Democrats Learn from Buffett

Warren Buffett recently co-hosted a fund raising dinner that raised at least $1 million for Democratic presidential candidate Hilary Clinton, according to an AP article. This article revealed a few of Mr. Buffett's stances on political issues.

First of all, he's a Democrat. While those in attendance at the fund raising dinner speculated that Warren will endorse Hilary Clinton for president, he is also slated to host an event for Barack Obama later in the summer.

During his speech at the dinner, Buffett said that we have a chance to repair a lot of damage in 2008. "We have a wonderful economy. The market system works in this country. Our problem is how we conduct ourselves in the world," he said.

He then went on to express his opinion of the tax system. The system favors the rich, according to Buffett. "Let's just see what Americans, chosen, are paying compared to the people who clean their offices." He went on to state that his $46 million in income was taxed at a higher rate than the $60,000 one of his secretaries earned.

Photo: REUTERS/Mike Segar


Lunch with Buffett auction update:

As of Friday, June 29, 2007, there have been 66 bids for lunch with Mr. Buffett. The bidding presently stands at $313,600.00 with 4.5 hours left in the auction.

Lunch with Buffett: $25,000 Opening Bid

Beginning June 24, 2007, and until June 29, you can bid on eBay for lunch with Warren Buffett. This auction has historically brought in bids that rival eBay records for the highest bids on a charity auction. Just last year, the lunch auction was the second-highest charity auction ever on eBay. Remember the motorcycle that Jay Leno had his guests sign? That was the most expensive charity auction ever, according to an AP article.

This year, the bidding for lunch with Buffett starts at $25,000. Of course, Mr. Buffett does not need the money for himself, so he will be donating all of the money to charity, as the auction site explains:

100% of proceeds from the winning bid will benefit the Glide Foundation, one of the most comprehensive service providers working with the poor and homeless in San Francisco. Mr. Buffett will sit down with the highest bidder and up to seven friends for lunch in New York. A mutually agreed upon date and time will be selected by Mr. Buffett and the winning bidder. All bidders must pre-qualify.

I thought it was interesting that Mr. Buffett was willing to set a "mutually agreed upon date and time." After all, he's the second-richest person, but he's willing to work with somebody else's schedule.

The auction site also explains the works of the Glide Foundation:

Each year, Glide helps thousands of men, women, and children confront and overcome the effects of poverty and homelessness through services that emphasize unconditional love, healing, personal empowerment and self-affirmation. Glide provides comprehensive human services to more than 2,000 individuals everyday in a “one-stop-shop.”

The services of this "one-stop-shop" include free meals, job training, addiction recovery, and mental health care.

I think it's great that Warren takes his own personal time to give back rather than just throwing money. He will no doubt be remembered for his remarkable works of philanthropy.

What is "float?"

I mentioned in my last post that Mr. Buffett uses float in his businesses, but what does that mean? He calls it "other people's money," and that's actually quite accurate.

In addition to the obvious definitions, float is defined as a : an amount of money represented by checks outstanding and in process of collection b : the time between a transaction (as the writing of a check or a purchase on credit) and the actual withdrawal of funds to cover it c : the volume of a company's shares available for active trading in the auction market. None of these definitions quite paints the picture of what Mr. Buffett does with float.

Float happens when a customer pays their insurance premium and does not have an accident or loss until later, according to a Motley Fool Article. Some of that premium money is used for operating expenses of the insurance company, and the rest of the money can be invested until the funds are needed for a claim. The float is that excess money the insurance company invests.

The length of time between premium payment and claim payouts affects the profitability of float. For instance, car insurance claims are typically resolved very quickly. On the other hand, insurance that involves lengthy lawsuits, such as those relating to asbestos exposure, typically result in claims being paid out many years later. In general, the longer the lawsuit lasts, the longer the float money can be invested and reinvested, and the more profitable the float is.

A Little More Personal

So far, my posts have mainly concerned what's going on now in Buffett's life and at Berkshire Hathaway. Now is a good time to look at the personal history of Mr. Buffett and some of the amazing things he has done over the years. Here are some fun facts from the 2007 list of the World's Billionaires in Forbes magazine:

• Warren was the son of Nebraska politician and delivered newspapers as a boy.
• He filed his first tax return at age 13. On the return, he claimed a $35 deduction for his bicycle (I assume he was using the bicycle for business purposes -- delivering newspapers)
• He studied under value-investing guru Benjamin Graham at Columbia and learned to hunt for undervalued stocks.
• Mr. Buffett bought control of textile firm Berkshire Hathaway 1965. He later added insurance underwriting so that he could invest the money derived from the float.
• In June 2006, Buffett announced that he earmarked the majority of his Berkshire Hathaway shares to charity. At the time the article was written, the value of Buffett's stock was $31 billion. Most of the gift, which is believed to be the largest in history, will be going to the Gates Foundation.
  
• In August 2006, Buffett married Astrid Menks, his longtime girlfriend.

I was particularly interested in more details about Buffett's donation, so I did a little more digging on the Gates Foundation website. I found out how the funds will be transferred to the foundation:

The gift is being implemented in annual installments. Ten million Berkshire Hathaway Inc. shares have been pledged. The first installment of 500,000 shares, or five percent of 10 million, was transferred to the trust in August 2006, with a value of about $1.6 billion. Each year, five percent of the remaining pledged shares will be transferred to the trust. For example, in 2007, 9.5 million pledged shares remain, and five percent of those shares—475,000—will be transferred to the trust. That will leave 9,025,000 remaining pledged shares, which means the 2008 donation will be 451,250 shares.

