BUFFET TAKES STOCK
By L. J. Davis; L. J. Davis, a contributing editor of Harper's Magazine, writes about business from New York.
Published: April 1, 1990
(Source: L. J. Davis, "
Buffett Takes Stock,"
New York Times Magazine ,
April 1, 1990,
p.
16.)
http://query.nytimes.com/gst/fullpage.html?res=9C0CE6D9173BF932A35757C0A966958260&ref=warren_e_buffett&pagewanted=all HE ALWAYS EXPECTED THAT HE would one day be rich, Warren E. Buffett says, although it is doubtful that the man now known as the Oracle of Omaha had any inkling of just how rich he would actually become. Last year, Forbes Magazine estimated his personal fortune to be in excess of $4 billion. With Berkshire Hathaway, a one-time textile manufacturer, as his vehicle, Buffett at age 59 has achieved an enviable standing in the world of finance. Laurence A. Tisch, the chairman of Loews Corporation and president of CBS, and himself no slouch in these matters, says that Buffett has had ''the most brilliant career in American investment history.''
Warren Buffett has been a student of the stock market since he was 9 years old: ''I used to chart all kinds of stock, the more numbers the better.'' When he was in his rebellious stage in high school, he recalls, ''I shorted a few shares of American Telephone because I knew that all my teachers owned it. They thought I knew about stocks, and I thought if I shorted A.T.&T., I would terrorize them about their retirement.''
It was one of the very few times that Warren Buffett has allowed emotion to dictate an investment. His discipline as an investor, his devotion to a rational, coherent strategy, are legendary. As a shrewd purchaser of stock and, on occasion, whole companies, he has compiled a record of unparalleled success. Yet in many ways, he is very different from the popular image of the financial titan.
With his off-the-rack suits and unruly, thinning hair, Buffett resembles nothing so much as a mildly eccentric clerk in a discount shoe store. He lives in a middle-class Omaha neighborhood in the house that he bought in 1958 for $31,500. He collects model trains. In fact, he has sometimes been portrayed as the quintessential cornfed, ''aw-shucks'' hick. Nothing could be further from the truth. Buffett, who reads the philosopher Bertrand Russell for relaxation, has a wit and erudition seldom encountered in his profession.
There is about him a remarkable sense of play, of business as an intensely enjoyable game. ''I'm the luckiest guy in the world in terms of what I do for a living,'' he says. ''No one can tell me to do things I don't believe in or things I think are stupid.'' In the age of the quick buck, he has been free to pursue long-term investments in well-run, responsible companies. In the process, he has acquired a reputation for prudence and probity. ''Warren wants to succeed,'' says Louis Lowenstein, head of Columbia University's Center for Law and Economic Studies, ''but he's not greedy.''
Within the investment community, Buffett is renowned as a follower of Benjamin Graham, widely regarded as the father of modern securities analysis. Graham held that the stock market is a highly irrational place where most participants brainlessly purchase stocks as prices rise and brainlessly sell them as prices fall. The disciplined, rational Graham investor seeks out stocks - Buffett calls them ''sleeping beauties'' - that are selling substantially below book value (redefined by Graham to eliminate good will and accounts receivable). When the market eventually corrects its mistake, the investor takes his profit.
Over the years, Buffett has rung a number of changes on the Graham methodology. For example, he has made major investments in companies with no net worth whatsoever. Recently, however, he has wandered further from the master's footsteps, attracting unaccustomed criticism. Specifically, Buffett has emerged as a so-called ''white squire,'' an investor who purchases large blocks of stock in companies threatened by takeover and receives unique financial concessions in return. He has also raised capital for Berkshire Hathaway by issuing zero-coupon bonds, which give him a handsome tax break on interest payments he will probably never make.
