Buffett's reputation for prescience is deserved
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Did you see the credit crunch coming?
Most probably not.
One man did have an inkling that the wheels might come off an overcomplicated financial system he called “nuttiness squared”: Warren Buffett, the investor extraordinaire who recently overtook Bill Gates as the world’s richest man (he’s now worth £31.4bn).
Impending crashes
The Oracle of Omaha, as he is affectionately known, had foretold of turbulence in the credit markets. He railed against over-elaborate financial instruments, calling credit derivatives “weapons of mass destruction” when many people would have guessed that a credit crunch was some sort of cereal bar.
Buffet, now 77, is like a parent who wearily warns his child that his perseverance in climbing a tree “will all end in tears”.
It isn’t the first time the venerable CEO of investment firm Berkshire Hathaway has predicted impending crashes.
Unmoved by the hysteria of the dotcom boom, he eschewed technology stocks. He alerted giddy investors to the simple fact – in hindsight blindingly obvious – that many of the dotcom upstarts weren’t actually making any money, which made a nonsense of the inflating share prices.
But no one would listen. Some commentators waved away his concerns as if he was a crotchety old man bellyaching about “these new-fangled gizmos”. But who had the last laugh?
Buffett was simply staying within his “circle of competence” as he calls it – ie, sticking to what he knew. In his 1999 letter to shareholders of Berkshire Hathaway, Buffett’s investment vehicle, he wrote:
“If we have a strength, it is in recognising when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.”
He also likes to keep his eye on the balance sheet and on the strength of brand and intellectual property. That’s why he bought shares in Coca Cola, American Express and Gillette. It all sounds rather obvious to invest according to such principles, but the fact is Buffett steadfastly adheres to them whereas others occasionally take their eye off the ball.
Legendary
At the beginning of May, thousands flocked from around the world to hear the Sage of Omaha impart his wisdom on the markets. It was akin to a religious pilgrimage for the 31,000 rapt attendees from around the globe, even though it was simply the AGM of Berkshire Hathaway.
Buffett is like a fortune-teller, albeit only in the field of stocks and shares. “In these stocks invest and, regardless of the lines on your hands, a rich man you shall become,” he probably doesn’t say.
His real quotes are legendary, and not just because of their wisdom – they’re also often funny. For example:
"We're only ageing at a rate of 1.75% a year, which is the lowest rate of ageing in corporate America," Mr Buffett said at the AGM. "Think of all those companies whose management is ageing at 2% a year and think how much riskier that is."
What’s more, the guy recently made the biggest philanthropic donation – £20bn – of all time.
Of course, no one could spend a fortune of £31bn if they tried, but Buffett lives like an ordinary Joe. He still lives in the same house that he bought in his home town of Omaha, Nebraska in 1958, and bought his car second-hand. As he once said, “we enjoy the process, not the proceeds.”
He might be revered as an investment genius, but Buffett’s success seems to be grounded in commonsense as much as anything. He doesn’t get distracted by flashy, shiny things and in these uncertain times, with reckless lending sending the world economy into a tailspin, his approach holds more appeal than ever. He looked in danger of finally being left behind in the millennium gold rush for tech stocks, but eight years on he is as successful, and relevant, as ever.
