Warren Buffett: The oracle of Omaha

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Welcome to Good Bad Billionaire, the show where we pick a billionaire every episode and find out how they made their money.

Then we judge them.

Are they good, bad, or just another billionaire?

I'm Zing Sing and I'm an author, journalist, and podcaster.

And I'm Simon Jack, and I'm the BBC's business editor.

And this episode, we have someone who is kind of a big deal, right, Simon?

In my world, he's almost like a kind of high priest of investment, I would say.

He's in fact called the Oracle of Omaha.

Omaha being the place where he's actually from and still lives.

He still lives, despite his vast wealth, in the same house he bought in the late 1950s.

Wow.

Kind of a unique billionaire, I'd put it that way.

Yeah, he is Warren Buffett, as I say, sometimes known as the sage of Omaha, sometimes the oracle of Omaha, but probably the most successful investor.

of all time.

He's also 93 years old and still going.

Yeah.

Which is pretty impressive in and of itself.

Let's do some numbers around him.

He's currently worth around $120 billion.

That puts him number six in the world's rich list, just one place above Bill Gates, who happens to be another billionaire we've done, who's also a very good friend of his.

And Warren Buffett bought his first stock at the age of just 11 years old.

He was an investor nerd from a very early age.

And as I say, he's gone on to be the richest investor in history.

His company, through which he owns all his different investments, is called Berkshire, not Berkshire, Berkshire Hathaway.

And one share in Berkshire Hathaway will cost you $550,000.

It's the most valuable share there's ever been.

Right.

And despite the immense wealth he's accumulated, he actually doesn't seem to enjoy spending money like many of our billionaires.

Like his favourite food is ice cream sundaes.

He drinks cherry Coca-Cola.

He also owns quite a lot of the company, as we'll discover later.

Yeah, he definitely is not interested in the trappings of wealth.

I remember once he said that wealth was just a way of keeping score about how smart he was.

He likes to make smart investments and boy, he's done that.

Right.

And he likes sitting on them as well, as you'll find out.

And he's still, as I say, he lives in the same house he bought in 1958 for $31,000.

I couldn't imagine having a better house, he says.

You can look it up on Google, actually.

I mean, it's a pretty moderate, it's five bedrooms, but it's pretty modest, right?

I think it's probably the most modest house of any of the billionaires that we will cover, probably.

I think that's right.

Although he does have a private jet and he's had one since the 80s.

He used to call it the indefensible.

But after seeing how useful it was to his job he's now called it the indispensable.

He doesn't just have a private jet he owns a private jet company called NetJets where you basically buy shares in jets so he he's managed to turn that into investment as well.

Clearly likes using the things he actually invests in.

He definitely does.

That's a massive theme of this which we'll get into in a minute.

And he's also begun to give huge sums of his own money away mostly via his close friend, his kind of BFF, Bill Gates's Foundation.

Yeah, he's promised to give 99% of his money away during my lifetime or at my death.

And he's also founded the giving pledge, which we've talked about on the show before, which is asking the richest Americans to give away 50% of their wealth to philanthropic causes.

Let's listen to the Oracle of A.

Mahai himself.

This is Warren Buffett talking to the BBC in 2009 about the difference between investment and speculation.

An investment attitude, you look to the asset itself to produce the return.

So if I buy a farm and I expect it to produce $80 an acre for me in in terms of its revenue from corn and soybeans and it costs me $600.

I'm looking at the return from the farm itself.

I'm not looking at the price of the farm every day or every week or every year.

On the other hand, if I buy a stock and I hope it goes up next week, to me, that's pure speculation.

He's got this incredible folksy charm.

You could actually fill up a book with his cute little sayings and his pithy bits of wisdom.

It feels like a kind of Tom Hanks movie.

Let's dig into his background and see

how Warren Buffett was made.

Let's rewind.

So he's in his 90s.

He's 93, I think.

Yeah, he is.

And he was born in Omaha, Nebraska, back in August 1930.

And this was right at the start of the Great Depression.

Yeah, less than a year after the 1929 Wall Street crash, where in one day, tons of money, people's fortunes were lost.

And it actually propelled the U.S.

into the Great Depression.

Right, which was the longest, the deepest, most widespread economic depression of the whole 20th century.

I mean, the Wall Street crash was called Black Thursday.

Let's have a look at his family life.

His parents, Layla and Howard, met at their college newspaper, The Daily Nebraskan, in the 1920s.

And after studying journalism, Howard set up his own brokerage firm in 1925.

But I feel like you need to explain what brokerage is.

So basically, if you want to buy and sell shares, you need to have a broker to do that for you because brokers are members of stock exchanges, so they're the people who can give you access to it.

You buy something for, let's say, $10 or £10,

you pay a small brokerage fee, which is like a commission on the trade.

And so the brokers basically don't own the stuff, they just buy and sell it.

So he was like a go-between.

Exactly, a go-between.

But times were kind of hard for the family, right?

It was the Great Depression in Warren's early life.

His parents really struggled to keep the household afloat.

And I think at one point, his dad, Howard, was genuinely worried his young family might starve because money was so thin on the ground.

Yeah, and that was a common experience in those times.

Layla, his mum, apparently used to skip her Presbyterian church circle because when it was her turn to bring coffee, it cost 29 cents and she just couldn't afford that.

Which just speaks to how difficult the times were back then.

And yet they pulled themselves out of that.

And his father, Howard, eventually made his stockbroking business a success in spite of a decade-long depression.

And I think this must have had a real impact on Warren's early life, right?

Seeing how your dad was able to use investing to kind of turn around the family fortune.

It's definitely in the family.

And actually, his favorite book as a child was a 500-page book called 1,000 Ways to Make $1,000.

And you would think that a 500-page book is a bit advanced for a kid.

Well, Warren Buffett was only seven years old when he took it out of the library.

And by that time, he'd already earned his first income as a six-year-old selling sticks of chewing gum in his neighborhood.

Right.

He was selling packs of five juicy fruit, spear mint, double mint.

These are all classic American gum brands.

