Warren Buffett Sources of Success

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Warren Buffett: Sources of success 1

Warren Buffett:

Sources of Success

A Descriptive Analysis Conducted for the International Investment

Management courseUtrecht School of Economics

Course: International Investment ManagementTutor:Judith Beugels

Students:Peter Angelov 3250377

Heero Hoomans 3110605

Haoyu Teng 3084213

Academic year: 2008/2009

Utrecht School of Economics


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Table of Contents

1.Biography......5

1.1 Childhood.. 5

1.2 Education and early career.6

2.Investing........8

2.1 Views on the Market..8

2.2 Principles of Value Investing.9

3.Warren Buffetts managerial skills.12

4. Summary and Conclusion..15

5. Appendix........17


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Introduction

Investment professionals and academicians have debated for a long time the practical

applicability and relevance of what is now known as the Efficient Market Theory.

According to this theory analyzing stock performance is an activity that does not bringany additional benefits since current prices reflect all available information. Thus, people

supporting the idea suggest that choosing randomly from a list of index stocks would

generate similar, if not the same, returns as to those obtained after a careful and costly

analysis performed by a professional financial expert. The EMT is an integral part of a

broader theory of Modern Portfolio Theory which goes further by describing the stock

market as a market resembling perfect competitive environment. As known a main

characteristic, among others, of such a market is that there are not excess profits in the

long run since any successful strategies would be easily copied and extra profits crowded

out. The MPT proposes the passive investment strategy, the choice of stocks resembling

the index, as the most successful strategy of all and defines the art of active portfolio

management as a losers game.1 Therefore, investors who beat the market and generate

higher returns are assumed to be just fortunate.

Yet some individuals appear to persistently outperform the market in many, even

consecutive years. Are those investors just extremely fortunate or are the current theories

just flawed? Is it possible that the stock market follows some alternative pattern from the

currently adopted paradigm? One of those extremely successful investors is Warren

Buffett, CEO of Berkshire Hathaway, a person with peculiar history and individuality,

and a proud owner of wealth currently estimated at 39$ billion, low from the highest of

62$ billion in mid 2008.2

The purpose of this paper is to reveal the sources of success that made the emergence of

Warren Buffett as an extraordinary investor and the accumulation of such and immense

wealth possible. We will investigate whether he was extremely successful only due to

luck and chance or there is something else that contributed to his outstanding

performance as an investor. In this way we will try to find out whether the modern

1 Larry E. Swedroe (2004), What Wall Street Doesnt Want you to Know, St. Martin's Griffin

2 Forbes Magazine


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market theories could be adjusted in order to provide the necessary means for sustainable

investors performance.

A topic like that has a particular relevance amidst the current financial crisis the world is

witnessing. What if the flaws of the stock market are incorporated in the system itself?

What if overconfidence stems from wrong business valuation techniques and myopias

investors? Moreover, the findings of such an investigation could prove extremely

beneficial to any person who contemplates to deal with any type of investing, either on

the stock market or in real assets.

The paper is structured in several sections with different topics, but each directed at

revealing more and more arguments in support of answering the ultimate question the

sources behind Warren Buffetts success. The paper starts with biographical information

from his childhood years, his education, and early career tracing the most influential

experiences and people in his life. The research continues with a summary of his views

on the market, his top investment principles and methods of valuing a business where

each one will be carefully analyzed and clarified. Any empire of the size created by

Warren Buffett needs a well understood and strictly applied corporate culture, the topic of

the third section.. In the last section we will give a summary of our findings and an

answer to our research question.

Through the paper we will use as our main sources of information and concepts the

works of Robert G. Hagstrom and his book The Warren Buffett Way, The essays of

Warren Buffett: lessons for corporate America by Lawrence Cunningham, Warren

Buffetts own article The Superinvestors of Graham-and-Doddsville, Prof. John Prices

Report on Warren Buffett, the nine investing principles of Warren Buffett, and

Benjamin Grahams and David Le Fevre Dodds Security Analysis. As a source of wit

and wisdom we will apply some of his most relevant quotes borrowed from his famous

letters to shareholders.


