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Buffett’s most important secret

By Sheyna Steiner · Bankrate.com
Monday, May 6, 2013
Posted: 3 pm ET

Last weekend marked the annual Berkshire Hathaway shareholder meeting in Omaha, Neb.

And as with any Warren Buffett sighting, the first question is always: What is his secret?

The answer: people.

Buffett investors are famously steadfast in their support of the moves made by the head of Berkshire Hathaway. The high-quality shareholders are one of the secrets to the company's success, according to Jeff Matthews, founder of the hedge fund Ram Partners, in his speech at the 10th annual Value Investors Conference.

The fact that Buffett isn't beholden to shareholders with a short-term focus gives him the ability to wait for investments to pay off.

"You think about the times he could have panicked. For instance, when the tech bubble was on the way up, many people were denigrating Warren and Berkshire Hathaway and saying their time was gone forever, and then the bubble burst," says Carol Loomis, senior editor at large at Fortune Magazine and author of the book "Tap Dancing to Work: Warren Buffett on practically everything 1966-2012."

Berkshire Hathaway stock price has fallen 40 to 50 percent four times during the last 48 years.

But during the height of dot-com craziness, some shareholders in Berkshire Hathaway did panic, as Buffett sat out the bubble entirely. Loomis' husband, a money manager, "would get Berkshire Hathaway shareholders calling him, saying, 'I can't stand it, it keeps going down.' And he said, 'Don't worry, it will go up.' Some people are not constitutionally able to be that patient about their investments. But he is totally consistent about he way he approaches everything," Loomis says.

The companies are important as well

But people play a major role in his success in another way as well. Value investors look for solid management when searching for investments.

"Buffett invests in people more than the company," says Michael Shearn, founder of Time Value of Money, a private investment firm. "When he bought Fruit of the Loom, he bought the CEO."

Loomis agrees. As a longtime friend of Warren Buffett and someone who has written about his career since 1966, she says that his emphasis on liking the managers of the companies he owns impacted how she chooses her own investments.

"I do own Berkshire Hathaway stock but I try to buy other companies and go to annual meetings. But if I don’t like the people who are running it -- that is a company I don't want to be in. That is something I learned from him as well," she says.

"I think it's because he doesn't like being in business with people who make his stomach churn. If you buy into a company -- and you should think of yourself as buying into the company -- and you meet the CEO heading the company and you just don't like him, that is the version of someone making your stomach churn. So I try to stay away from that kind of investment," Loomis says.

The second question about Warren Buffett

Besides wondering how to acquire his Midas touch, the question on the minds of many Berkshire shareholders is, who will replace Buffett? After all, he is 83 years old. Charlie Munger, the vice chairman of Berkshire Hathaway, is 89 years old. A successor has been chosen to lead the investment empire, but no one who knows the secret is talking.

"He has picked someone but hasn't yet said who it is," says Jeff Matthews, author of "Warren Buffett's Successor and Why It Matters."

What do you look at first when investigating potential investments? Do you look at the people involved?

Follow me on Twitter: @SheynaSteiner.

***

Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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1 Comment
systemBuilder
May 06, 2013 at 11:52 pm

Buffet's car insurance company, GEICO, is rated #15 by consumer reports survey of subscribers. What about "putting the customer first", warren, rather than "line the investor's pockets first" mr. buffet?

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