It's amazing, they're still around.

I know.

A nickel a pack, and he was refusing to split the pack.

So for the non-Yanks out there, nickel is five cents.

Yeah, and according to a story in The Snowball, which is the biography written by Alice Schroeder, who, by the way, was a Wall Street analyst herself and became a very good friend of Warren Buffett's, she said that Warren knew if he sold a single stick for a penny, he'd then have to sell the other four sticks individually or risk the two cent profit he made selling the whole pack.

And that was a risk he wasn't willing to take this is not how a regular seven-year-old thinks let's put it that way no

and he also sold coca-cola in six packs he was willing to break those up and uh interesting he ends up being the largest single shareholder of coca-cola in his later life these businesses and brand names they'll keep popping up over the course of warren buffett's life he has what you might call brand loyalty i guess yeah he actually describes it at one stage as having a moat around it like brands which are really well known if you look at some of the things he's bought Gillette, Coca-Cola, things that have big brand names, strong brand affinity, and that in a way protects them against, you know, getting buffeted, if you don't mind.

See what you did there.

See what I did there.

Getting buffeted.

That kind of brand loyalty means that it's got a protection against market downturns.

He was also collecting golf balls and selling them to make money, which actually led to a visit from the police about presumably the young kid going around golf courses, picking up people's unused balls.

But his parents were actually pretty impressed by his entrepreneurialism.

At 10, he got his first paying job selling peanuts and popcorn at University of Omaha's football games.

That's American football.

Also, at this time, Howard was becoming increasingly political and anti-U.S.

Democrat President Roosevelt running for a third term.

Yeah, so the young Warren was wearing badges supporting Republican candidates into work until he was stopped by his boss because they thought it might be bad for business.

So a challenging start to his life, growing up through huge cataclysmic events like the Great Depression.

But he actually describes his childhood pretty positively.

He actually says, I won the Ovarian lottery.

I was born at the right time and place.

And he talks about the advantages of a home where people talked about interesting things.

He had intelligent parents.

He went to decent schools.

And, you know, lots of people would be like, well, it was really hard.

I really suffered.

But he seems to have a really positive outlook on life.

In his mind, it was a pretty idyllic childhood.

He's hustling for money, looking for investments, making a buck here and a buck there.

Omaha very much his home.

But in 1940, his father Howard takes his children to New York City.

And that was a pivotal moment.

Not that he particularly wanted to go to New York City, but there was something there he did want to see.

He wanted to see the New York Stock Exchange, not, you know, Macy's or, you know, the toy parade.

Or the Statue of Liberty.

Yeah, he wants to see Wall Street.

And they spent a half an hour with a guy called Sidney Weinberg, who at that time was running Goldman Sachs and had spent the previous decade rebuilding the company after the Wall Street crash.

And they hit it off immediately.

Yeah, he saw the floor, the trading floor where staff were delivering traders hand-rolled cigars.

He saw Weinberg's office, the inner sanctum.

And Warren, even as a young boy, realized how much money there was on Wall Street, even while the rest of the country wasn't doing great.

It was kind of suffering.

Yeah, and it's funny because he's not a hand-rolled cigar kind of guy.

He's more like a cheeseburger and a Coke kind of guy.

But nevertheless, he recognized that there was a ton of money out there to be made.

And that, I think, entranced him a little bit.

It's odd, right?

Because I think a lot of our billionaires, they want to make money so they can spend it.

But he's really never left Omaha.

I mean, he'll leave occasionally over the course of his life, as we'll talk about, but he always ends up going back.

Yeah.

And throughout his childhood, Warren saved most of the money he earned, along with some cash he was given by his father.

And in spring 1942, he convinced his elder sister Doris to join a scheme of his to buy three shares of a company called Cities Service Preferred, a stock his father had often recommended to his customers.

And they bought that for $114.75, which is quite a lot of money in 1942 for a young lad.

Yeah, and by young, we mean young.

He's like 11 or 12 at this point.

Exactly.

But by June, the stocks weren't doing so well.

So they had gone from $38 to $27 a share.

And elder sister Doris reminded Warren each and every day of how much money he was costing her and made him feel quite bad about it.

Who knows?

If that had been the end of experience, we might never have been here to walk.

He might be a teacher in Omaha.

He might be a teacher in Omaha.

But the stock recovered and he sold each share at $40.

So got a total profit of $5 for them.

His sister said, I knew then he knew what he's doing.

But this is the seminal bit, I think, to me of this story.

The stock then goes up to over $200 a share.

And Warren was devastated that he'd sold too early and didn't hang on.

And

that taught him a number of things.

One of the most important lessons of his life, don't fixate on what you pay for a stock.

Don't rush to gain a small profit and don't risk other people's money unless he's confident he'd make a profit.

But holding things for the long term, I think, is the massive seminal moment there.

So after his experience of city service preferred, he set himself the goal of becoming a millionaire by the time he was 35.

Some of us are happy with just a pension at 35, but you know, who am I to say?

We should also, you know, millionaires are 10 a penny these days.

In the 1940s, a millionaire was a very big deal.

And while this was happening in the 40s, his dad, Howard, was also making moves politically.

So he stood as a Republican candidate for U.S.

Congress in Nebraska's 2nd District.

And surprisingly, he won in 1942.

So that meant that 12-year-old Warren Buffett and his family had to move away from his beloved Omaha to Washington, D.C., the big city.

Yeah, and he didn't like it much.

No, he really didn't.

As Warren puts it, I had all these things I was doing in Omaha.

I had a nice niche there.

When we moved to Washington, the ping-pong table disappeared, the Boy Scouts, you know, kind of cute that he's still into all these things, even though he's making money on the stock market.

And he says, I was mad.

I didn't exactly know how to direct that.

I knew I was just having a lot less fun than I was having before my dad got elected.

And there he fell in with a bad crowd.

His grade started dropping.

He even shoplifted from Sia's department store.

I know.

You feel like that's maybe the most rebellious thing he's ever done in his life.

Yeah.

But even when he was rebelling against his parents, he was still working hard to earn money.

