Profiting from Hedge Funds: Winning Strategies for the Little Guy

Chapter 4

Warren Buffett

Invest within your circle of competence. It’s not how big the circle is that counts; it’s how well you define the parameters.

—Warren Buffett

Warren Buffett is chairman and CEO of the holding company Berkshire Hathaway Inc. based in Omaha, Nebraska. He oversees a number of the conglomerate’s subsidiaries. Renowned as the most successful investor of the twentieth century, Buffett is among the wealthiest individuals in the world.

Buffett, born in 1930, is the son of U.S. Congressman Howard Buffett. He was fascinated with making money from a very early age, buying his first stock at the age of 11. His investment philosophy was profoundly impacted by Benjamin Graham’s classic, The Intelligent Investor. Buffett has declared that book, which he read while in college, as by far the best book on investing ever written. Buffett received his master’s in economics from Columbia in 1951 under the tutelage of Benjamin Graham and David Dodd. His investment career also took off under Graham, when he worked as a securities analyst at Graham-Newman Corporation from 1954 to 1956. The Buffett partnership was started in 1957 and the rest, as the world will attest, is history.

The book value of Berkshire had a compounded annual gain of 19.8 percent between 1965 and 2011 for an overall gain in BV of 513,055 percent. This is against the compounded annual gain of 9.2 percent and overall gain of 6,397 percent of the S&P 500 index for the same period.1 The 10.6 percent annual outperformance ...