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1.BiographyFor a tree to grow strong the roots have to be deep. In this section we will dig deep into

Buffetts childhood experiences, the role of his father in his life, his passions, and theeducation he has undergone. Further on a succinct profile of his mentor Benjamin

Graham will be provided and his first steps as a professional will be traced. In this way

we would like to show that the path to success has its origins much earlier than the

financial statements could account for.

1.1 ChildhoodWarren Edward Buffett was born in 1930 in Omaha, Nebraska. He is the son of Howard

and Leila Buffett. The figure of his mother has some ambiguity as to the influence she

had in Warrens life but the same cant be said for that of his father. Howard Buffet t was

a local stock broker, a banker, and served as a four-term US Congress representative from

the conservative wing of the Republican Party. From an early age Warren became fond of

his father and often spent his spare time choking stock prices in his office or reading his

books on investment. The young Buffett even moved to Washington D.C when his father

got elected in the Congress.3 The figure of Howard Buffett definitely served as a role

model of a leader and of entrepreneurial skills to Warren, characteristics clearly

recognized in his later years.

Warrens life is full of stories of childhood entrepreneurship. At the age of six he bought

six packs of Coca-Cola bottles, a company with great significance in his mature business

ventures, and resoled them for a profit. He made his first stock market investment at the

age of eleven when he bought three shares of City Services stock for the price of 38$ and

waited till they rose to 40$ when Warren sold them. But the stocks went on rising and

reached 200$ in two years, an event that served him as a good lesson to stay on the

market. Upon moving to Washington, while his father was busy with politics, he took

two routes as a paper delivery boy of The Washington Post, another major investment of

him, and Washingtons Times-Herald. At this occupation he filed his first tax income

return being only thirteen. With the money he earned as a paperboy he and a partner of

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


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him bought reconditioned pinball machines and placed them in barbershops soon ending

up owning seven of those securing them some 50$ each weekly. But Buffett did not like

to spend; he was a gatherer and a holder and enjoyed much more seeing his money grow

than contribute to somebody elses wealth by spending them. Later on with the same

partner of him they bought a 1934 Rolls-Royce for 350$ and leased it for 35$ a day.

Upon graduation from high school at the age of sixteen, he had close to 6000$ of savings

and decided to invest it by buying 40 acres of land for 1200$ renting it to farmers. In

home Omaha Warren became a big fan of horse racing and the statistics of weights,

speed, and past performance fascinated him to the extent that he formed a partnership to

issue the Stable Boys Tip Sheet. 4 None of these would be possible without Warrens

fascination by the magic of numbers and money. He could easily perform calculation in

his mind and keep track of them while having a conversation on a topic. What especially

was intriguing to him was the idea of money growing at a compound interest, a passion

he would keep for a lifetime.

1.2 Education and early careerAfter graduating high school Warren Buffett enrolled at the University of Pennsylvania in

1947, and more specifically the Wharton School of Business. However, after two years of

studies he became convinced that most lecturers knew less about finance than he did.

This made him return back home to Omaha where he obtained Bachelor of Science in

Economics from University of Nebraska. During those years he got acquainted with the

works of Benjamin Graham by reading The Intelligent Investor. This classic book

influenced him so much that he became determined to study under Graham and he did so.

Warren left home to move to New York where he graduated Columbia University with a

Master in Business in 1951. During those years Graham and Buffett formed a bond

between each other that would last for decades and would determine the investment

philosophy of Warren once and forever.

The significance of Graham in Buffetts career and the role of a mentor he would have in

future deserve a few words to be mentioned about his teachings. Benjamin Graham is

known as the father of value investing. He stressed the importance of trading on the

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


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market as one would trade with a business partner that offers you the chance to buy you

or sell you his interest on a daily basis. This imaginary partner, to whom he referred as

Mr. Market, would sometimes offer fair deals but often his price would be either

undervalued or overvalued given the characteristics of a specific business, which created

the possibility of speculation. For him having a margin of safety on an investment,

meaning to buy a stock only if its price is lower than the conservative value of he

business, was essential. In this way he ensured any investment from fluctuations on the

negative side. For this purpose an investor has to determine the intrinsic value of a

company. In his believes a company that was well managed and firm in its belief about

the value of its product could and should prosper as an investment.5 The mathematical

simplicity of Grahams methods appealed much to Warrens feeling of numbers.