He was waking up at 4.40 a.m.

to deliver the Washington Post.

Something he ends up owning.

Yeah.

And he also found the quickest way to do his three paper routes.

He was tracking customers, magazine subscriptions and selling subscriptions and calendars on the side.

He was hustling.

Yeah, and he was actually earning around $175 a month, which is a lot of money back then, probably more than any of his teachers were earning.

And he was investing the vast majority of his earnings and had to file his first tax return at 13 years old.

You are kidding.

First tax return at 13.

But he wasn't doing so well at school and so his father used a pretty drastic threat to motivate him to do his schoolwork.

He said he would take away his paper roots, which of course is a source of his income.

Yep, his way of making money.

So Warren had a real rethink and a change of heart and applied himself to school and continued doing the paper round.

So, by age 15, the hard-working Warren had saved at least $2,000 from delivering papers and apparently had sock drawers stuffed with cash.

Yeah, kind of soprano style, really.

And he used the money to invest in a 40-acre farm in Nebraska and arranged.

He buys a farm at 15.

Yeah, kind of crazy when you put it that way.

So he was arranging this profit share agreement with the farmer.

I mean,

who even knows to do that when you're that age?

And that was not his only investment.

He also set up a legitimate this-time golf ball business, a car shine business.

He was selling collectible stamps.

And at 17, he bought an old pinball machine for $25 and got a barber there to put the machine in his shop and agreed to split the profits.

He even pretended to be a representative of a company, which was non-existent, called Mr.

Wilson's Coin-Operated Machine Company.

It sounds like something out of Willy Wonka, doesn't it?

Yeah, it really is quite a wonker-esque.

In a week, he'd earned basically the $25 back, and he'd reinvest it in another machine.

Within a few months he'd built a mini empire with seven or eight Mr.

Wilson's machines which was making him money all around town.

Yeah.

Anyway Howard Buffett, Warren's dad, lost his seat in the House in the 1948 election so the Buffetts get to return to Nebraska.

Warren enrolls to study business administration for two years and while he's studying he also ends up managing 50 guys delivering paper rounds in six counties.

After graduating from there he decides that he's going to get a higher degree instead of going to work immediately.

And he wants to go to Harvard Business School, but Harvard Business School doesn't want him.

No, he thought he'd be able to wow them with his deep knowledge of investing, but was turned down in 10 minutes flat.

Yeah, so this is interesting, right?

Because I think he's also pinpointed this himself as one of the seminal moments of his life.

Because Harvard wanted to create business leaders, and 19-year-old Warren just wasn't one.

He says of himself at the time that he looked about 16 and emotionally was about nine years old.

And so having been turned down by Harvard, he turns his attention to Columbia Business School, which is in New York.

And there there are a couple of people called Benjamin Graham and David Dodd.

And Benjamin Graham becomes a bit of a momentor in his life.

And he'd actually read Benjamin Graham's book, The Intelligent Investor.

And a friend...

has said that it had mesmerized him.

It was like he'd found a god to worship.

So he was now determined to go to Columbia, but he's very late.

The term had already begun, didn't think he'd get in, but he sent a written application to Benjamin Graham's protégé, Dodd, who was very impressed by what he'd read, and he admitted Buffett to Columbia without an interview.

So the young Buffett moves into the cheapest room available at the YMCA on West 34th Street and immediately impresses both Dodd and Graham.

He's their youngest student, but he's also the most knowledgeable.

He's the guy who always has his hand up first when a question is asked.

Yeah, and also, if you're a teacher, knowing that the person in the class slightly idolizes you and knows your book that you've written better than you do, no wonder they had a, you know, a pretty good teacher-student relationship.

He was, in fact, the only person in the class to earn an A-plus in the exam.

And one of the fundamental principles he took away from Benjamin Graham's class was that Mr.

Market is your servant, not your master.

Values of stocks don't always make sense and shouldn't influence your own value of a stock.

So, what the market says it's worth should not influence what you think it's worth.

So, the market can go up and go down and whatever.

If you understand what it's worth, then there'll be opportunities sometimes when the market will give you a price where you think that's cheap.

So, how do you understand what a stock is actually worth?

Do you just have to do your own research, basically?

You have to do your own research, and the way you value it is what are its potential future earnings, right?

And that's based on a bunch of things like future sales, the dividends the company will pay, and also its durability.

He often buys things that he thinks are going to be long-term parts of people's lives like Gillette Razor Company, like Coca-Cola.

So it's due diligence basically.

Yeah, doing your own homework, trying to understand what would I be prepared to pay to get that stream of income over the next few years, well, a few years or decades in case of Warren Buffett.

And even while he was absorbing all these lessons from, you know, Graham, he was starting to develop his own kind of investment philosophy if you want to put it that way graham was a fan of buying lots of stocks but warren buffett decided that he wasn't actually a big fan of that that's right because the modern portfolio theory says that you can reduce your risk by owning lots of different stocks warren buffett said i'd much rather own a few invest heavily in those ones which i understand and believe in than buying a smattering of lots of different ones.

It kind of bucks the trend, right?

It does.

I mean, most people would say that you spread your investments, you spread your risk, you don't put all your eggs in a few baskets.

And actually, Warren Buffett himself says for the average investor, he would recommend doing that.

He's saying, you don't have the time to do the kind of stuff that I do.

What you should buy is an index fund, which basically is

essentially when you buy an index fund, you're buying a little bit of all the companies that make up either the Dow Jones or the S ⁇ P 500 or the FTSE 100.

He's saying, for the amateur, do that.

Right.

You can't do what I do.

Okay.

And presumably the amateur doesn't have billions of dollars as the kind of backup fund in case it all goes horribly wrong.

Well, that's right.

But the amateur also gets scared quickly, which is something Warren Buffett doesn't get.

Right.

He doesn't spook easily.

He doesn't spook easily.

So one of the great examples of Warren Buffett's investment philosophy, buy into something heavily which you really understand, is Geico, which is short for the Government Employees Insurance Company.

