The Warren Buffett You Don't Know – Part 2

Has there ever been a less pompous billionaire than Warren Edward Buffett? Hollywood might cast him in the role of an amiable teacher at a Midwestern college or a sweet-tempered, wisecracking inventor who eventually wins a Nobel prize and gets the girl besides. To hear Buffett sing his beautifully artless rendition of Ain’t She Sweet to his own ukulele accompaniment is to wonder not only how such a man came to measure his net worth in billions but also whether he might not be a time-traveler from a more innocent age.

If Buffett had a business card, it would identify him as chairman and chief executive of Berkshire Hathaway Inc. (BRK.A) But he is far better known–indeed, world-famous–as the greatest stock market investor of modern times. The figures, though often cited, still astound: Had you put $10,000 into Berkshire when Buffett bought control of it in 1965, you’d have $51 million now, vs. just $497,431 if the money were invested in the Standard & Poor’s 500-stock index.

The numbers don’t lie, but the story they tell is out of date. Buffett has not added a major position to Berkshire’s bulging stock portfolio since amassing 4.3% of McDonald’s Corp. (MCD) in 1995. In the meantime, he has transformed what long has been a sideline at Berkshire–the acquisition of entire companies–into the main event. Over the past three years, Berkshire has spent $27.3 billion to buy seven companies in industries as disparate as aviation, fast food, and home furnishings. The $22 billion purchase of reinsurer General Re Corp., which closed late last year, was Buffett’s largest ever.

The effect has been dramatic: In short order, Berkshire has been transformed from a closed-end fund in corporate drag to a bona fide operating company. At the start of 1996, the company’s famous stock portfolio accounted for fully 76% of Berkshire’s $29.9 billion in assets. But by the end of 1999’s first quarter, the figure had plummeted to 32% as assets quadrupled, to $124 billion. Today, Buffett’s company employs 47,566 workers, double the number in 1995.

And he isn’t done yet. ”I’d love to make a $10 billion to $15 billion acquisition, and we could go bigger than that if I really like the company,” says Buffett, who holds $15 billion in cash and is sitting on top of an additional $30 billion in unrealized gains in Berkshire’s stock portfolios.

It’s all there in black and white in Berkshire Hathaway’s famously literate annual reports, but somehow the company’s transformation has gone not just unheralded but unnoticed. Berkshire is ”possibly the most talked about and the least understood company in the world,” contends Alice Schroeder, a PaineWebber Inc. insurance analyst who in January published one of the few comprehensive studies of the company ever undertaken by a brokerage house.

MISUNDERSTOOD. The common view is that Berkshire shares fetch a premium because of Buffett’s reputation as a latter-day Midas. The ”Buffett premium” undoubtedly is real in the sense that if the man died today, the stock would plunge tomorrow. In Schroeder’s view, though, Berkshire’s stock is already trading at a sizable discount to its true value, which she estimates at $91,000 to $97,000 per A share. The A shares lately have been trading at about $70,000. The basic problem, Schroeder says, is that the world continues to misperceive Berkshire as little more than the sum of the stocks it holds in its $37 billion portfolio. In other words, the market tends to overreact to news about the seven stocks that form the core of Berkshire’s holdings (table). Over the past 12 months, Berkshire has fallen by about 17%, from a high of $84,000 in June, 1998. In Schroeder’s view, the main cause of this decline is the plunging value of Buffett’s colossal stakes in Coca-Cola Co. (KO) and Gillette Co (G).

The radical recent shift in Berkshire’s corporate profile does not reflect a radical change in Buffett’s thinking. In most ways, he remains true to the conservative precepts of value investing. In essence, Buffett continues to prefer today’s sure thing to the next big thing, no matter how spectacular its potential. Forget Internet stocks: Buffett still will not invest in even such well-seasoned high-tech companies as Microsoft Corp. (MSFT) or Hewlett-Packard Co. (HWP) because he doesn’t believe that anyone can predict how much they will earn over the next decade or two. ”I can’t do it myself,” he says. ”And if I don’t know, I don’t invest.

”Even in his stock-picking heyday, Buffett preferred owning businesses to passive minority investment. Until recently, though, Berkshire’s acquisitions have been few and far between because Buffett insisted on buying top-quality businesses at discount prices. What has changed is that he is now willing to pay a premium for one-of-a-kind businesses.

Why this is so is not completely clear. The Buffett psyche is notoriously labyrinthine. ”I could easily spend a lot of time trying to analyze Warren if I didn’t consciously try not to,” says Olza M. Nicely, CEO of auto insurer GEICO Corp., one of Berkshire’s largest subsidiaries. ”There are certain mysteries you just have to accept.”

In Buffett’s view, he is putting the finishing touches on his masterpiece. ”Berkshire is my painting, so it should look the way I want it to when it’s done,” he says.

In an era in which most CEOs at least mouth the platitudes of good corporate governance and shareholder rights, Buffett, in his good-natured way, is a throwback to a time when a mogul was a mogul and did as he damn well pleased. ”Berkshire is the company I wanted to create. It’s not the company Alfred P. Sloan wanted to create. It fits me,” he says. ”I run it with our investors and managers in mind, but it is designed to fit me.” To be blunt, Buffett stands revealed as a driven, even monomaniacal corporate empire-builder.

For all his offhand charm, Buffett is pretty much all business all the time. Aside from an addiction to luxury air travel, he is a man of simple tastes and frugal habits. He neither spends his money nor gives much of it away. Philanthropy, the renascent vogue of America’s superrich, interests him peripherally at most. Buffett intends to take his fortune to the grave–and to keep adding to it until the day he dies. ”The problem I’ve got with doing anything else except what I’m doing is that there is nothing remotely as fun as running Berkshire,” he says. ”I’m selfish that way.”

So far, Berkshire’s legendarily devoted shareholders would not have it any other way. In May, some 15,000 of them flocked to Omaha to sit at the feet of the master during Berkshire’s three-day festival of an annual meeting, which Buffett calls ”Woodstock for Capitalists.” Of course, Buffett and his wife, Susan T. Buffett, are the largest Berkshire shareholders by far: Their 38.4% stake is worth about $40 billion.

The highest circle of management power at Berkshire has always been tight, but it has shrunk in recent years–to Buffett alone. Charles T. Munger, Buffett’s longtime vice-chairman and business alter ego, continues to enliven the annual meeting by playing the part of drolly laconic sidekick to Buffett’s ebullient master of ceremonies. Behind the scenes, though, his influence has waned. ”Charlie and I don’t talk a lot anymore,” acknowledges Buffett, who says he did not even bother to consult his vice-chairman before making the epochal Gen Re acquisition.

By all accounts, including their own, Munger and Buffett have not fallen out. But while Buffett is wholly devoted to building Berkshire, Munger, 75, now spends his time chairing a not-for-profit hospital and serving as a trustee of a private high school. ”Charlie is broader in his interests than I am,” Buffett says. ”He doesn’t have the same intensity for Berkshire that I have. It’s not his baby.” Munger concurs: ”Warren’s whole ego is poured into Berkshire.”