After graduating Columbia University, Buffett returned to Omaha where he had a short

traineeship at his fathers brokerage firm. During this time he didnt cut his contacts with

Graham but on the contrary, informing him for various investments he made and

discussing common topics of interest. Graham was generous with his time and thoughts

and this relationship between a professor and a former student eventually brought them

working under the same roof. In 1954 responding to a invitation of Graham, Warren

Buffett ended up as a security analyst at Graham-Newton Corporation. These two years

working side-by-side with Graham and the other analysts analyzing hundreds of

companies proved decisive for the future successive investment style of Buffett.

Apart from Buffett, Graham employed several other bright youngsters coming from

various fields of study and backgrounds. What unified them all was their common

understanding of the value investing approach and the willingness to apply it

unconditionally. Among them were Walter Schloss manager of WSJ Ltd Partners, Tom

Knap, founding partner of Tweedy, Browne Partnerships, and the founder of Sequoia

Fund Bill Ruane. All of them became very successful investors in their careers after the

liquidation of Graham-Newman which proves the fact that the success of Buffett was not

just a pure miracle but grounded to a big extent in his adopted investing methods. 6

5B. Graham, D. Dodd (1934), Security Analysis, McGraw-Hill Professional

6 Warren Buffett (1984), The Superinvestors of Graham-and Doddsville Hermes Magazine


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In this way, after almost two decades of business entrepreneurship, excellent education,

inspiring role models to follow and mentors to learn from, armed with bright mind and

proven successfully expertise, and friends to cooperate with, Warren Buffett became

ready to take it on his own. 1956 was the last year he worked under someone elses

supervision. From then on it would only be him on the steering board.

2. Investing7After digging into Warren Buffetts early years its time to see what was inherited and

adopted by him in his investment style.In this section the focus will be on Buffetts views

on the market, thus his investing principles will be discussed as well as his criteria for a

business worthwhile buying. References to and comparisons with EMT and MPT

mentioned in the introduction will be made when talking about his personal believes and

principles.

2.1 Views on the Market

"I'd be a bum on the street with a tin cup if the markets were always efficient."

In his views on the market Buffett is influenced greatly by his friend and teacher Graham,

both directly challenging the EMT and the contemporary academic teachings and market

views on Wall Street. Buffett uses the same attitude towards it dealing as if the market

was a business partner from where the name Mr. Market stems. According to their view

Mr. Market often suffers from incurable emotional problems. In times of growth he is

very optimistic and euphoric about the business opportunities so he offers very high buy-

sell prices in fear that the investor will reap all his imminent gains. On the contrary, when

Mr. Market is depressed he sees only the pessimistic picture and his lower expectations

of future lucrative opportunities, not say that even losses are anticipated, makes him set

very low prices in fear that an investor will unload his interest on him. In both cases

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


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prices deviate from the real value of a business. Moreover, Mr. Market is a partner that

does not mind being ignored, meaning that transactions are fully optional and whenever

an investor does not like the proposed price, he can wait until Mr. Market offers a new

one in hope that it will be more suitable. Thus Mr. Marke ts emotionality fully favors the

investor, as long as one uses the market as a servant not as a guide. For this purpose one

should be sure that one understands Mr. Market or else better not deal with him since

falling into his influence can be disastrous. Buffett synthesize all that very clearly

profit from folly rather than participate in it. Be fearful when others are greedy and

greedy when others are fearful.

2.2 Principles of Value Investing

Intelligent investing is not complex, though that is far from saying it is easy. What an

investor needs is the ability to correctly evaluate selected business. Note that word

selected, you dont have to be an expert on every company, or even many .