And Benjamin Graham, his...

tutor, his mentor, was on the board of this.

So he was in a position to really understand exactly what was going on here.

So he was doing his due diligence and he got on a train to Washington DC to visit their head office where he managed to get a meeting with their vice president after explaining he was Graham's student.

Yeah, he impressed this vice president with the intelligence of his questions, the knowledge of the insurance market.

And the vice president began asking Buffett about all the businesses he'd run as a child and they ended up speaking for hours.

Can you imagine a young Warren Buffett turning up at your office?

Yeah.

Who's this little kid who seems to know everything?

So, although his tutor Benjamin Graham is on the board, Benjamin Graham actually thought Geico was a little bit overpriced.

It was just a small player in a huge market.

But Warren Buffett took a different view, and this is typical of things he does.

He finds opportunities, he'll seize opportunities where other people don't.

He saw it had an opportunity to expand much more than its bigger competitors.

It had a lot of growth potential.

So he goes off, sells some of the stocks he's previously invested, puts his money together to buy a stake in Geico.

And by the end of 1951, when he'd graduated from Columbia, he actually had three-quarters of his net worth invested completely in Geico.

So there you go, you know, bet big, concentrated in something you really understand.

And it's a stock that Buffett returns to time and time again.

He actually ends up salvaging it in the 1970s and he owns it outright to this day.

And it's been one of the central holdings of his investment company throughout the decades.

So after this moment, he graduates and he sets his sights working again for his mentor, Ben Graham's firm, But he's initially rejected.

Graham thought he was kind of overpriced.

Even though he offered to work for free.

I mean, it must be kind of a blow, right?

Your own business mentor and teacher turning around and saying, no, I don't think you can work at my firm.

It is odd.

And maybe it's because, you remember when he was turned down for Harvard?

Because they said he was kind of immature.

They wanted leaders and he wasn't that.

He's still a bit of a kid in a way.

Yeah, maybe Benjamin Graham kind of looked at him and said, I think you need to grow up a little bit back home.

Yeah, maybe.

So he goes back to his parrots' home in Omaha and he wants to reacquaint himself with this girl called Susan Thompson, whom his older sister had introduced to him before he went to Columbia.

Back in New York, he'd taken a public speaking course because he was so nervous about wooing her.

That's so interesting because people literally hang on his every word these days.

He literally has thousands of people show up to listen to every word he says now.

Yeah, and the same guy who can talk to a VP of Geico for hours can't even talk to a girl that he fancies.

That's true.

But Susie was otherwise engaged.

Yeah, she was going out with some other boys.

So Warren, who is aware of the influence her father has over Susie, decides that he is going to show up every single night at her house with his ukulele to romance her dad.

Okay, this is just plain weird.

Yeah, yeah.

So as Warren puts it, I would flirt with him instead.

Okay, odd, odd, odd.

Very strange.

But it worked because Susan's dad decided that he kind of liked Warren.

And as Warren puts it, it was two against one.

Yeah.

And he wrote to his aunt, things in the girl department are at an all-time peak.

Hooks have been sunk pretty deep into me by one of the local gals.

Apparently her only Achilles heel was not knowing about stocks.

Tut, tut, tut.

Despite this huge oversight on her part, they were married the following year in 1953.

They had the first of their three children, Susan Jr.

And Buffett has always credited Susan with changing his whole political outlook.

And over the course of their long marriage, which also has an unusual end, as we'll see later on, she slowly shifted him from being a Republican to a Democrat.

In the 60s, she was working to aid racial integration in Omaha.

She actually took Warren to see Martin Luther King speak.

He actually has something quite sweet to say about her in this HBO documentary called Becoming a Warren Buffett.

He says, I was a lopsided person.

She put me together.

Oh, that's sweet.

That is sweet.

Well, like you say, hold that thought because the romantic stakes get pretty weird again later on in this in this tale.

So he's busy selling securities, stocks and shares for his father's firm and in the meantime building his own portfolio, but also keeping in touch with Benjamin Graham, his old tutor, who he still wants to work for.

And he said, I made a pest of myself.

And it finally works.

Graham gives in.

He gives Warren his dream job of working for him for $12,000 a year, which is still quite a lot in those days.

And he moves his family to White Plains, New York.

And every morning, he gets on the train to Grand Central Station and goes to work on Wall Street, where the business in action is.

Yeah.

It was a short-lived position, though, because within a few months of Warren Buffett starting there, Graham, his mentor, his tutor, said that he was planning to retire.

And Graham actually offers him a once-in-a-lifetime chance to replace him at the firm.

And it was, you know, a tiny fund, $6 million or $7 million, but it was famous.

And Buffett was kind of taught.

Yeah, he said it was a traumatic decision.

Here was my chance, he said, to step into the shoes of my hero.

I even named my first son, Howard, Graham Buffett, after Benjamin Graham.

But I also wanted to come back to Omaha.

So I probably went to work for a month thinking every morning that I have to tell Mr.

Graham I was going to leave, but it was hard to do.

Omaha is like his rosebud, man.

It's like he'll never leave.

It's like, you know, with Denise Coates, the Bet 365 Stoke, that's her Omaha.

That's right.

That's a good, that's a good parallel.

If you haven't heard the Denise Coates one, do give that one a listen.

But let's return to Warren Buffett at 25.

He goes back to Omaha.

He's now got a net worth of $127,000.

Remember, his target was a million by 35.

So he's on the way.

He's doing well.

And he actually decides that he's going to retire in Omaha because he could earn $12,000 a year in compound interest from the money he already owned.

He actually rented a house because he didn't want to dip into his capital.

He said it was like a...

carpenter selling his toolkit.

He's obsessed with this idea about compound interest, which he something, a concept he learned from that 500-page book about a thousand ways to make $1,000.

And compound interest just means like if interest rates are 10%,

you got $100 in year one.

At the end of year one, you got $110.

You then get 10% of 110.

And so it's 121.

And in year three, you get 10% of 121.

And so basically, you get interest upon interest.

It compounds.

So he thinks he can live off the interest without dipping into the actual pot itself.

