known Nebraskan on earth, a grey-haired, no-nonsense, low-falutin' figure who has been triumphantly vindicated by events. He is not so much a financial institution as a national institution, the object of a cult that attracts 14,000 or so people to Omaha every May for Berkshire Hathaway's annual meeting. Buffett himself has called the occasion the "Woodstock of capitalism". Some people buy a BH share just to attend (not as small a matter as it sounds, for old-fashioned Warren has never been one for fancy devices such as stock splits, and a single share currently costs $63,000).

In this age when CEO stands in many minds for chief embezzlement officer, Buffett embodies those Midwest virtues of probity, modesty and common sense Americans like to think of as part of the national character. It should be noted that this same part of the world spawned Arthur Andersen, once held as another paragon of honesty and good housekeeping. Buffett has kept his halo. He is a CEO for the nation, the self-made man who made his fortune honestly, the scourge of less principled peers.

The foundations of the Buffett legend were laid young. The son of a stockbroker and Republican congressman, he made his first trade in 1941 when he was just 11, buying three shares in a company for $38 apiece. They dropped to $27 then rose to $40 at which point the cautious youth sold, earning a tiny profit but missing a later climb to $200. Herein surely lie the seeds of his lifelong investing philosophy, that sharebuying is for the long term.

As a child he must have been maddeningly industrious – running a double paper round, collecting lost golf balls and selling them, and putting the proceeds towards buying 40 acres of farmland, which he then rented out. College in Omaha was followed by a graduate degree course at Columbia University in New York, where he met and worked with, Benjamin Graham, the author of The Intelligent Investor and soon to become Buffett's own financial mentor.

Graham's strategy was to search for what he called "cigar butt" companies, no longer of interest to the market and thus undervalued, but which still had a few puffs of life in them. In 1962 Buffett found one – a rundown Massachusetts textile concern called Berkshire Hathaway. He poured what resources it had into other businesses, notably insurance.

It was a stroke of genius. Insurance companies may not intrinsically be hugely profitable, but they have a "float", up-front premium payments from policyholders from which claims are only settled later. The cash pile grew during the early 1970s bear market on Wall Street. Buffett used the money to buy stakes in companies at bargain prices, and the Berkshire Hathaway phenomenon was born.

Amazingly, at a time when business reputations have rarely been lower, Buffett's own moral authority has grown with his personal fortune. In fact, as an investor himself, he can speak for every investor enraged by the corporate misdeeds that have cost him so dear.

He was at it again this week from the liberal bully-pulpit of the op-ed page of The New York Times, denouncing not so much the "outright crookedness" of Enron and WorldCom as the dodgy accounting methods used by most corporations to calculate pension charges, stock-option costs and the like: "CEOs will be respected and believed... only when they deserve to be. They should quit talking about some bad apples and reflect instead on their own behaviour." When President Bush goes on like that, you think Harken Energy and snigger.

When Buffett speaks, ordinary Americans listen. But the truly sacred texts of Warren Edward Buffett are Berkshire Hathaway's annual letters to shareholders, studied at business schools across the country, and collectively published in 1998 as The Essays of Warren Buffett. They are pithy and wise, sprinkled with the endearing admissions of human failure that a deity may occasionally permit himself.

The 2001 edition for instance contains a huge mea culpa for his failure to protect General Re, one of BH's re-insurance units, from the shockwaves of the 11 September terrorist attacks. Buffett well knew a mega-catastrophe (albeit more likely natural than man-made) was possible. "I violated the Noah rule," he grovelled, "Predicting rain doesn't count; building arks does."

Few shareholder letters quote Horace. But BH's in 2001 noted that "Many shall be restored that now are fallen and many shall fall that are now in honor" – which pretty succinctly describes the reversals of reputation between 1999 and now of Buffett on the one hand and AOL-Time Warner on the other, not to mention disgraced erstwhile superstars like Ken Lay of Enron and WorldCom's Bernie Ebbers.