Warren Buffett has some very intelligent investment principles which are not very

complex and one probably does not have to be a mathematical or a social science genius

to understand them. But applying them would require a very conservative, clear and

analytical character. Acquaintance with the idea of value investing by Graham and Dodd

is almost obligatory. Here a synthesis of his most prominent principles will be presented

but the full grasp and diversity of strategies, especially concerning arbitrage and trading

of bonds, is beyond the scope of this modest paper.

Be an investor, not a trader

Probably principle number one of Buffett is to buy stocks as if he is buying a part of the

business not just a piece of paper he will sell tomorrow for a profit. He says he never tries

to make money from a business on the stock market but buys on the assumption that the

markets could be closed the day after and stay so for five years. He is often quoted for

saying Our favorite holding period is forever.


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Buy the boring not the pompous ones.

Warren Buffett invests in companies only if he understands their business model which

means that he can value the foundations of the company and predict its future

performance. Then he picks up the ones with favorable future economics, the ones for

which there will always be need by the world so their growth is secured by the overall

population and demand growth. Examples of such businesses Warren has invested in are

producers of clay-bricks, soft drink producers, and insurers as the world will always

remain risk-averse.

Watch out for fortresses.

Mr. Buffett says you should buy castles with a big castle moat. Translated that means

Warren Buffett buys companies with a very good business model which cannot be copied

so easily. The reason for that is that the main problem of the capitalism is the erosion of

the profit margin - when the margin is too high it attracts more competitors who also

want to participate in the lucrative business and the margin falls. In order to circumvent

that Buffet buys companies with unique products, brands or organizational characteristics

so that barriers to entry are created.

Beware a cool head and have patience.

Many would guess that when the price of a share drops Buffett would get rid of it

immediately to avoid further losses. Actually its quite on the contrary. Buffett searches

and buys predominantly undervalued stocks so when the price falls further the short term

losses seem negligible compared to future perspectives so he uses the opportunity to buy

even more and strengthens his position on the market. Grounded in the belief that the

intrinsic value of a company would secure its long term sustainable growth, short term

fluctuations are not a sign of increased risk for Warren but just that the market is myopic.
http://www.worldfinancialblog.com/investing/the-worlds-biggest-companies/106/http://www.worldfinancialblog.com/investing/the-worlds-biggest-companies/106/http://www.worldfinancialblog.com/investing/discover-the-behavioural-economics/89/http://www.worldfinancialblog.com/investing/discover-the-behavioural-economics/89/http://www.worldfinancialblog.com/investing/discover-the-behavioural-economics/89/http://www.worldfinancialblog.com/investing/the-worlds-biggest-companies/106/


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Concentration instead of diversification

Deeply grounded in the principles of MPT is the notion that diversification is the best

insurer against risk. Warren Buffett is in the opinion that strategies like that are

performed only by people that do not know what they do. In his view concentration raises

the intensity with which an investor is involved into a business as well as the level of

comfort with its incorporated economic characteristics therefore decreasing the risk of

losses by correctly identifying and valuing businesses. Under these premises he denies

the method of estimating betas most academics defend, the relative volatility of a stock

compared to a large universe of stocks based on historical data, and judging about risk

from them. Warren Buffet accuses those academics that they forget an essential principle

It is better to be approximately right than precisely wrong. The beta theory evenproduces some absurdities like the fact that if a stock drops dramatically lower than the

market, it becomes riskier than it was on the higher price. Such constructors of betas

often dont know anything about the product of a company, the competition it faces or the

leverage it uses, sometimes even the name of the company is irrelevant, but they praise

the importance of historical price fluctuations. On the opposite bank is Warren Buffett

who forgoes all the history for a bit of information that could improve his understanding

of the business.

Make your own decisions

The principle of self reliance when making an investment decision highly correlates to

the attitude towards Mr. Market. Warren Buffett says that what you need is the

temperament to control the urges that get other people into trouble. The fact that

people will be full of greed, fear or folly is predictable. The sequence is not predictable.

You are neither right nor wrong because the crowd disagrees with you. You are right

because your data and reasoning are right. Look at the market fluctuations as your friend,

rather than your enemy.