The interest would be able to give them a pretty good life.

But he doesn't do that.

No, of course he doesn't.

Warren Buffett, being Warren Buffett, isn't going to be happy with just living off compound interest for the rest of his life.

Seven family members and friends in Omaha ask him to invest on their behalf.

So rather than retire, he sets up his own firm.

And then actually his tutor, Benjamin Graham, started recommending Buffett to some of his customers, given the fact that he'd liquidated his own firm.

So Warren Buffett says, at age 25, it was a turning point.

I was changing my life.

I was doing something I liked, and I'm still doing it.

Yeah, 68 years later, he's still doing it.

He was soon operating multiple investment funds.

In 1958, he purchases that house we've talked about in Omaha, Nebraska for $31,000, where he still lives to this day.

No private golf courses or underground bowling alleys, unlike some of our other billionaires.

Yeah, and in 1962, three years ahead of his original target, Buffett becomes a millionaire, aged 32.

His partnerships had excess funds over $7 million,

of which more than $1 million is owned outright by Buffett.

And don't forget, in 1962, being a millionaire also means a lot more than it does now.

He's done it.

He's a millionaire.

Officially, a millionaire.

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So how does he go from a million to a billion?

There's no single big deal that marks his arrival into the Millionaires Club.

And indeed, there's no kind of single big deal that marks his arrival in the Billionaires Club.

It's a story of consistent growth and good investments.

But it does have to do with the arrival of a significant person, a lawyer called Charlie Munger.

Yeah, who Buffett had met in 1959.

Charlie Munger becomes his closest associate for the next six decades, right up to his death late last year at the age of 99.

And they kind of have a cute...

meeting, right?

They met at this dinner party.

And the thing that drew Warren to Munger was that Charlie Munger liked to roll around on the floor laughing at his own jokes, just like Warren Buffett.

Kelly, they remind me a little bit of Stadler and Waldorf.

Do you remember the two guys from the Muppets?

I was going to say, are they the two Muppets?

Exactly.

And they do rub along together very, very well.

They've both shared a passion, or Munger said the pair shared a passion for getting rich.

Yeah.

And Buffett convinced Munger that investment was a better way to get rich than charging an hourly fee for legal services.

So you've got this double act.

Munger's sort of the elder intellectual in sort of big thick glasses.

Buffett was the folksy investor.

They start start to co-invest before Munger comes on board officially as his right-hand man in the late 70s.

And Buffett credits Munger with refining his philosophy of investing.

And he took Buffett further away from the Graham method, which is buying undervalued stock, to buying long-term investments.

Buffett is known to say his favourite holding position, how long you're going to hold this stock, is forever.

And that's part of Munger's influence.

And Charlie Munger kind of explains the logic behind this in a Forbes interview in 96.

You're paying less to brokers, you're paying less tax because you only pay capital gains tax on transactions.

So if you have no transaction, you pay no tax.

And that's really important in terms of long-term returns.

If you're buying and selling stocks all the time, you're paying a commission to the broker every time you do it.

That frictional cost eats away at your money.

And also, when you sell something for a profit, there's capital gains tax, there's tax on that profit.

If you don't sell it, you don't have to pay that tax.

And that means, as Charlie Munger put it,

one day we'll have to pay tax on this because we'll one day we'll make a profit but in the meantime whether they're not selling it we're keeping the tax money and making it work for us wait so let me get this straight if you're an investor and your job is just to be a full-time investor like Warren Buffett you don't actually need to pay tax on anything except for when you buy and sell.

The only difference is if you own a company which pays cash dividends out, that is cash income to you, and you would have to pay tax on that.

It's only when you take income out or take a profit out that you become liable for tax, which is one of the reasons he doesn't pay that much tax.

And in 1965 comes one of Buffett's most significant purchases, which he actually would later call his dumbest stock purchase.

The company was a struggling New England textile manufacturer called Berkshire Hathaway.

Not Berkshire, Berkshire Hathaway.

And he'd been buying up stock of it in 1962.

The company was actually a merger of two different textile companies, but it hadn't done them much good.

So it was closing manufacturing plants and laying off staff, but Buffett still figured it was worth more than the stock price of $7.60 and bought stock planning to sell for a profit.

By 1964, Berkshire Hathaway boss Seabury Stanton,

made a verbal offer to buy Buffett out at $11.50 a share.

Remember, he bought it at $7.60.

But when the offer came in writing, it was $11.37.5,

which is 12.5 cents below what they'd agreed.

And Warren Buffett, for maybe the first time in his life was enraged.

Yeah he went absolutely nuts so he decides to buy up all the stock until he owned the coal company and he could sack Stanton.

I mean, I feel like this is the only succession style flex that Warren Buffett has displayed throughout the entire shortchange me by 12 and a half cents.

I'll buy the company and sack you.

You can only imagine what his wife had to say about this.

Yeah, he sort of really loses his rag here.

And anyway, in less than a year, he was installed as chairman.

As he says, he fought the failing textile business for 20 years and the textile side of it actually closed in 1985 but by then Berkshire Hathaway was worth much more than a regular old textile company yeah it becomes the holding company for all of Buffett's investments so when you buy a share now of Berkshire Hathaway you're buying a slice of all the things that he owns and he headquarters Berkshire Hathaway guess what of course Omaha, Nebraska.

Initially, he'd invested in insurance companies.

Remember, he understands these really well, But this broadened out over the years.

And from 1965 onwards, for 50 years, Berkshire Hathaway outperforms the SP 500 companies' annual gains by more than double.

That's insane.

Nobody beats the index every year in, year out, as often as that.

That is, I would say, that is one of the reasons he's such a legend, because that's so unprecedented.

That's why he's the oracle of Omaha.

Yeah, so the value of a share in Berkshire Hathaway increased by an average of nearly 22%

every year for 50 years.

And today, a single share of its A stock, which is it's number one.

Yeah, they basically, the A stock is the normal share, but it costs because it costs $550,000 per share, not everyone could afford even a single share.