The latest letter contains a decent CEO joke as well, of "the gorgeous woman who slinks up to a CEO at a party and through moist lips purrs: 'I'll do anything, I mean anything, just tell me what you would like.' The answer came back instantly: 'Reprice my stock options'". And so to Buffett's great cause, his demand for an end to the practice of not treating stock options, one of the most important and lucrative elements of an executive's compensation package, as an expense on the debit side of the balance sheet, thus reducing declared earnings. For years Buffett (along with other luminaries including Volcker, and the former Securities and Exchange Commission chairman Arthur Levitt) has been urging the change. But senators and congressmen, Democrat and Republican alike, under pressure from their backers in business and the accounting industry, refused.

But Buffett is forcing companies to act. Earlier this month Coca-Cola and the Washington Post Company (in which BH also has a substantial stake) said they will henceforth treat options as expenses. The online retail giant Amazon says it will follow suit. That change of heart is a nice irony, given Buffett's aversion to hi-tech companies – though he recently raised eyebrows by investing $100m in a small telecoms company called Level 3 Communications.

The fawning literature about Buffett, the hero worship he inspires among his followers, can be irritating. But at least he practises what he preaches. No stock option crosses his desk. As CEO of a $60bn company, he pays himself just $100,000 a year. His only luxury is a private jet. He favours homely pursuits like bridge and golf, and ordinary foods like steaks and hamburgers (washed down with, what else, Coke). Above all, he delivers.

Wall Streeters know the figures by heart: $10,000 invested in Berkshire Hathaway when Buffett secured control in 1965 would be worth some $50m today. If you'd put the money in the general market index, you'd have only $500,000. The formula verges on heresy in this age of hucksterism and short-termism: pick companies that are preferably undervalued, have a solid and predictable business, are simple to manage and have a good reputation – then stay with them. As the Oracle has pronounced: "An investor should act as though he has a lifetime decision card with 20 punches on it. Every investment decision punches his card, and he has one fewer for the rest of his life."

It is astonishing, then, to discover that this supremely methodical man has a slightly bizarre private life. He is still married to his wife Susan, a former singer, but they have not lived together for 25 years. In 1977 she moved to San Francisco, but not before she had introduced her husband to a Latvian-born waitress in Omaha called Astrid Menks, who then moved in with him. But husband, wife and partner are still good friends, and Susan is to be seen at most of Warren's public appearances. A possible consolation is that she is sole heir to that $32bn fortune.

But in other family dealings, old Midwestern habits of thrift and discipline return. Buffett is a firm believer that too much money too early is a bad thing, and his past stinginess with his own children is legendary. One one occasion his daughter Susie needed a $20 bill to get her car out of a garage, only for Buffett to make her write him a cheque first. Tough love indeed. But then again, if some of America's errant CEOs had watched their companies' small change as carefully, Wall Street might now be a rather happier place.

Life Story

Born: August 30 1930, Omaha, Nebraska; son of Howard Buffett, a stockbroker and congressman, and Leila Buffett (née Stahl).

Family: Married Susan Thompson 1952, with whom he had three children, Howard, Susan and Peter. Now lives with Astrid Menks, a Latvian-born waitress in his Omaha home.

Education: Universities of Pennsylvania and Nebraska (1947/1950), Columbia University, New York, 1951.

Career: Investment salesman at Falk and Co of Omaha before setting up his own stockbroking partnership. He then acquired Berkshire Hathaway, of which he is chairman and CEO. He is also on the board of a host of major companies, including Coca-Cola, Gillette and ABC/Capital Cities.

Books about him: Dozens. They include The Warren Buffett Way (1994) and The Warren Buffett Portfolio (1999), both by Robert Hagstrom; Buffett, the Making of an American Capitalist (1996) by Roger Lowenstein; The Thoughts of Chairman Buffet t (1998) compiled by Simon Reynolds.

Books by him: Warren Buffet Speaks (1998), The Essays of Warren Buffet (2000).

He says: "You don't know who's swimming naked until the tide goes out."

They say: "I don't know of any manager who hasn't made mistakes. Buffett doesn't make huge mistakes. He doesn't waste shareholder money" –Timothy Vick, investment broker