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Leave a margin of safety

The reduction of risk of a portfolio or an investment Buffett constructs does not stem

from the ordinary method of diversification, as explained earlier, but from the margin of

safety he leaves on each stock. To achieve this he buys only on a price that considerably

underestimates the value of the common stock he has estimated through the method of

value investing. In this way he assures that future volatility will bring only gains.

Again to make this clearer Buffett uses one of his many practical examples:

When you build a bridge, you insist it can carry 30,000 pounds, but you only drive

10,000 pound trucks across It. And that same principle works in investing. Its not

risky to buy securities at a fraction of what theyre worth.

Clearly Warren Buffetts believes highly depart from the dogma accepted in the academic

circles. Nevertheless, his integrity and consistence of following his principles, and

discipline and conservatism when making an investment have made him the most

successful practitioner and definitely a person capable of proving theories wrong,

moreover proposing alternatives.

3. Warrens Buffet managerial skillsAfter having looked for sources of success in Warren Buffetts childhood and his earlier

career, and further analysing his successful investment principles its time to find out what

kind of corporate culture is needed to manage his empire. In this part the focus will be on

Warren Buffetts managerial skills and how a management team functions optimal

according to Warren Buffett. Of course one man can not run companies on his own, but

needs to create management teams that will perform according a certain philosophy. This

need stems from the fact that Berkshire Hathaway owns 79 subsidiaries with a total of

246,083 employees8.

8 Appendix 1: BKH subsidiaries


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For Warren Buffettt, managers are stewards of shareholder capital. The best managers

think like owners in making business decisions. 9 However as economic theory predicts,

manager will not always pursue the same interests as shareholders, which is reflected in

the classical agent-principal problem. According to Warren Buffett it is important to

select employees who are able, honest and hard-working10 Having those people in a

management team is more important than designing hierarchies and clarifying who

reports to whom about what and at what times.11

For subsidiaries and portfolio companies, Warren Buffett sees their shareholders as

partners. He considers them as owner-partners and himself and other managers at

Berkshire Hathaway as managing-partners. This is not just a simple way to convince

shareholders and potential shareholders to invest in the company, since Warren Buffett

invested 99% of his net worth in Berkshire Hathaway and Charlie Mungers (Vice -

Chairman of Berkshire Hathaway) family fortune is for more than 90% invested in the

company. Furthermore relatives of Warren Buffett also considerably invested in stocks of

the company. These facts show that the top-mangers of Berkshire Hathaway have a lot of

long term confidence in the company, since a lot of their wealth is invested in stocks of

the company, and that are not looking for some short-term return, which regularly occurs

when managers are given large stock options as bonuses.

Berkshire Hathaway owns a lot of subsidiaries, but for Warren Buffetts there is no need

to intervene in every detail, he argues the following: they were managerial stars long

before they knew us, and our main contribution has been to not get in their way 12.

Managers of those subsidiaries are given considerable freedom to carry out their

businesses. Warren Buffett is not intervening as much as he would like, because he

knows better, according to him there are two kind of jobs; running the business, and

running the people who do it, so managers should be given the freedom to perform.

9Buffett, W, The Essays of Warren Buffett: Lessons for Corporate America, 1997 -1998, p. 810Buffett, W, The Essays of Warren Buffett: Lessons for Corporate America, 1997-1998, p. 1011

Buffett, W, The Essays of Warren Buffett: Lessons for Corporate America, 1997-1998, p. 1012

Buffett, W, The Essays of Warren Buffett: Lessons for Corporate America, 1997 -1998, p. 42


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The managers earnings also depend on the performance of their subsidiary instead of the

overall performance of Berkshire Hathaway, according to Warren Buffett a very

important stimulus to excel at their occupation. As an associate says, 'somehow Warren

has been able to keep a diverse cast of characters working harder for him than they did

for themselves. Isee it every day - and I still don't know how he does it'. But I do know

that all of us feel this incredible responsibility to him.13 Warren Buffett's ways make the

managers of Berkshire Hathaway feel proud to be affiliated with the company, feel

valued as human beings and feel they can communicate openly and honestly with Buffett

14. Berkshire Hathaway has in 34 years never lost an operating chief except to death.

Even, a majority of its subsidiaries are still under control by the same managers, which

shows the managers great devotion to their company and their loyalty to Warren Buffett

as a person. This might be the result the good judgement of character by Warren Buffett

or a great corporate culture in which everyone is pushing their limits.