''Ben would not have bought any of the stocks we own now,'' Buffett says. Ironically, Graham would undoubtedly have avoided buying Berkshire Hathaway shares as well. As of the first week of March, the company was trading in the vicinity of $7,200, down by more than $1,500 from its peak last year but still the most expensive listing on the New York Stock Exchange. At that price, Berkshire's stock fetches 1.8 times book value. Buffett says that book value does not accurately reflect the true worth of any holding, but it remains extremely unlikely that Benjamin Graham would have invested two cents in the company of his most prominent disciple.
VISITORS TO WARREN BUFFETT's offices on the 14th floor of a plain-vanilla office building on the edge of downtown Omaha are greeted by a small porcelain plaque inscribed with the words: ''A fool and his money are soon invited everywhere.'' Buffett's total staff consists of a chief financial officer, four accountants, two secretaries, a part-time treasurer and a personal assistant, Gladys Kaiser, who has been with him for 22 years.
Scattered about Buffett's own office, a modest space with walls of emerald green, are miniature sculptures of bulls and bears. Under a glass dome rests an antique Edison stock ticker, but there are no electronic calculators, no Quotrons, no computers. ''I am a computer,'' he says.
His ''data base'' includes copies of his first income-tax returns - they date back to 1944, when he was 13. At the time, he ran two paper routes and published a racing tip sheet called ''Stableboy Selections.'' He has also preserved a 1931 letter written by his grandfather, Ernest H. Buffett. Warren's father, Howard, had recently opened a stock brokerage. In the letter, Grandfather Buffett advised his fellow Rotarians not to patronize the new firm. ''He said his son was a nice young fellow,'' Warren Buffett explains, ''but he didn't really know his stocks.''
The firm prospered nonetheless, providing young Warren, a frequent visitor, with an early introduction to the mysteries of the marketplace. By the time he was 8 or 9, he was marking up stock prices on the blackboard at the local office of Harris Upham.
''I was always interested in statistics,'' recalls Buffett, who developed a precocious and lasting taste for horse handicapping. ''There are a lot of similarities between handicapping and investing. There are speed handicappers and class handicappers. The speed handicapper says you try and figure out how fast the horse can run. A class handicapper says a $10,000 horse will beat a $6,000 horse. Ben Graham said, 'Buy any stock cheap enough and it will work.' That was the speed handicapper. And other people said, 'Buy the best company, and it will work.' That's class handicapping.''
In 1942, Buffett's father entered his first Congressional race. ''He was such an improbable candidate,'' Buffett says, ''that neither he nor his opponent took him seriously. On election night, he wrote out his concession statement, went to bed at nine o'clock and woke up the next morning to find he'd won.''
The family moved to Fredericksburg, Va. ''I was miserably homesick,'' Buffett recalls. ''I told my parents I couldn't breathe. I told them not to worry about it, to get a good night's sleep themselves, and I'd just stand up all night.'' He describes his classroom performance as ''miserable,'' but his business thrived. He established a company that placed pinball machines in the capital's barbershops. By the time he was 20, he had $9,800 in cash.
At his father's urging, Buffett attended the Wharton School of Business at the University of Pennsylvania. He lasted two years. ''I didn't feel I was learning that much,'' he says. ''Nebraska called, Wharton repelled.'' He finished his undergraduate education at the University of Nebraska, then applied to the Harvard Business School. ''The interview in Chicago took about 10 minutes,'' he says, ''and they threw me back in the water.''
Buffett had read a book entitled ''The Intelligent Investor,'' by Benjamin Graham - a popular version of ''Security Analysis,'' his classic study written with David L. Dodd. ''I don't want to sound like a religious fanatic or anything, but it really did get me,'' Buffett says. Graham was teaching at Columbia University's Graduate School of Business. Buffett enrolled.
The Graham method of value investing had one characteristic that was not shared by many market theories: an extraordinary portion of the time, it worked. To Graham, the actual business of a company was immaterial. The difference between its market price and its discounted book value was everything, providing an all-important Margin of Safety that would protect the original investment and insure future profits. In the short run, the market was irrational, but in the long run it would detect the discrepancy between the price of a stock and the underlying value of the actual company. ''It was sort of a no-brainer,'' says Buffett.