And what does the foundation plan to do with such a large donation?

For the next couple of years, we’ll continue on a steep climb to ramp up our grantmaking. Beginning in 2009, and continuing through the next decade, the payout target will be approximately $3.5 billion per year, tightly focused on our major areas of investment, including global health and global development, and improving access to a great education and to technology in public libraries here in the United States.

Join the Buffett Fan Forum!!

When I loaded up the Warren Buffett Fan Center (http://www.warrenbuffett.com/), I was immediately reminded of the home page of Berkshire Hathaway. Both are no-frills websites with simple text links. A disclaimer at the top of the Fan Center's page states that Warren Buffett is not "endorsing, approving, or in any way managing" the site.

The rest of the site is also very simple with short, to-the-point articles about Buffett's personal history, his management style, and his investment approach. On each page, viewers are invited to "Join the Warren Buffett Fan Forum!" A quick check of the forum revealed that there haven't been too many postings in recent weeks. It looks like some people think the forum is a way to reach Mr. Buffett directly and ask him for money.

One bit of interesting information on the main page concerns Buffett's frugality:

Despite his immense wealth, Buffett is famous for his unpretentious and frugal lifestyle. When he spent $6.7 million of Berkshire's funds on a corporate jet in 1989, he jokingly named it "The Indefensible" because of his past criticisms of such purchases by other CEOs. He continues to live in the same house in central Omaha he bought in 1958 for $31,500, in the Dundee neighborhood (although he also owns a summer house in Laguna Beach, California).

It is quite true that you cannot always tell who is rich in a neighborhood. People sometimes do not flaunt their wealth, and Buffett seems to fit into this category.

Going back to the website, I'm surprised that Buffett himself has not bought the warrenbuffett.com domain for his own use. Then again, I've heard that he doesn't have a computer in his office. What would he put on his website, anyway?

Buffet Says CEOs Are Overpaid

Half of America's CEOs make more than $8.3 million per year, according to a recent study by the Associated Press. Yahoo's CEO was at the top of the list with his earnings of $71.7 million. This is far higher than Alex Rodriguez's $27 million compensation, and he is the highest-paid baseball player. The top CEO compensation is even higher than what an A-list celebrity makes in a typical movie. Not surprisingly, CEOs of energy and oil companies were also high on the list of top compensation.

The Securities and Exchange Commission has established more strict guidelines on reporting the compensation of CEOs. More detailed information has to be given about perks, such as tax payments made on behalf of the CEO and payments made for household bills.

Another part of this story that was nothing new to me was the fact that a very small portion of total CEO compensation is made up of salary and cash bonuses. The rest of the compensation is mostly stock grants and stock options.

"If the minimum wage had risen at the same pace as CEO pay since 1990, it would be worth $22.61 today, according to the Institute for Policy Studies." This is very telling evidence that executive compensation is going through the roof.

What does Warren Buffett have to say about this? In his annual letter to shareholders last year, Buffett said that "too often, executive compensation in the U.S. is ridiculously out of line with performance."

There has been a movement to require more explanation of CEO's compensation packages. There is also growing consensus that CEO compensation should be ratified by an entire board of directors and not just a compensation committee. I think that shareholders will continue to demand better information about the rationale behind compensation packages. If nothing else, shareholders will put a downward pressure on CEO compensation. Warren definitely has the right idea when he says that compensation often doesn't match performance.

Buffett: Next Owner of The Wall Street Journal?

Rupert Murdoch's News Corp. recently offered to purchase Dow Jones & Co., the owners of The Wall Street Journal, for five billion dollars. The Bancroft family, which controls Dow Jones & Co, rejected this deal over fears that the editorial stance of the paper would be too slanted by the new ownership.

A recent AFP article notes that a union representing Dow Jones & Co. employees has contacted several investors about the possibility of selling the business. One of the investors the union is courting is none other than Warren Buffett. All of this happened just one day after Dow Jones & Co. had met with the Bancroft family.

According to the article, Buffett has not responded to the offer.

The Wall Street Journal had 2 million subscribers in 2006, according to a Wikipedia article. 931,000 users paid for online subscriptions.

All About GEICO

One of Berkshire Hathaway's most popular companies is, without a doubt, GEICO. The ubiquitous gecko and cavemen are instantly recognizable across the country, and their ads promise to save customers on their car insurance.

GEICO is actually an acronym for Government Employees Insurance Company. Their website states that they currently insure 12 million vehicles and are the fourth-largest private passenger auto insurer in the United States.

It was in 1996 that Warren Buffett acquired GEICO. Since then, the company has enjoyed receiving top ratings from insurance raters Standard & Poors, Moody's, and A.M. Best.

We're all familiar with the gecko that is often featured in the company's ads, but it is interesting to note that the computer-generated creature was not the first choice to be the company's spokesperson. According to a May 2006 USA Today article, the marketing leader at GEICO was considering several other choices besides the lizard. At the time of the choice, there was a strike in the Screen Actors Guild that ruled out the use of live actors in the commercials. The article goes on to state how the gecko has received a makeover since its inception:

Now that the gecko has taken the lead in Geico advertising, however, he's had a subtle makeover. At the start of this year, The Martin Agency gave him bigger, more-expressive eyes, more humanlike movements, a shorter body and a slight heft to his shoulders. His voice is now provided by one announcer who speaks with a more common English accent vs. a rotation of three actors who spoke using more upper-class English.

Photo illustration by Andy Knoblauch