The Snowball

Warren Buffett and the Business of Life

By

Alice Schroeder

Submitted by
Rana Rizwan Zahid
Reg.
6302
Class
MBA 1.5
Submitted to
Sir Awais Ijaz

International Islamic University Isalamabad

Acknowledgement
The successful completion of this project would just have not been possible without
cooperation and support of our teacher, friends and our institute.
Apart from this, I express my sincere thanks all the people who have helped me directly or
indirectly. I am also thankful to my respected teacher sir Awais Ijaz with whose help this
activity was possible and who provided full guidance, cooperation and valuable suggestion
about this project.
I am really obliged to the institution and all the related members who heartily gave me all the
required information by answering my questions.

Introduction
This report is based on the life history and criticism of renowned personality Mr. Warren
Buffet and his contribution to the concept of economy
Warren Edward Buffett (born August 30, 1930) is an American investor, businessman, and
philanthropist. He is one of the most successful investors in history, the primary shareholder
and CEO of Berkshire Hathaway, and in 2008 was ranked by Forbes as the richest person in
the world with an estimated net worth of approximately $62 billion. In 2009, after donating
billions of dollars to charity, Buffett was ranked as the second richest man in the United
States with a net worth of $40 billion.
Buffett is often called the "Oracle of Omaha" or the "Sage of Omaha" and is noted for his
adherence to the value investing philosophy and for his personal frugality despite his
immense wealth. Buffett is also a notable philanthropist, having pledged to give away 85
percent of his fortune to the Gates Foundation. He also serves as a member of the board of
trustees at Grinnell College.
In 1999, Buffett was named the top money manager of the twentieth century in a survey by
the Carson Group, ahead of Peter Lynch and John Templeton. In 2007, he was listed among
Time's 100 Most Influential People in the world.
Buffett was born in Omaha, Nebraska, the only son of Leila (ne Stahl) and
businessman/politician Howard Buffett, and second of three children. He worked at his
grandfather's grocery store. In 1943, Buffett filed his first income tax return, deducting his
bicycle and watch as a work expense for $35 for his work as newspaper delivery boy. After
his father was elected to Congress, Buffett was educated at Woodrow Wilson High School,
Washington, D.C. In 1945, in his freshman year of high school, Buffett and a friend spent
$25 to purchase a used pinball machine, which they placed in a barber shop. Within months,
they owned three machines in different locations.
Buffett first enrolled at The Wharton School, University of Pennsylvania, (194749) where
he joined the Alpha Sigma Phi Fraternity. His father and uncles were Alpha Sigma Phi
brothers from the chapter in Nebraska. In 1950, he transferred to the University of Nebraska
where he received a B.S. in Economics.

In 1962, Buffett became a millionaire, because of his partnerships, which in January 1962 had
an excess of $7,178,500, of which over $1,025,000 belonged to Buffett. Buffett merged all
partnerships into one partnership. Buffett discovered a textile manufacturing firm, Berkshire
Hathaway. Buffett's partnerships began purchasing shares at $7.60 per share. In 1965, when
Buffett's partnerships aggressively began purchasing Berkshire, they paid $14.86 per share
while the company had working capital of $19 per share. This did not include the value of
fixed assets (factory and equipment). Buffett took control of Berkshire Hathaway at the board
meeting and named a new president, Ken Chace, to run the company. In 1966, Buffett closed
the partnership to new money

Criticism on Warren Buffet

Buffett ran into criticism during the subprime crisis of 20072008, part of the late 2000s
recession that he had allocated capital too early resulting in suboptimal deals. Buy
American. I am. To quote Warren Buffetts opinion piece published recently in the New
York Times.
Buffett has called the 2007present downturn in the financial sector "poetic justice".
Buffett's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of
his recent deals appear to be running into large mark-to-market losses.
Berkshire Hathaway acquired 10% perpetual preferred stock of Goldman Sachs. Some of
Buffett's Index put options (European exercise at expiry only) that he wrote (sold) are
currently running around $6.73 billion mark-to-market losses. The scale of the potential loss
prompted the SEC to demand that Berkshire produce, "a more robust disclosure" of factors
used to value the contracts.
Buffett also helped Dow Chemical pay for its $18.8 billion takeover of Rohm & Haas. He
thus became the single largest shareholder in the enlarged group with his Berkshire
Hathaway, which provided $3 billion, underlining his instrumental role during the current
crisis in debt and equity markets.
In October 2008, the media reported that Warren Buffett had agreed to buy General Electric
(GE) preferred stock. The operation included extra special incentives: he received an option
to buy 3 billion GE at $22.25 in the next five years, and also received a 10% dividend