Graham practiced what he preached at a small Wall Street investment firm, Graham-Newman. Buffett was eager to join him there, and Graham eventually capitulated. ''It was easier than being pestered,'' says Buffett. The new man soon discovered that he and Graham had somewhat differing views of practical investing: ''Ben was not interested in going as deeply into corporate analysis as I might be.''
In 1956, two years after Buffett joined him, Graham wound up the business and retired; over the years, his investors had received a return of 19 percent, compounded annually - almost precisely the figure he had predicted. And Buffett returned to Omaha.
AT BISHOP'S LODGE IN Santa Fe, N.M., last September, two dozen business luminaries from around the nation gathered at Warren Buffett's behest to share four days of fun and games. Among those in attendance: Donald R. Keough, president of the Coca-Cola Company, of which Berkshire Hathaway owns 7 percent; Thomas S. Murphy and Daniel B. Burke, chairman and president, respectively, of Capital Cities/ABC (Berkshire owns 17 percent); Katharine Graham and her son, Donald, principal owners of The Washington Post (Berkshire has 13 percent).
The high point of the festivities came with a re-enactment of the Time-Warner merger. Murphy played Time's president, Nicholas J. Nicholas Jr., while Burke took the part of chairman J. Richard Munro. Katharine Graham was the ghost of Clare Boothe Luce, the wife of Time's founder, Henry Luce. And John J. Byrne, chairman of Fireman's Fund Insurance Company, served as moderator amid heckling and catcalls from a knowledgeable audience that included Laurence Tisch.
Buffett's biannual get-togethers originated with a reunion of 11 of Benjamin Graham's former students and associates and their mentor in 1968. ''They were moderately well to do then,'' says Buffett. ''They're all rich now. They haven't invented Federal Express or anything like that. They just set one foot in front of the other. Ben put it all down. It's just so simple.'' Over the years, the gatherings have broadened to reflect the host's wide circle of acquaintances, but not the growing size of his purse. Everyone goes Dutch.
When Warren Buffett returned to Omaha from his stint with Graham in New York, he was 25 years old, married with two children, and his personal fortune stood at $140,000. ''I thought it was enough to retire on,'' he says. ''I had no master plan.'' Soon, however, he was approached by family members in need of investment advice. Buffett established a partnership, informing his investors: ''I'll run it like I run my own money, and I'll take part of the losses and part of the profits. And I won't tell you what I'm doing.''
Over the following 13 years, Buffett achieved a compounded annual return of 29.5 percent, and the total fund, including some investments from new partners, grew from $105,000 to $105 million. Buffett's own wealth rose to $25 million.
Among the new partners was a local physician, who contacted Buffett in 1957, listened with seeming indifference to his ideas - and then pledged a $100,000 investment. When Buffett asked why, the doctor replied: ''Well, you remind me of a fellow named Charlie Munger.''
Two years later, Buffett actually met Charles T. Munger, an Omaha native six years his senior who had been practicing law in Los Angeles. The two became fast friends and began doing business together in 1967. ''It was never a formal partnership,'' says Munger, ''but we were partners.'' (In 1978, he became vice chairman of Berkshire Hathaway.) Munger was not an unqualified admirer of the theories of Benjamin Graham. ''I thought a lot of them were just madness,'' he says. ''They ignored relevant facts.'' Buffett was still learning to adapt Graham's principles to the new realities of the marketplace. ''I evolved,'' he says. ''I didn't go from ape to human or human to ape in a nice, even manner.'' He searched for bargains and, as he puts it, ''I had the misfortune to find some.'' Specifically, Buffett bought a struggling Nebraska farm-equipment manufacturer and a third-rate Baltimore department store. ''When a management with a reputation for brilliance tackles a business with a reputation for bad economics,'' he says, ''it is the reputation of the business that survives.''