So they issued what they call B shares, which are much cheaper, but you don't get the same voting rights.

It's like a junior version of the thing.

Like a beta kind of stock.

Yes.

So he sold these B stocks in 96 for $22.

Those are now worth over $350.

So well done to all the smaller investors who got in while the iron was hot.

And although he takes them from the companies he invests in dividends from the likes of Coca-Cola, Gillette, Apple, whatever, Berkshire Hathaway itself does not pay out dividends, which is one of the reasons it's become so valuable over time.

It's that, you know, it's accumulated all that cash.

And it actually only did so once in 1967.

But Buffett says that he thinks he must have been in the bathroom when that was authorized.

That's hilarious.

Quick, he's gone to the loo.

Sign it off now before it's too late.

But in 1970, Warren Buffett wrote the first of an annual tradition of letters to the shareholders of Berkshire Hathaway.

And this is where he talks about what he's been doing, his philosophy.

And the Berkshire Hathaway shareholder letter is one of the most eagerly anticipated, most famous documents in all of, you know, in the world of finance.

Is it like Moses coming down from the hill with the commandments?

Exactly.

He comes, and he talks about things that have happened in the investing world.

He puts some of his pithy little aphorisms, his little sayings in there.

People pour over them.

They look forward to them every year and they are still seen as seminal advice.

And he actually also stages this annual shareholder meeting, which then becomes a really big deal.

It becomes known as the Woodstock of Capitalism.

Yeah, they have thousands of people go to Omaha for this event.

They used to have it in a small hotel.

They now have it in a 19,000-seater arena in Omaha.

And I remember that, I don't know if he still does this, given he's 93, but it used to be a baseball game.

And he would go and throw the first pitch at the baseball and whatever.

So it's all, there's a lot of theatre to it, but it's, but it's folksy theatre.

Everyone loves it.

It's like the Taylor Swift Era's tour, but for investors.

Exactly.

And it's quite a carnival atmosphere.

Right.

And it really was these letters and these meetings that cemented his reputation as the oracle of Omaha.

You have to beat a path to where the oracle is.

I love that for you know, this pilgrimage to Omaha.

It wouldn't have worked so well if if it was just in new york let's put it that way exactly that's become legendary so are some of his investments over the years in 1972 he buys something called sea candies from the sea family for 25 million dollars and he still owns it and both buffett and munger cite the purchase of sea candies as a turning point i've eaten sea's candies excellent have you yeah i have to be honest with you i've never heard of them it's really big in america it's very tasty and also bear in mind that american chocolate is usually disgusting okay sea candies is actually really good.

There you go.

But it's a good example of Warren Buffett's famous maxim.

It's better to buy a wonderful company at a fair price than a fair company at a wonderful price.

To me, this kind of goes against most investing advice, right?

Because if something's a wonderful company, everyone's investing it.

So it's kind of expensive, right?

You shouldn't be investing in expensive companies.

He looks at the company first and how much he likes it and looks at the price second.

Whereas a lot of people say, oh, that looks cheap, let's buy that.

And that means

you can buy a mediocre company at a bargain basement price.

He would rather buy a great company at a fair price than try and get something on the cheap.

Not that he doesn't like to find value and as we'll see, there are times when things are going cheap when he'll look at them.

But mainly he wants to look at their brand, their appeal, their prospects over the long term.

And then he'll look at the price second.

And Seas Candies is enormously popular in America.

And since since Warren Buffett bought it, Berkshire Hathaway has taken over $2 billion in pre-tax profits from the company.

That's an 8,000% return.

That's a pretty good investment.

I mean, that's up there with Apple, right?

Surely.

And there's another thing that makes C's candies appeal to Buffett.

He genuinely likes the product and that's a particular quirk of the things that Buffett invests in.

So, you know, we talked about him doing the paper round for the Washington Post when he was a kid.

He started investing in the Washington Post in the 70s, you know, in the late 80s, after he was introduced to their then-new product, Cherry Coke, which he loved and apparently still drinks every single day.

Berkshire Hathaway started investing in Coca-Cola.

And then Skyco, of course, that was the business he found.

as Graham's student.

That's wholly owned by Berkshire Hathaway.

And the thing about insurance companies,

I think I've mentioned before, is they're great cash machines.

People pay in their premiums, you know, you pay out the claims later.

They're very good at generating cash.

And it's generated a lot of the cash that he's used to invest in other companies.

So all these investments worked out for him, but you know, it's clear that him believing in a product is still one of the number one reasons he invests.

Yeah.

So in the late 70s, things were really taking off for the Buffett family.

Charlie Munger became closer to the heart of the action.

He gave up his own investment firm.

He became shareholder, a vice chair, and his right-hand man.

But Warren Buffett's marriage wasn't doing so great.

In 77, Susie Buffett moves to San Francisco to pursue her musical career.

And although the couple remained married and stayed in daily contact, they often spent holidays together.

Warren Buffett has said, it shouldn't have happened.

It was my biggest mistake.

And then enters a third person into this relationship.

This is where his private life does get pretty weird.

Well, it gets very 21st century, if you want to put it that way.

Susie introduces Warren to a cocktail waitress called Astrid Manx, who is 16 years younger than him, and asks Astrid to take care of Warren so she can focus on her own kind of career and her own thing.

And this is the start of an unconventional threesome.

Astrid moves in with Warren in 1978 with the approval and full knowledge of Susie and the three start sending out Christmas cards signed Warren, Susie and Astrid.

There's something slightly weird about saying I'm moving to San Francisco.

He's going to need someone to look after him.

You move in, Astrid, and you take care of him because I'm off.

They're basically in this kind of polyamorous thrupple, like long-distance three-way.

And it worked for decades, though.

Susie died in 2004, and Warren was there when she died.

But before she died, she told an interviewer that Astrid Manks takes great care of him.

He appreciates it, and I appreciate it.

She's a wonderful person.

And three years after Susie passed away on his 76th birthday, Warren Buffett marries Astrid Manks.

Well, strange one.