(callable within three years). In February 2009, Warren Buffett sold part of Procter & Gamble
Co, and Johnson & Johnson shares from his portfolio.
In addition to suggestions of mistiming, questions have been raised as to the wisdom in
keeping some of Berkshire's major holdings, including The Coca-Cola Company (NYSE:KO)
which in 1998 peaked at $86. Buffett discussed the difficulties of knowing when to sell in the
company's 2004 annual report: "That may seem easy to do when one looks through an
always-clean, rearview mirror. Unfortunately, however, its the windshield through which
investors must peer, and that glass is invariably fogged." In March 2009, Buffett stated in a
cable television interview that the economy had "fallen off a cliff... Not only has the economy
slowed down a lot, but people have really changed their habits like I haven't seen."
Additionally, Buffett fears we may revisit a 1970s level of inflation, which led to a painful
stagflation that lasted many years.
In 2009, Buffett divested his failed investment in ConocoPhillips, saying to his Berkshire
investors "I bought a large amount of ConocoPhillips stock when oil and gas prices were near
their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last
half of the year. I still believe the odds are good that oil sells far higher in the future than the
current $40-$50 price. But so far I have been dead wrong. Even if prices should rise,
moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."
2009 - Proposed merger with the Burlington Northern Santa Fe Railway (BNSF, to close
upon BNSF shareholder approval in 1Q2010. This deal is valued at approximately 34 billion
US and reflects an increase of a previously existing stake of about 22%.
2009 Verisk stock acquisition- before Verisk (ISO [Insurance Services Office]) went public,
Buffett owned about 5%. When Verisk went public in May 2009, Buffett purchased 6% more
of Verisk.
It's not the first time people have wondered if Buffett is off his game. Criticism of Buffett
reached its peak during the 1990s tech bubble because he refused to invest in dot-com
businesses he didn't understand. Berkshire's Class A stock sunk to roughly $56,000 a share.
When the tech bubble burst, many of those businesses failed while Berkshire continued to
prosper through acquisitions and investments. These days, Berkshire's A stock trades at more
than $193,000 a share.

Author and investor Jeff Matthews, who wrote "Warren Buffett's Successor: Who It Is and
Why It Matters," says criticism of Buffett is a byproduct of where the overall market is
because Berkshire tends to trail a surging stock market. The Standard & Poor's 500 index
soared 30 percent in 2013 and has nudged up another 2 percent this year.
"Buffett always looks less exciting when everyone else does great," Matthews says.
Many investors focus too much on recent history. Critics point out that Berkshire lagged the
market in four of the past five years, based on Buffett's own yardstick. That measurement,
Berkshire's book value, gained 18.2 percent in 2013, lagging S&P 500's rise of 32.4 percent,
including dividends.
But that short-term view obscures the fact that Berkshire Hathaway has only trailed the S&P
500 10 times since Buffett took over in 1965. And cumulatively, Berkshire has delivered
compounded annual gains of 19.7 percent to the S&P 500's 9.8 percent. Berkshire is also
sitting on at least $48 billion in cash.
Buffett has told investors for several years that the massive size of Berkshire makes it
impossible for him to match the investment gains he delivered decades ago, but he still
believes Berkshire will beat the overall market.
Bill Smead, founder of Smead Capital Management, says most people have a hard time
relating to someone who thinks in terms of decades, and in his last shareholder letter, Buffett
emphasized he thinks Berkshire subsidiaries like BNSF railroad and MidAmerican Energy
will be thriving a century from now.
"He is the ultimate long-duration thinker," says Smead, who recently increased his firm's
Berkshire investment.
Smead says he expects Berkshire will trounce the S&P 500 over the next five to ten years
because so many of its subsidiaries thrive when the economy is growing.
"I don't think people realize what a machine he has created to milk the U.S. economy,"
Smead says.
Last year, Berkshire's profit grew more than 31 percent to $19.48 billion on revenue of
$182.15 billion.