A more lasting Graham-inspired investment was the 1965 purchase of Berkshire Hathaway, a New Bedford, Mass., company that had once spun a quarter of the nation's fine cotton. The company sold for about $12 a share but had a book value of more than $19 a share. The difference represented Graham's Margin of Safety, and Buffett needed every dollar of it as the textile industry continued its inexorable decline.
But elsewhere in his investment strategy, Buffett had begun to analyze companies in a highly un-Grahamlike fashion. Instead of relying simply on book value, he studied a company's management and performance. Rather than simply pursuing bargains per se - a mediocre company at a very cheap price, for example - ''I became very interested in buying a wonderful business at a moderate price.''
Buffett's first great coup in that regard was the American Express Company. In 1963, devastated by a scandal involving a large quantity of nonexistent salad oil, the company saw its stock price plummet from around $60 to $34. It was hardly a Ben Graham investment situation: facing a $60 million loss, American Express effectively had no net worth. There was no Margin of Safety.
''But as far as I was concerned,'' Buffett says, ''that $60 million was a dividend they'd mailed to the stockholders, and it got lost in the mail. I mean, if they'd declared a $60 million dividend, everybody wouldn't have thought the world was going to hell.''
A careful scrutiny of the company revealed that American Express virtually owned the nation's traveler's check business and possessed by far the strongest credit card, assets that were entirely unaffected by the scandal. Together, the check and card businesses constituted an unassailable franchise - what Buffett calls ''a castle with a moat around it,'' his new Margin of Safety. A franchise, as Buffett defines it, consists of a product or service that people will seek out and ask for by name, even if it is priced above the competition. ''It ain't a wonderful business if it doesn't have a franchise,'' he says.
As a rule, Buffett had never committed more than a quarter of the partnership's capital to a single investment, but he broke that rule now, pouring $13 million - 40 percent of the capital - into American Express. He sold out two years later for a $20 million profit.
Buffett found many an opportunity in the mid-1960's. ''I went from flower to flower in those days,'' he recalls. But as the decade waned, and the stock market boomed, the opportunities grew fewer.
OVER THE YEARS, WARREN Buffett has developed his own very distinctive modus operandi. Yet he does little, he says, that the average serious investor cannot do for himself. His investment ideas, in the main, come from reading annual reports, the financial press and trade magazines. He determines the ''intrinsic value'' of a business by judging management's ability to allocate capital intelligently and by analyzing the outlook for the company's products and its industry. He arrives at the dollar value of the business by computing its future cash flow, allowing for inflation and interest rates.
Herewith, a sampling of Buffett's insights:
Knowing the Company. ''We don't buy things we don't understand.'' Buffett says he has trouble getting a fix on cyclical and capital-intensive industries such as automobile manufacturing. ''If I'd been right on Ford, I'd have made a lot of money. Because I didn't know the right price to pay for Ford in 1980 or 1982, I probably don't know the right price to pay now. The difference is that I know I don't know.''
Efficient Market Theory. This theory, widely taught in business schools, holds that the market already knows everything of consequence about a company and has priced its stock accordingly; it is therefore a waste of time for the individual investor to undertake his own study of a business. Buffett regards the market as a highly inefficient place. ''I think it's fascinating how the ruling orthodoxy can cause a lot of people to think the earth is flat. Investing in a market where people believe in efficiency is like playing bridge with someone who's been told it doesn't do any good to look at the cards.''
When Not to Buy. ''For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.''
Index Funds. The investment community has devised instruments, called index funds, that are often based on the collective performance of a basket of companies. ''You don't try and figure out who has the best business and who are the best managers. It's a know-nothing approach, essentially. The people who sell index funds, though, don't charge like it's a know-nothing approach.''
Value Investing. ''The fact that it's so simple makes people reluctant to teach it. If you've gone and gotten a Ph.D. and spent years learning how to do all kinds of tough things mathematically, to have it come back to this is - it's like studying for the priesthood and finding out that the Ten Commandments were all you needed.''
