The Hindu Business Line : Warren Buffett, the sober saviour

Currently, the global financial market is undergoing a turmoil never seen after the Great Depression in the late 1920s. Famous names and outstanding institutions are getting wiped out.

The Governments in the US and many parts of Europe, the backbone of the global economy, are working overtime to come out with bailout packages to stem the rot.

In this volatile market, Warren Buffett and his company, Berkshire Hathaway INC, stand out as saviours trying to support the US Government initiatives.

At the same time, he is trying to add shareholders’ value by going for value investment, the philosophy he had successfully followed all these years. Investors can learn a few good lessons on understanding the way in which Warren Buffett is reacting to the current market situation.

What makes Warren Buffett unique?

It is well-known that Warren Buffett is one of the most successful investors in the world. His company, Berkshire Hathaway, in the period from 1965-2007, has recorded shareholder value growth of over 21 per cent CAGR as against 10 per cent of S&P 500 index of the US market.

In this long period of 42 years, in only 5 years was the Berkshire Hathaway’s growth rate lower than of S&P 500 index. Let us look at how Warren Buffett could deliver such an extraordinary performance.

The life style of Warren Buffett is reflected in the functioning of his company. He leads a simple life. When such a philosophy is reflected in the management of a company, it makes a big difference. In the heyday, the company does not go for extravagance, thereby preserving cash for the rainy days or for investment at a time when others are not able to do so. After all, in business, cash is king!!

Another philosophy of Warren Buffett is not to blindly follow others. In the late 1990s and early 2000 when the whole world was investing in IT, he did not do so for the simple reason that he was not conversant with the industry. As a result, when the IT bubble burst, his investments did not suffer. For the same reason he did not opt for sub-prime investment, which is the main cause for the current problem.

Taking measured risk

Is it therefore correct to conclude that Warren Buffett is averse to risk? The answer is a clear no.

What distinguishes Warren Buffett from others is his ability to take a measured risk. In the past, he had pitted against the dollar and lost the gamble. But the quantum of risk he took was well within his capabilities and, hence, he could withstand the loss.

On the other hand, many of the reputable organisations went in for high level of borrowings, over 30 times, for subprime investments and, as a result, when the property prices dropped, these institutions could not withstand the losses.

When the US administration was fighting hard for support for the bail-out package, Warren Buffett came to its rescue. He not only committed investment to companies such as Goldman Sachs, but also offered to participate in the bail-out assets. His statement that the US Government could make money in the long term from the assets to be taken over under the bail-out package, did help the administration get the support of the House of Representatives.

Thus, Warren Buffett has not only helped the US administration get through the bailout plan, but has also made a few sound investments to continue his highly successful investment strategy.

Lessons for investors

The key lesson for investors is not to be too greedy and invest in the stock market beyond the financial capabilities during the peak as in January 2008. Always, have cash in the portfolio to invest in the good shares when there is opportunity.

Be patient and wait for the right opportunity to invest. Even a great investor like Warren Buffett had waited over 10 years to invest in Goldman Sachs!

(The writer is Director, ICI India.)