Anyway, meanwhile, the steady growth of his investments saw Buffett named a billionaire by Forbes in 1985 when he was 55.

So he's done it.

He's a billionaire.

So in 85, he's a billionaire.

Coming up is one of the most memorable moments in stock market, recent stock market history.

It was the Black Monday of 1987, which saw US stock prices severely decline.

In fact, the Dow Jones Industrial Average dropped 23% in one session.

That remains the largest one-day stock market decline in history.

And initially, Warren Buffett dumped stocks in favor of bonds and pared back his portfolio.

But by the third day of the crash, it was clear that his strategy had changed.

Now, remember, he's not usually the kind of person who looks to buy stuff on the cheap, but he starts realizing that there are good companies going for cheaper rates and there are some bargains on offer.

So he starts buying them.

And this is also the origin of the famous Warren Buffett saying: be fearful when others are greedy and be greedy only when others are fearful.

And Berkshire Hathaway wasn't immune to what had happened in the stock market.

They lost 12% on Black Monday.

But over the course of 1987, it had made its usual consistent profits and shares had risen by the typical 20%.

I have to say that most stocks actually finished that year higher than when they went.

So if you were bought in at the bottom, you did very well in 1987.

And his skill at negotiating a crash like Black Monday proved even more more salient two decades on with the 2007-2008 financial collapse.

Yeah, because if you remember, that was triggered by the banks.

A lot of banks went out of business.

Lehman Brothers, for example, others were really challenged at that time.

And Buffett came to the fore.

He's got plenty of money and he supported some famous institutions, Goldman Sachs, General Electric, Dow Chemicals.

He comes in and supports them financially.

And he came in for some criticism himself during this period.

But at the same time, the way he kind of negotiated that cemented his status in financial circles.

The Oracle of Omaha did it again.

Yeah, and the banking crisis was when that other famous Warren Buffett quote came along saying, You only learn who's been swimming naked when the tide goes out.

This was a reference to banks which have been taking loads and loads of risk, and then when the market conditions changed, they were left in a very vulnerable position.

And it was actually in 2008 itself that Forbes, for the first and only time, named him the richest person on the planet.

His net worth was estimated at $62 billion.

Overtaking his friend Bill Gates at the top of the list.

So let's bring the story up to date.

Warren Buffett is immensely rich.

Yeah.

Today, Berkshire Hathaway has a total market capitalization, that's what the entire company is worth, of $800 billion.

And he's also spent 80 years investing.

So we've only really scratched the surface of his major investments.

His largest current holdings, in case you want to know what the Oracle of Omaha likes at the moment, he owns nearly 6% of Apple.

That in itself is worth $160 billion.

He's also got Bank of America, American Express and Coca-Cola.

Some pretty standard names.

Yep, you know, names that everyone would recognize.

And Buffett himself is now worth $120 billion, but he's been giving a lot of that away.

Yeah, because in 2010, Buffett and Gates founded together the Giving Pledge, which we've talked about when we've talked about other billionaires, where they asked the rich to donate half their net worth to charity.

In 2012, he wrote an open letter revealing that he was diagnosed with prostate cancer, but over a decade later, he doesn't show any signs of slowing down.

And he's still with Astrid, if you're wondering.

And he's still in that Omaha house that he bought in 1958.

Time to judge him.

So, this is a part where we judge our billionaires based on different categories.

We rate them on a score of one to ten and we ask ourselves whether they're good, bad, or just another billionaire.

So wealth, just plain wealth, well, he's right up there.

He has been the richest person in the world for a while.

He's still in the top 10, but he doesn't live a high life because sometimes we look at how they wear their wealth.

There's a famous story from Bill Gates, his BFF, of a lunch they shared in McDonald's.

So no fancy four-course meals for them.

Warren Buffett apparently offered to pay.

And in Bill Gates' telling of the story, he dug into his pocket and pulled out.

coupons.

Coupons.

And I think that tells you a little bit about his cheapness of his taste.

He likes junk food, regularly eats McDonald's, a company here in Mungo.

One of the biggest regrets that they never invested in that when they had the chance early on.

He drinks cherry coke and eats ice cream Sundays.

There's actually a great clip in that HBO documentary becoming Warren Buffett.

He's at the Mackie's drive-thru and he goes for a cheaper $2.95 sausage, egg, and cheese muffin rather than the $3.17 one with bacon because the market's down that day.

You're kidding me.

So he's counting every single cent and making it work.

Well, I think he's playing that for laughs because he famously always says he never looks at what the market's doing.

So there we go.

Okay, so on wealth, I mean, he clearly doesn't wear it.

There's no bling to Warren Buffett for sure, but just the sheer extent of his wealth and the fact that he cares so much about being rich and the fact that he's used wealth to keep score about how smart he is.

Out and out wealth, he's a nine out of ten.

Yeah, I'd give him a nine out of ten.

The one point is deducted just because he's so folksy and frugal, you know.

Yeah, Kaylee couldn't be a ten.

Yeah, don't fool us, Warren Buffett.

You're loaded.

Nine out of ten.

So, Rags to Richards, how far has he traveled from his humble origins or not so humble origins?

Yeah, this is interesting, isn't it?

Because at the time, he was humble.

It was just after the Wall Street crash.

He was born.

He lived through depression.

His parents said they were worried about whether they would actually starve.

But at the same time, he managed to grow a stockbroking business in that 10 years and he went to really decent schools.

So I don't feel that that experience as a family was unique to the Buffett family in the 1930s.

So for Rags to Riches, he's certainly very rich, but I didn't come from Rags.

I'm going to give him a three.

Yeah,

I'll give him a four because, you know, there was clearly a time when his family worried about putting food on the table.

So yeah, an average four out of 10 for me for rags to riches.

Now we have a category called villainy.

This is, you know, what did they do that was bad to get where they were?

And

here's an interesting category here because there's, you know, we're talking about the morality, if you like, or the ethics of investing.

Where are you on this?

I mean, he doesn't behave like a typical billionaire investor, right?

He doesn't do hostile takeovers or, you know, major restructurings.

