StreetTalk: Investing The Buffett Way

Many times, success is not the result of the hot trend or the big patent breakthrough. More often, it is the quality of the people who are running the companies and the quality of the ideas they bring to the table.
Aug 01, 2005
Volume 18, Issue 8

Brian O'Connell
It's summer and the living is easy if you don't mind heat, insects, and thunderstorms. The biopharm indexes are listless, because August and September are notorious for inactivity in the various life sciences stock market indexes. Earnings announcements taper off and life sciences companies keep their gunpowder dry by holding off new announcements until after Labor Day. As of mid-July, the American Biotech Index (Symbol: BTK) has leveled off at the tail end of a year of unbridled growth. If history is any indication, the autumn months will see another rise from the 550 or so levels we're now seeing in the BTK.

So let's chart a different course with this month's edition of StreetTalk. I've been reading up on Wall Street legend Warren Buffett lately and his story – especially his views on investing – is worth telling in an otherwise quiet stock trading period. As investors, we can learn a great deal about true stock-picking. So pull up a chair while I tell the tale of the Sage of Omaha.


Warren Buffett's story is quintessentially American. He is by most counts the second richest man in America (the wealthiest is Bill Gates) with a fortune estimated by Forbes Magazine at more than $44 billion. He is the only US billionaire to have made his money entirely through investing, and today, along with Alan Greenspan and Paul Volcker, the current and former chairmen of the Federal Reserve, he is arguably the most respected voice of financial America.

His natural habitat is not Wall Street or Washington, but the unpretentious midwest heartlands. To investors across the globe Buffett is also known as the Sage of Omaha. This title derives from the pleasant, but largely unremarkable, Nebraska city on the banks of the Missouri River where he was born and raised, where he made his fortune, and where he lives to this day, in the same gray stucco house he bought for $31,500 in 1956.

Buffett is the best-known Nebraskan on earth, a gray-haired, no-nonsense Man of the Heartland who has been triumphantly and repeatedly vindicated by financial market events. He is not so much a financial institution as a national institution, and has become the object of a cult that attracts 14,000 or so people to Omaha every May for Berkshire Hathaway's annual meeting. Buffett himself has called the occasion the "Woodstock of Capitalism." Some people buy a Berkshire Hathaway share just to attend. This is not as small a matter as it sounds, for old-fashioned Warren has never been one for fancy devices such as stock splits, and a single share of Berkshire Hathaway stock can cost over $80,000.

Buffett's investment strategy is an interesting one. And learning it is a useful exercise for any investor — in the biopharmaceutical market or elsewhere. Let me elaborate. Buffett is careful and cautious, and he places a huge premium on solid, well-run companies (more on that in a moment) that produce steady profits and good shareholder value.

But it wasn't so long ago that the so-called "experts" on Wall Street were laughing at Warren Buffett, mocking his cautious, carefully measured methodology of investing. To the self-proclaimed gurus, Buffett's take on things seemed out of tune. They said the rules of the game had changed, and he just didn't get it. "Warren Buffett should say, 'I'm sorry,'" fumed Harry Newton, publisher of Technology Investor Magazine, in early 2000. "How did he miss the silicon, wireless, DSL, cable, and biotech revolutions?" That was when AOL stock rose six-fold, and rocketed by 1,000 percent in a year, while shares in Berkshire Hathaway, the investment company Buffett built from virtually pennies, climbed — only 11 percent.

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