IN 1969, AS THE BULL market wound down, Warren Buffett informed his investors that he was winding up the partnership. His stated reasons were several. The partnership's capital had grown so large that small investments were no longer reasonable, and he could find no big investments to his liking. In addition, the market was too speculative for his taste. ''I didn't know how to be a hero anymore,'' he says. Whereas he had once been a Niagara of new ideas, he was now an eyedropper. But he had other reasons for abandoning the partnership.
''I did not want to be running any vehicle where my implicit obligation was to earn the highest return I could every year,'' Buffett says. He wanted to be free to make long-term investments. Moreover, there was a personal factor involved. ''I was developing relationships with the operating people in our owned businesses,'' he says, ''and I simply didn't want to have their duration determined by whether I got an exceptionally good bid that morning.''
From that point on, his principal investment vehicle would be Berkshire Hathaway, in which he and his wife, Susan, eventually had a 45 percent interest. As chairman and principal stockholder, Buffett could invest where and when he pleased, with money provided by the insurance companies that Berkshire had begun to buy in 1967.
Insurance companies had a special charm for an investor like Warren Buffett. He could deploy the float - money generated by the insurance premiums that remained on the books until claims were paid, which might take a very long time indeed. (Soon he would also have access to another kind of float, generated by Blue Chip Stamps. Buffett and Munger were buying the company, whose float was created by the lapse of time between the purchase of stamps by merchants and the claiming of merchandise by customers.) Over the next two decades, Berkshire acquired eight companies that Buffett speaks of as the ''Sainted Seven Plus One.'' The companies, with an estimated collective worth of $1.6 billion, are a distinctly mixed lot, but they share three features: excellent management, superior products and a franchise in their industries. Among others, Berkshire owns Borsheim's, an Omaha volume jeweler; See's Candies, a West Coast confectionery chain; The Buffalo News, and Fechheimer Brothers, a Cincinnati manufacturer of uniforms.
In 1983, Buffett paid $55 million for 90 per cent of the Nebraska Furniture Mart, the largest discount home-furnishings store in the nation. Three years later, Berkshire bought the Scott & Fetzer Company, a Cleveland conglomerate with three operations: a manufacturing group, whose products include air compressors; the Kirby Company, and World Book.
While Berkshire was acquiring its portfolio of companies, it was also acquiring an impressive portfolio of stocks. In 1973, Buffett paid $10.6 million for 9 percent of the Washington Post Company. By his calculation, the company was worth between $400 and $500 million, but the market valued its stock at only $100 million. ''The people selling it to us were institutions,'' Buffett notes. ''They probably would have come to the same conclusion about the intrinsic value that I came to, but they wouldn't have cared because they thought the stock was going down tomorrow.'' At the end of 1989, Berkshire's investment was worth $486 million.
By 1974, the market was once again depressed. Buffett was ecstatic. ''I feel like an oversexed guy in a harem,'' he crowed. ''This is the time to start investing.''
One bargain that particularly caught his eye was Geico, the Government Employees Insurance Company, in Washington. Buffett had briefly invested in the company in 1951, when Benjamin Graham was its chairman. By 1976, Geico was in bad shape, but it still retained its franchise, the sale of automobile insurance by mail to a low-risk constituency, which guaranteed a huge float. Berkshire eventually bought $45 million of Geico stock, an investment worth $1.4 billion at the end of 1989.
For 15 years, Warren Buffett and Thomas Murphy, the chairman of Capital Cities Communications, had shared a warm friendship. ''Whenever there was a major decision to be made for our corporation,'' Murphy says, ''I checked it with Warren.'' In 1985, as Capital Cities was about to buy ABC, Buffett committed $517 million of Berkshire's money to purchase 17 percent of the merged enterprise. With typical candor, Buffett reminded the readers of his annual report that Berkshire had once owned a major block of Capital Cities and had disposed of it. ''I understood the business,'' Buffett says, ''and I sold it. I mean, I don't mind missing businesses like Control Data that I don't understand, but I do mind missing businesses I understand. I've done plenty of that. That's the real sin.''
