COMMENTARY | COLUMNISTS | JOHN PATRICK FORD

Buffett raises the bar for investors

For an 84-year-old billionaire who generally stays under the radar, Warren Buffett has been headline news this summer. First was the financial eye-opener that his flagship company, Berkshire Hathaway, burst through a stock market record to be priced at more than $200,000 per share. That’s only for one.

Why hasn’t the Oracle of Omaha split the stock since he acquired control in 1964 in order to broaden ownership? Simply because Buffett says he doesn’t want to encourage market speculators. The end result is that Berkshire Hathaway is the fifth-largest company in the world. For 49 years the stock has averaged 19.7 percent growth, compared to 9.8 percent for the S&P 500.

Stockholders have to be content with that rate of return because the company has not paid a dividend since 1987. Another unique feature of the corporate management is the salary it pays Buffett — $100,000 a year. Compare that to the big-time executives of giant corporations who draw down salaries and perks in the double-digit millions. They can’t begin to match Buffett’s shrewdness in business decisions or investment return to stockholders.

The second breaking news for Buffett was his part in financing Burger King’s acquisition of Tim Hortons, a Canadian fast-food chain, and moving the corporate headquarters out of the United States, which has a higher tax rate. Despite President Obama’s outrage over the “inversion deals” that shift U.S. corporations to lower foreign rate bases, it was merely business as usual for the tax-saving billionaire Buffet.

A U-T San Diego editorial supported the Burger King move, referring to the Internal Revenue Code as destructive for growth. Corporations should not be demonized for acting in their own best interests.

Burger King’s Canadian acquisition is assisted by Buffett’s firm by underwriting $3 billion dollars in exchange for preferred equity stock paying a 9 percent dividend. Not bad in an economy where near-zero interest rate is common. The sweetheart interest rate will partially offset the tax Berkshire Hathaway will pay on its investment,

How has Warren Buffett been so successful? He recognizes a bargain that other astute investors overlook. Buying textile mills and railroads when their prospects were failing were two coups. Investing in solid, established companies like Wells Fargo, IBM, Coca Cola and American Express are other commitments made by Buffett with expert timing.

It’s interesting to learn that Buffett has always claimed that his purchasing control of Berkshire Hathaway was the worst investment mistake he ever made. Figure that one out! Well, here is the story.

In 1955 Berkshire Fine Spinning, a company tracing its roots to 1839 as the first successful textile mill in America, merged with Hathaway Manufacturing Co., founded in 1888. At its peak, the company had 15 mills and 12,000 workers returning a good profit. Then the textile trade moved overseas; mills were closed and workers were laid off.

The decline caught Buffett’s attention in 1962 for a turn-around opportunity. He started buying stock until the CEO made an oral tender offer to buy his stock at $11.50 a share. When the offer came in writing, the price had dropped to $11.27 a share. It angered Buffett so much that he bought more shares, took control of the company and fired the CEO.

That’s the kind of impulsive entrepreneurship that succeeds. However, Buffett was now in control of a failing textile business. The financial world thought he had done it again when he took control of the Burlington Northern Santa Fe Railway in 2009, when rail service was declining.

Needless to say, Buffett’s Midas touch turned into golden opportunities that paid off handsomely.

Warren Buffett grew up in the Great Depression in his hometown of Omaha. He learned the value of money selling chewing gum and weekly magazines. Later he had a newspaper route, sold golf balls and detailed cars. At the age of 14 he filed a tax return deducting $35 for the use of his bicycle in his business enterprises.

As a child he hung out in a local brokerage office. At the age of 10 he visited the New York Stock Exchange with his stockbroker father. At 11 he bought three shares of City Services from his door-to-door sales profits.

His father served four terms as a congressman and was a fierce critic of the New Deal government interference in domestic and foreign policies. Perhaps that explains Buffett’s imposing self-made image as a rugged entrepreneur with conservative principles.

Buffett is not inclined to show his wealth by living in the style of a modest middle-class citizen. He bought his home in Omaha for $31,500 in 1957 and still lives there. His one big extravagance is philanthropy. He has pledged 85 percent of his estate to charity in collaboration with Bill Gates, who he considers to be as skillful as himself.

Always on the alert to legally avoid paying income taxes, as he believes the Internal Revenue Code to be unfair, Buffett will probably pull off history’s biggest tax-avoidance scheme, columnist Dan McSwain has predicted.


Ford is a freelance writer in San Diego. He can be reached at johnpatrick.ford@sddt.com

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