So what makes Warren Buffett a good leader? First of all the personality of him, which

comes close to the social cognitive level15, because he puts effort in understanding and

making sense of people around him, meaning that in an organisation he is one that can

place himself in anothers persons shoes.

Furthermore an important fact is that he remains loyal to his partners and employees. He

is considered to be a self empowered leader, because he is loyal, sets goals, plans a

strategy for achievement, and stays committed until he accomplishes his purpose16.

Leadership is one of the most important factors to perform in an organisation and to be

successful, Warren Buffett is a good example what a leader should be like.

Next he is good listener and can transfer his knowledge and information quite easily.

And he has the understanding of the people he is trying to reach and what he can and

cannot hear from the people. Communication can be considered as one of the most

important abilities a leader should have. Warren Buffet communicates well with his

managers and other employees. Concluding it can be seen that Warren Buffett has been a

13 Heller, R., Management styles & leadership styles of Warren Buffet & Bill Gates, 07-08-200614

Stallard, M., More Than an Oracle - The Employee Engagement Practices of Warren Buffett 15

Spindler, M., Superior leader: Warren Buffett16Spindler, M. Superior leader: Warren Buffett


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very successful leader over the last four decades, he manages Berkshire Hathaway and its

subsidiaries with almost 250,000 satisfied employees.

4.Summary and ConclusionIn this paper we took on a journey through the personality and expertise of Warren

Buffett, one of the richest men in the world and by far the most praised investor, in a

pursuit to reveal whether his success is based on luck or the sources of this success are to

be found within some individual characteristics. During this journey we returned to his

childhood and youth years in order to look at the laying of the foundations. Then an

analysis and depiction of his view on the market and of selected investment principleswas conducted. What followed next was to take a look at Buffetts managerial style and

the created corporate culture needed to run and control his business empire. Moreover,

various statistical data was collected, deliberately omitted it in the text and placed as an

appendix, in order to test the luck hypothesis for his success.

The luck hypothesis of such an extraordinary performance17 is easily rejected as it is

statistically impossible to base seventeen consecutive years of beating the market and a

compound interest higher with more than 10% above S&P500 over more than forty years

span on luck. Moreover, all of the early associates of Buffett in Graham-Newman became

very successful investors as well implying that the causes are somewhere else.

The foundations of success were laid in very early age. Buffett was undoubtedly a

prodigy. This coupled with the figure of his father who served Buffett as an inspiring role

model of leadership and entrepreneurship to follow. The determination and persistence of

Buffett synergized these two in several ventures he established before finishing high

school, gaining valuable experience and information on the principles of doing business

and deeply incorporating the pursuit of success in him. His university education only

built up on things he already knew but also was the time to get acquainted with the ideas

of and meet his lifetime mentor Benjamin Graham who thought him the principles of

17 Appendix 1


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value investing. The gained knowledge and experience combined with a suitable

character to excel at life made success already a big part of Warrens history.

What made Warren Buffett really successful investor was the firm application of the

principles he adopted. His alternative views on the market allowed him to exploit its

flows and gain advantage over the mainstream investors. Moreover, his extreme ability to

spot valuable businesses granted him the crown of the long-term sustainable growth.

But would this success be possible without his innate ability to inspire people and earn

their respect? Quite doubtful, indeed. By creating trust and loyalty in his shareholders and

managers Buffett secured himself the needed capital to perform his lucrative investments

and moreover to sustain, if not accelerate, their growth.

To conclude we may undoubtedly say that the major sources of Warren Buffett success

have been his inborn analytical abilities, the human factor of having inspiring and

generous with their thoughts people like his father and his mentor around him, the

conservative style of investment and his integrity as a person, and the time as he had the

opportunity to witness unprecedented growth in financial markets. This is a mixture of

subjective and objective factors but all of them are present at certain points in ones life,

and the ones that are not are obtainable and learnable. So there is no obstacle for Warren

Buffetts success to be repeated again.

