Warren Buffet - Giving away his wealth

My last posting on Warren Buffet was on how he made his money. In this posting, I wish to share with you his well-thought way of giving away his wealth.

His Philosophy on Wealth and Distribution
Buffett has donated much of his wealth to the Gates Foundation ie. 85% of Berkshire stock, worth about $40 billion back in June 2006.

Why donates away most of his wealth?
As he states: "The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society."

Buffett believes that children should not inherit money just because of the lottery of their birth. He says children should be left "enough money so that they feel they could do anything, but not so much that they could do nothing."

How do he and the Gates want the Foundation to manage the money donated?
Objectives

• Together with Bill and Melinda Gates, the wealth will be used to try and fulfill shared goals of eradicating major diseases like malaria and HIV/AIDS in developing countries, and improving high school education standards in the U.S.
• The monies must all be spent over 20 years on health and education.

It is one of the few philanthropic donations where the money will run out relatively quickly, contrary to the self-interest of foundation bureaucracies to survive as long as they can. He does not want the managers of the Foundation to become big fat cats ie. to preserve their cushy jobs and thus holding back on putting the money to good use.

Buffett has not set up a foundation nor paid for buildings at hospitals or museums to try to perpetuate his name.

"Buffett's ideal was a world in which winners were free to strive, but narrowed the gap by helping the losers," writes Alice Schroeder.

Source - Alice Schroeder, Buffett: Rock Star of American Capitalism, Knowledge at Wharton

Do you still trust your bank and banker with your money?

I have just read an article on Business Times entitled "Restoring Trust in Financial Institutions" (FIs) reflecting the views of Mr Simon Newman, Managing Director, AVIVA Singapore.

To restore something means you must have lost it first and then looking to find and put it back. So have we the investing public lost trust in FIs? And the FIs are now trying to restore or regain the public's trust and confidence?

The collapse of structured products amid allegations of massive mis-selling by FIs and their commission-powered sales representatives was the main contributor to that loss of trust.

Can FIs regain that trust of the consumers by simply requiring them to print the sales brochures in all 4 languages (which of course, will be peppered with tons of disclaimers in all 4 languages) and to follow MAS-issued Guidelines on Fair Trading? Mr Newman said FIs need to go beyond merely fulfilling their legal obligations (yes, I agree), (but also) to truly engage consumers and meet their evolving needs in this challenging and volatile economic climate (blah, blah blah). Huh? Is this the panacea to people who have lost millions of dollars of life savings? Let me share with you a parallel example.

The travel industry too was generally in doldrum in the last few months due to the financial crisis. It was later compounded by the outbreak of H1N1. Many who have pre-booked their holidays wanted to cancel and seek refund. Some travel companies are ok to refund but with heavy penalty. The question here - what would you have done if you were running a travel agency?

An industry player opined the industry as a whole should have adopted the position to refund. Otherwise the consequence would be consumers would be more fearful of future early commitment (thus impairing your long term business viability) and prefer last minute self-arranged travels.

Bottomline - When self interest is the foundation of every party's action / decision, the debate will continue. Or given time, the pain will ease and trust will return.

Who is Warren Buffet?

He is the chief icon of Bershire Hathaway. About 30 years ago, Buffett spent $15.4 million to buy 46% of Berkshire (a textile entity) including 3% for his wife Susan, paying an average $32.45 per share. With Berkshire shares recently traded around $87,200, Buffett has grown his wealth nearly 3,000-fold in some 30 years.

How did he do it?
Technically, he learned this massive capital accumulation discipline from Benjamin Graham, investment GURU of Columbia University in 1951.

Buffett's approach to investment involves using seventh grade math and common sense to analyze a company's underlying economics ie.

1. “buying a business not a stock”,
2. “ignoring the fluctuations of the stock market”; and,
3. most importantly, Graham’s main principle “maintaining a margin of safety.”

In frothy bull markets, Buffett is fearful while others are greedy, taking profits on some holdings and piling up the cash generated by businesses. Example - Berkshire sold its stake in PetroChina for $4 billion in 2007 amid rapidly rising oil prices and the craze for investing in emerging markets, having bought it in 2002 and 2003 for $488 million.

Then, during severe stock market or industry declines, he is greedy when others are fearful, buying good businesses at attractive prices. Example - Berkshire secured favourable terms in deals with Goldman Sachs and General Electric during last year's stock market panic.

Buffett's three rules of portfolio management are:-
1. Don't lose money;
2. Don't forget rule one and;
3. Don't go into debt.

Buffet’s personal traits required do the job:-

• His focus,
• an intellect which is a perpetual learning machine,
• rationality,
• an ambition from childhood to become rich,
• family is secondary,
• he attracts talented people to work, partner and deal with him due to his honesty, fairness, letting them do their job without interference and crediting them for success and;
• he freely acknowledges making several errors.

Source - Alice Schroeder, Buffett: Rock Star of American Capitalism, Knowledge at Wharton

Creative Technology - Can see any light yet?

Creative Technology reported a net loss of USD$14 million for its fourth quarter ended June 2009, including a provision of US$12.8 million for potentially unrecoverable loans due from a former subsidiary, compared with a net profit of USD$116.2 million a year ago.

Total loss in FY2009 is USD$137.9 million, compared with net profit of USD$128.2 million in FY2008. The previous year's profit was mainly due to a gain of USD$147.9 million from the sale of Creative's headquarter office and restructuring charges of USD$11.2 million.

I am sure its management knows that it is in need of new ideas that are sustainable. There was a rumour that there could be some sort of a tie up with THX. Whatever it is, the lifeline has to come really soon. Otherwise, the only card left is new Zii platform.

I don't know what it is but I hope for the sake of Singapore's entrepreneurial spirit and Mr Sim's good spirit, the company would turn black soon.