Still, the Berkshire stockholders could hardly complain. As of the end of 1989, the value of the investment had tripled. Attending the 1988 Capital Cities/ABC management meeting, Buffett dressed in a Salvation Army uniform and serenaded the gathering with a song of his own composition, ''What a Friend I Have in Murphy.''
By and large, however, the 1980's did not offer great opportunities for value investors. In a stock market fueled by takeovers, bargains were not in abundant supply. At the same time, Berkshire's capital had grown so huge that Buffett was forced to make large investments. Like ocean liners, immense amounts of money are hard to maneuver. As Buffett puts it, ''Large sums forge their own anchors. In the 70's, I had a lot of ideas and very little money. Now I've got a lot of money and very few ideas.'' As usual, however, Buffett found a way.
He trimmed his portfolio back to just four major investments: The Washington Post; Geico; Capital Cities/ABC - and Coca-Cola. He regarded them as his permanent holdings. The Coca-Cola investment, completed in 1989, cost Berkshire $1 billion, representing 6.3 percent of the company. At the end of 1989, Berkshire's stake was worth $1.8 billion.
BUFFETT HAD ALWAYS parked a significant portion of Berkshire's capital in tax-exempt bonds, but changes in the revenue code reduced their desirability. He soon found a substitute. Some careful investors have long favored convertible preference stock, a security that can be cashed at face value or converted into a company's common stock. The convertible preferreds are regarded as safe, and they yield a predictable, bond-like return. Such stock sells at a premium over the quoted price of the common on the day of purchase but offers the investor the tantalizing possibility of sizable capital appreciation, should the value of the common stock increase in price.
In four instances, Buffett has committed a substantial amount of capital to buy private issues of this investment vehicle. In each case, the issuing company had been or was being threatened by takeover. In each case, the convertible preferred that he bought carried special restrictions but also special privileges.
In 1987, Revlon's Ronald O. Perelman exhibited a keen interest in the parent company of Salomon Brothers, the investment banking firm. Shortly before the October stock market crash, Berkshire paid $700 million for an issue of Salomon convertible preferred; if converted, it would represent 12 percent of the company. In the case of Salomon - as was true of the other three companies - Buffett obtained a relatively low conversion premium, though it would increase as the market dipped. Buffett receives a yield of 9 percent, but the fact that he purchased most of the securities through Berkshire rewards him with a corporate tax advantage that brings his effective yield to around 11.5 percent.
Last July, Buffett cut a similar deal with Gillette - a company recently threatened by both Perelman and Coniston Partners - paying $600 million for 11 percent of the company. A month later, he paid $358 million for an issue of convertible preferred representing 12 percent of USAir Group, the airline holding company that had attracted the predatory interest of Steinhardt Partners. And in December, Buffett paid $300 million for the convertible preferred of Champion International, representing 8 percent of the giant paper company.
In all four deals, unusual restrictions applied. If a potential buyer for his block of convertible preferred appears, Buffett is obliged to offer the issuing company first refusal. Even if the company does not buy back the shares, he is prohibited from selling his entire block to any one purchaser. With the exception of Champion's stock, there are extensive waiting periods before he can convert the preferreds. Buffett must wait three years to begin converting his Salomon preferreds, and two years before converting Gillette and USAir preferreds. On the other hand, Buffett has been granted the unusual privilege of voting his preferred stock as though it were common. And a cash redemption is guaranteed unless the company defaults.
To many in the investment community, Buffett seemed to be assuming the role of a so-called ''white squire,'' selling protection to nervous companies at a handsome premium to himself. (It is a charge Buffett denies, insisting that he is, as usual, a long-term investor - nothing more, nothing less.) Considerable controversy has arisen over the fact that the convertible preferred was made available to Buffett alone, not to other stockholders. In fact, a stockholder suit has been filed against Salomon on that issue.