We(Buffett and Munger) were born in America, had terrific parents who saw that we

got good educations, have enjoyed wonderful families and great health, and came

equipped with a 'business' gene that allows us to prosper in a manner hugely

disproportionate to that experienced by many people who contribute as much or more to

our society's well-being

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

things wrong.


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y = 0.5652x

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-0.15

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-0.05

0

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0.1

0.15

0.2

0.25

0.3

0.35

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Series1 Linear (Series1)

4.AppendixAppendix 1: Statistics performance Berkshire Hathaway

In this part several statistics will be given to show the performance of Berkshire

Hathaway relatively to the S&P 500. Furthermore it will be shown how BerkshireHathaway has been performing in times of crisis and recessions.

In this graph it is shown how much you would have earned in 2005 if you had invested

$1 in 1965.

Berkshire Hathaway had a compounded return of 20.3% in the period 1965 2008 while

the S&P 500 index had a compounded return of 8.9%. So Berkshire Hathaway had more

than twice the compounded return of the S&P 500 index. Within this 43 years, the S&P

500 index only outperformed Berkshire Hathaway only 4 years and Berkshire Hathaway

only had two years with a negative return while the S&P 500 index had 11 years with a

negative return in the period 1965-2008.


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This graph on the previous page shows the beta calculation of Berkshire Hathaway share

price by regressing it with the S&P 500 over the last ten years. The beta of the company

calculated is 0.57. This means that the stock of Berkshire Hathaway is less volatile than

the S&P 500. But still the company managed to outperform the S&P500 while having a

beta of 0.57, still comes from the fact that Berkshire Hathaway only faced 2 years with a

negative return while the S&P had much more years with negative return, which were

much more severe than those of Berkshire Hathaway. Concluding that the S&P 500 has

much more market risk than Berkshire, because the company is well diversified.

Even in times of recession and crisis, Warren Buffett managed to perform better than the

S&P 500. For instance in the oil crises in the seventies, which led the stock market

collapse due enormous inflation pressure. Berkshire Hathaway did not face any year of

having a negative return, while the S&P 500 faced 3 years with a negative return in the

seventies.

However in this decade Berkshire Hathaway had 2 years with a negative return. In 2001,

when 9/11 took place, the stock market collapsed as a result of a loss of confidence in the

economy and the vulnerability of America. And Berkshire Hathaway faced high

insurance pay outs, as a direct result of the terrorist attacks. The second year of having a

negative return was in 2008, the credit crunch. Even Berkshire Hathaway faced the direct

consequences of the financial crisis; it made some investments that did not turned out to

be successful.

So it can be concluded that Berkshire Hathaway managed to overcome the stock market

collapse in the seventies, but did not manage to overcome two crises in this decade. Even

a great performing company and a top investor like Warren Buffett are not always

capable to overcome stock market collapses.


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Appendix 2: Investments Berkshire Hathaway18

18 Annual report 2008 Berkshire Hathaway p.15


20/21


Appendix 3: Berkshire Hathaways Subsidiaries19

19 Annual report 2008 Berkshire Hathaway p. 98


21/21

Bibliography

Annual report Berkshire Hathaway,http://www.berkshirehathaway.com/2008ar/2008ar.pdf, 2008, retrieved on 12 March2008.

Buffett W. (1984), The Superinvestors of Graham-and Doddsville Hermes MagazineBuffett, W, The Essays of Warren Buffett: Lessons for Corporate America, 1997 -1998,p. 8

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

Heller, R., (2006) Management styles & leadership styles of Warren Buffet & BillGates,

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

Birmingham, Ala.: APKE

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

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

Stallard, M., More Than an Oracle - The Employee Engagement Practices of WarrenBuffett
http://www.berkshirehathaway.com/2008ar/2008ar.pdfhttp://www.berkshirehathaway.com/2008ar/2008ar.pdfhttp://www.berkshirehathaway.com/2008ar/2008ar.pdf

Warren Buffett Sources of Success

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