In the wake of the financial crisis, the insurance industry has tried to distance itself from the investment banking industry, where the trouble began. And this has meant a return to core values.
When it comes to the image of capitalism in general, there is no more prominent champion of core values than Warren Buffett. The ‘Sage of Omaha’ was recently interviewed by the BBC in his office on the 14th floor of Kiewit Plaza. Despite being valued at around $150bn, his company Berkshire Hathaway rents just one floor in this nondescript block.
Buffett, personally worth around $40bn, still lives in the house he bought more than 50 years ago for $31,000; he says it’s “convenient”. It is not the largest house on the street, but he takes the view that living somewhere bigger would not make him any happier. He bought a car that was damaged by a hail storm, because it was cheaper. There is no computer on his office desk. The company “wine cellar”, as he calls it, is a small fridge stocked with Coca-Cola (he is a big investor in the company).
Buffett made his money by picking the right companies in which to invest. He draws a distinction between investment and speculation. “In an investment attitude, you look to the asset itself to produce a return, rather than looking at the price of the asset,” he says.
Berkshire Hathaway developed a simple check list for potential investments: it only deals in things they are capable of understanding; it only looks at businesses that have a durable competitive advantage; it likes to have a management with a lot of integrity and talent; and it insists on a price that makes sense. It’s a simple enough list, but it is put into practice with great deftness. Many in the insurance industry can testify to Berkshire Hathaway’s tough negotiating abilities. Insurance is core to Berkshire Hathaway. Buffett got into the insurance business because premiums paid upfront provided a float that he could use to pursue his investments. This was much more attractive than borrowing. “More smart people have gone broke through leverage than any other activity,” he says.
The public’s current distrust of investment bankers is echoed by Buffett. “The idea that people who move money around are some favoured class strikes me as getting pretty far away from where we should be,” he says. Even so, he recently invested $5bn in Goldman Sachs, and has made big bets on derivatives.
Buffett is in reality a complex figure, but his championing of long-term investments based on the fundamental values of companies is admirable. His modest lifestyle might just be worth learning from, too.