He never sells the companies he buys.

Yeah, he's not a corporate raider.

There's none of that to him.

He's also very interesting when it comes about sort of paying taxes he always says people should pay their taxes the environment in which we operate which is peaceful just well-ordered those take institutions which need paying for and that's why you should pay your federal and state income taxes as it happens he almost never sells shares so he doesn't actually pay that much tax but the thought is there yeah the intention is good but he is ruthless on one thing i remember when he took over Solomon Brothers, famous Wall Street firm which got into trouble in the 1980s and then the early 90s after a scandal, he went before Congress and said if you lose money for the firm I will be understanding lose a shred of reputation for the firm which is what happened at Solomon Brothers and I will be ruthless

villainy I he's not he's not much of a villain no I don't think so I'm not fooled totally by the folks he charm but at the same time I don't think that you know he's he's masking some evildoer so I'm gonna give him a Two for villainy.

He could be so much more evil.

This is the thing, right?

He could be.

I mean, some people will say anyone that rich, there's an inherent distastefulness to it.

There's an inequality about it.

And he's an embodiment of the accumulation of wealth for its own sake.

And that in itself is villainous.

But that's a phenomenon rather than he himself.

Exactly.

And he kind of mitigates that, right, by being so tight-fisted.

Yeah.

I would give him a one.

I mean,

he could be much worse than he currently is.

Yeah.

And he isn't.

Two from me, one from you.

Okay.

Philanthropy.

Got to score highly highly on this category, I would have thought.

Yeah, he's given 55 billion.

That's quite a lot.

That is a lot.

And he's promised to donate over 99% of his wealth during his life on his death.

He's also said an interesting thing, which is that what his wealth amounts to is a giant pile of claim checks on the world's resources, checks which are largely worthless to him but potentially valuable to others, which is a nice way of putting it.

Thoughtful way of putting it.

And he's also donated to good causes.

So, you know, he's donated to LGBTQ rights, access to clean water, environmental rights.

So

for me, he scores highly, like a nine out of ten.

Yeah, I mean, I'm trying to think.

The only person who scored higher than this would be Chuck Feeney, who got a 10 because he gave all his money away.

He says he's going to give his kids $2 billion each, which is not bad.

Surely

if you were that rich, anything less than $2 billion would be pretty mean to your kids.

Bill Gates said an interesting thing.

I want to give my children enough so they can do anything, but not enough that they can do nothing, which is quite a nice way of putting it.

You could do a lot of nothing on 2 billion.

You should.

It's my personal opinion.

Yeah, 9 out of 10 on philanthropy.

I mean, 9 and a half, actually.

Nine and a half for me.

Power.

How much power does he have?

It's interesting.

He can pick up a phone to just about anyone.

He could wield enormous power over the companies in which he invests, but he tends to leave them alone.

He tends to find great businesses with great management teams and lets them get on with it.

So he exerts a lot of power and respect, a lot of respect in investing circles, but I wouldn't say he's that powerful.

So I'm going to give him a seven.

But if, you know, in one of those Woodstock of Capitalism conferences, he said something that was really out there, would people take it seriously?

What does happen is that when people find out that Berkshire Hathaway has been either buying or selling different companies, that can affect the market price.

If they say Warren Buffett is buying, everyone wants to buy.

So he's influential in the market, but I don't think he can change the weather totally.

But yeah, he has some market power.

Right.

In that case, I'd agree.

I think he's probably more of an eight out of 10 for me.

Okay.

Seven for me, eight for you.

Legacy.

The Oracle of Omaha.

I mean, his investment philosophy is something that a lot of people have tried to copy.

No one's successfully quite done it.

But his legacy of investing for the long term, I think is something that even governments could learn from in a way, which is basically you need long-term decision-making if things are going to work.

You know, you can't fix things overnight.

You can't reform something overnight.

Sometimes things can't be done in parliamentary cycles.

Getting good returns, whether they be social or financial, can take a long time frame.

Yeah, he's a master of holding the line and being in it for the long term.

In a way, you kind of want more people to learn from him, surely, because that's kind of a good approach to life.

Yeah.

I mean, he's 93 now.

I think we'll be talking about the Oracle of Omaha for decades to come.

So I'm going to give him a five out of 10 for legacy.

I think I'll give him a six out of 10.

Like, if you were to talk to someone on the street and say, name a famous investor, he's the number one guy.

I can't think of anyone else.

No, that's true.

All right, I'm going to bump mine up to a six.

Right.

So six out of ten for legacy.

So finally, we come to the ultimate judgment: is he good, bad, or just another billionaire?

well for some he will be seen as the living embodiment of a fixation on amassing as much wealth as possible and people will think that is generally bad for others he will be seen as somebody who focuses on the value of something rather than the price of it and that's a valuable lesson for life he also happens to be at least on the surface a pretty nice guy comes across us with plenty of folksy charm although he knows he can be hard-headed.

I'm going to say he's on the side of good.

The thing that tips it for me from him just being another billionaire investor is the fact that he set up the giving pledge, right?

Yeah, absolutely.

To not only commit to giving away your wealth like Chuck Feeney did, but to also create an institution that kind of pressures other rich people to do it.

Yeah, you create a culture of giving amongst the super rich.

Exactly.

That to me tips him over into good.

Yep, Warren Buffett, you are a good billionaire.

And I'm sure if you're listening from Omaha, you will be pleased with that.

Okay, so who have we got next week?

Well, we've got Miss Americana, Miss Shake It Off, Miss Folklore, Miss Eras Tour, herself.

Taylor Swift and our army of fans.

The Swifty's.

So if you're a Swifty,

you might want to tune in.

Yeah.

And for my, you know, this, I've got a feeling you're going to be helping me through this one a little bit.

But what I can say is that she has brought a new version of the dismal science of economics.

There is a whole branch of science now called Swiftonomics, and we're going to be looking at how it works.

Thank you for listening to Good, Bad, Billionaire.

This podcast is produced by Hannah Hufford and Mark Ward.

James Cook is our editor, and it's a BBC audio production.