The giving game

The world’s second richest man Warren Buffett has decided to hand over most of his US$40 billion to charity. Anil Bhoyrul and Tamara Walid examine Buffett’s recent performance in the markets – and ask who may be next to give their fortunes away? Additional reporting from Sam Lister of The Times.

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By  Anil Bhoyrul Published  July 2, 2006

|~|33-1329460-200.jpg|~|Ideals: Buffett said passing his entire US$40 billion fortune to his children would fly in the face of meritocracy.|~|The world’s second richest man Warren Buffett has decided to hand over most of his US$40 billion to charity. Anil Bhoyrul and Tamara Walid examine Buffett’s recent performance in the markets – and ask who may be next to give their fortunes away? Additional reporting from Sam Lister of The Times. We are standing in the lobby of the Hilton Hotel in London’s Mayfair, when George Soros suddenly appears. The man often acclaimed to be the world’s greatest stock market player looks a little embarrassed to find himself suddenly surrounded by journalists and cameramen. “So George, can I ask you something? I don’t want to interview you. I just want to know what the secret is to becoming incredibly rich like you? What’s the one single piece of advice you could give me?” asks one journalist. “That’s easy,” says Soros. “Go and have lunch with Warren Buffett.” That was six years ago, and since then, “lunch” with Buffett has gone up in value. One desperate investor recently forked out nearly US$500,000 (given to charity) for the benefit of Buffett’s wisdom. It is some wisdom; since first showing his eye for a good deal at the age of just 13, when he filed a tax return for money spent on his bicycle, 75 year old Buffett is now undeniably the world’s greatest investor. And with a fortune approaching US$40 billion, the world’s second richest man last week became the world’s greatest ever giver, deciding to hand over US$31 billion of his cash to a charitable foundation run by his pal Bill Gates. It is a huge amount of cash, but then again, Buffett isn’t exactly about to go short. US$9 billion left in the bank isn’t that bad. And yet again, the prospects at his Berkshire Hathaway empire just appear to keep getting brighter. The company’s value rose by US$5.6 billion in 2005, an increase in the per-share book value of both its Class A and Class B stocks of 6.4%. Over the course of 41 years, Buffett’s midas touch has seen the value of his company’s shares soar from US$19 to US$59,377; a rate of 21.5% compounded annually. Berkshire Hathaway’s portfolio today includes utilities (MidAmerican Energy Holdings), insurance (Geico, General Re), apparel (Fruit of the Loom) and flight services (FlightSafety, NetJets). It also has sizeable stakes in American Express, Coca-Cola, Gillette and Wells Fargo. In total, Buffett owns 68 different businesses, the vast majority profitable. And last year, with a US$43 billion cash pile in the company accounts, he resisted the temptation to make another huge acquisition, choosing instead to spend US$21 billion betting against the dollar on the currencies market. Like his biggest fan – and more renowned currency trader George Soros – Buffett hardly put a foot wrong. So what is the real secret of his success? “It’s not what he does, it’s what he doesn’t do,” says UK stock market analyst George Windchild. “If you go back to 1999, when everyone and their brother were piling into technology stocks, the only man who didn’t do that was Warren Buffett. “He called it right; just a year later the stocks crashed, and many big name investors saw their careers and reputations ruined. Warren became a legend literally by doing nothing,” says Windchild. The ‘doing nothing’ formula seems to work pretty well. Two years ago he was poised to make a US$15 billion deal, but decided at the last moment to sit tight. Instead, he consolidated his existing portfolio, again with an impressive outcome. Buffett has invested heavily in the insurance sector, led by GEICO. Despite losing US$2.5 billion on the back of Hurrican Katrina, GEICO still managed to turn in a good performance. “When you look at the figures closely, you notice that GEICO actually improved its productivity by 32% last year and its policy count went up 26%. “I guess you could say Warren managed to foresee the number of disasters that would happen. Most people figured that investing in insurance was a bad idea in case of disaster. Warren decided precisely for this reason that it’s a good investment – after a disaster, everybody wants to take out insurance policies,” says insurance fund manager Garth Raith. He adds: “Berkshire Hathaway is now basically divided into four different groups, but they all hang together on one thing: Warren Buffett.” And right now, many more people are about to hang on Buffett, after his decision to give away most of his cash. But just how do you thank a man whose just given you US$31 billion to spend? Bill Gates came up with the answer last Monday by giving Buffett, a fellow billionaire philanthropist, his personal copy of Adam Smith’s The Wealth of Nations. When they appeared together for the first time since Buffett announced his US$31 billion donation to the Microsoft founder’s charitable foundation, Gates recited the opening line of Smith’s famous doctrine in tribute to his friend. “However selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him,” the world’s richest man said to its second richest. On a stage in the New York Public Library, the pair shook hands as Buffett took his place alongside Gates and his wife, Melinda, as the most generous philanthropists in history. The gesture by Buffett, who optedto give his vast wealth to the Gates’s foundation rather than form his own, also marks him out as arguably the most selfless of givers. The man nicknamed “the Oracle of Omaha” for his canny investments dismissed the suggestion lightly, saying that he already had “some stuff” for his headstone. Starting next month, Buffett will send US$1.5 billion every year to the Bill & Melinda Gates Foundation, which currently has assets of US$29.1 billion. It spends much of the money on world health, alleviating poverty and increasing access to technology in developing countries, as well as education and technology in public libraries in the United States. Buffett described his gift not as setting a standard of giving to other people’s charities, but simply reinforcing a charitable model “used rather infrequently”. “[Philanthropists] should seek out talent to distribute their money, just as they sought out talent to acquire it,” he said. Describing America as a “great meritocracy”, he added: “I cannot think of anything that’s more counter to that than dynastic wealth. “My kids have had all kinds of advantages, let alone being given billions of claims cheques on other people. “The idea of passing those from generation to generation so that your descendants can command resources just because they came from the womb fly in the face of a meritocratic society.” Buffett’s comments drew cheers from a room of journalists, economists, health experts and members of Buffett’s family. A second ovation came as Gates gave over his perfectly maintained two-volume copy of The Wealth of Nations. Gates said that it was “almost scary” thinking about how the donation should be spent. “If I make a mistake with my own money it just doesn’t feel the same as if I make a mistake with Warren’s money. This is his life’s work.” One of the stipulations made by Buffett under the deal is that all his money is to be distributed in the year it is donated, not added to the foundation’s assets for future giving. Given what Buffett has done, there is no doubt his every wish will be complied with. Analyst Windchild says: “No-one can argue with the sincerity and decency of what he’s doing, though you could rightly ask whether now is the time to do it. “Buffett is on a winning streak in the markets, and is in good health. That US$31 billion might be worth a lot more if it stayed in the company for a few more years and was then given away.” Buffett however is eager to get the charity ball rolling right now. Insurance expert Raith explains: “I guess he deserves a break. “He has been doing this for 41 years, and it’s hard to find where put a foot wrong. He’s going out on a high, and I doubt the investment world will ever see another like him.”||**||

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