In his defense, Buffett remarks, ''There are very few people who would want to buy something that was totally unmarketable for such a long period of time. For most people, it just wouldn't be a practical investment.'' In addition, he says, ''If I had four more Coca-Colas to buy, I wouldn't be buying these. I like the convertibles better than I do other fixed-income investments, but I'm not doing handsprings. We get a mediocre return.'' ''Mediocre'' for Warren Buffett, that is. William H. Miller 3d, a senior vice president with the Baltimore investment firm of Legg Mason, observes: ''If people object that he got a special deal, those are objections that should be against the management of those companies, not Buffett.''
Last year, in another departure from past practice, Berkshire raised $400 million from a sale of zero-coupon convertible bonds. Holders receive no interest payments, but they will eventually have the option of converting the bonds into cash or common stock. Thanks to a provision of the tax code, Berkshire deducts interest payments on these bonds, even though such payments are not being made, and most likely never will be. As a result, Berkshire's carrying costs are only about 4 percent.
Meanwhile, the holders of the bonds declare interest they never receive. ''There is a very curious market for this kind of zero-coupon bond,'' says Columbia's Louis Lowenstein. ''It only makes sense for people who care about reported income rather than real income, which gives it an appeal for institutional investors who are judged on a performance that isn't necessarily based on cash.''
Though Berkshire has grown and profited hugely under Buffett's custodianship, it has not declared a dividend since 1967. Nor has he ever split the stock, although the price has risen astronomically. As recently as 1982, the stock traded as low as $420; in 1988, when Buffett listed Berkshire with the New York Stock Exchange, the shares soared as high as $8,900 before falling back to trade in a range between $7,200 and $8,500. Berkshire remains the most expensive stock on the exchange, though it has recently come under pressure following a Feb. 12 article in Barron's. An analysis in the financial weekly concluded that Berkshire's market price was ''considerably higher than the company's value when viewed as a collection of business and portfolio investments.'' (Buffett claims that the article contained serious computational errors that reduced the book value of Berkshire's holdings by hundreds of millions of dollars.) The annual reports he personally composes are remarkable for their wit and candor and are liberally laced with apposite quotations from the likes of Pascal, Goethe, Sam Goldwyn and Yogi Berra. Sometimes a note of pessimism creeps in. ''Our gain in net worth during the year was $613.6 million, or 48.2 percent,'' he wrote in his 1985 report. ''It is fitting that the visit of Halley's Comet coincided with this percentage gain; neither will be seen again in my lifetime.'' Perhaps, but the comet's trail was sighted last year, when Berkshire posted an annual gain of $1.51 billion, or 44.4 percent.
WARREN BUFFETT HAS never regretted his return to Omaha. His older son, a farmer and county commissioner, lives outside town, and Buffett's daughter has recently returned to Omaha from Washington. Her husband manages the Buffett Foundation, devoted to population control and nuclear disarmament; the foundation will receive by far the largest portion of Buffett's personal fortune. His second son is a musician in Milwaukee. Buffett is separated from his wife, who resides in San Francisco; he lives with his companion and housekeeper, Astrid Menks.
''I think it's a saner existence here,'' he says. ''I used to feel, when I worked back in New York, that there were more stimuli just hitting me all the time, and if you've got the normal amount of adrenaline, you start responding to them. It may lead to crazy behavior after a while. It's much easier to think here.''
As Buffett reflects on his life, his rapid, hesitant voice is punctuated with bursts of laughter. ''I love what I do,'' he says. ''I'm involved in a kind of intellectually interesting game that isn't too tough to win, and Berkshire Hathaway is my canvas. I don't try to jump over seven-foot bars; I look around for one-foot bars that I can step over. I work with sensational people, and I do what I want in life. Why shouldn't I? If I'm not in a position to do what I want, who the hell is?''
Photos: Warren E. Buffett (Jodi Buren) (pg. 16); Charles T. Munger, Warren Buffett's longtime partner (Bonnie Schiffman/Onyx) (pg. 63); graph of Berkshire Hathaway stock (pg. 62)