Those figures include $4.3 billion in paper gains on investments and derivative contracts
Berkshire holds, up from $2.2 billion the previous year.
Even without those mostly unrealized gains, most of Berkshire's roughly 80 subsidiaries are
performing well.
Berkshire subsidiaries include BNSF railroad, Acme Brick, Shaw Carpet and Home Services
of America. Berkshire also holds major investments in American Express, Coca-Cola, and
IBM. Its first-quarter results will be released Friday.
Andy Kilpatrick, author of "Of Permanent Value: The Story of Warren Buffett," says he
thinks Berkshire is set up to consistently beat the S&P 500 by a narrow margin.
"The whole thing is up and running better than it ever has been," Kilpatrick says.
Besides routine items, Berkshire investors will vote on a shareholder proposal that would
encourage the company to pay a dividend. Berkshire's board opposes the proposal.
Buffett has said he believes that reinvesting Berkshire's cash is worth more for shareholders
than they would receive in a dividend. Since Buffett controls 34 percent of the voting power,
it's difficult for proposals to pass without his support.
Warren Buffett has responded to critics who said the timing of Berkshire Hathaway's
purchase of $1.2 billion of its own stock was designed to save the seller a lot of money in
taxes.
That's based on the assumption the seller expects the tax rate on capital gains will be
substantially higher next year after the "fiscal cliff" is resolved, so he or she wanted to
complete the sale before the end of this year.
In that light, Berkshire's participation in the deal could be seen as contradicting Buffett's
high-profile calls for higher tax rates on extremely wealthy Americans who make a lot of
their money from investments, and for higher estate taxes.
Reuters ran a story that said the buyback "likely helped" the seller's estate "save substantially
on taxes," just one day after Buffett's call for a "strong" estate tax.
And on Squawk on the Street earlier today, CNBC's Gary Kaminsky accused Buffett of
hypocrisy for helping a wealthy "friend" avoid taxes.

Buffett pointed out in an email to CNBC responding to Kaminsky, the assumption the seller
was trying to save on taxes is wrong.

Burger King on Tuesday announced its roughly $11 billion agreement to buy Tim Hortons,
the Canadian coffee-and-doughnut chain. The deal is a so-called inversion, as it will move
Miami-based Burger King's headquarters to lower-tax Canada. It is also structured to shield
Burger King Holders from capital-gains taxes.
Though many such takeovers have been struck lately in part to minimize taxesand have
been criticized by legislators and the White House for depleting the government's coffers
executives of Burger King and its owner, Brazilian private-equity firm 3G Capital
Management, said the deal is aimed instead at capturing growth opportunities.
The deal, which has been in the works for months, put Mr. Buffett in an awkward position, as
the 83-year-old billionaire has been a public advocate of higher taxes on the wealthy. In a
2011 essay, he laid out the case for why the wealthy should pay more in taxes, leading to the
so-called Buffett Rule, a tax-fairness principle that has been embraced by the Obama
administration.
While Buffett has been publicly critical of stock buybacks by other companies at prices he
considered too high, he hasn't gone so far as to rule out any Berkshire buyback, or buybacks
in general.
He pointed out to us that as far back as the mid-1980s, he wrote that "when companies with
outstanding businesses and comfortable financial positions find their shares selling far below
intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as
repurchases."
And as recently as earlier this year, he praised JPMorgan Chase CEO Jamie Dimon for
always stressing the "price/value factor in repurchase decisions."
Although Mr. Buffett has rarely aired his thinking on U.S. corporate taxes in public, he in the
past has pursued deals that minimize Berkshire's payments to the government. He has also
said he wouldn't voluntarily pay any more in taxes than Berkshire owed.

When 3G Capital approached him about participating in the deal, Mr. Buffett assumed the
new company resulting from it would be based in the U.S., according to the person familiar
with his thinking.
However, as negotiations between Burger King and Tim Hortons progressed, executives
made the decision to move the headquarters to Canada. Since Tim Hortons is considered a
Canadian icon, the deal makers felt regulators were more likely to approve the merger if the
company was based in Canada, this person said.
Planning to base the company in Canada in turn changed the tax picture for Berkshire,
increasing what Berkshire would have to pay in U.S. taxes given American laws governing
dividend income from foreign entities. If the deal goes through, Berkshire will end up paying
taxes on its income from the preferred securities at the 35% U.S. corporate tax rate, rather
than the 14%, after deductions that an insurance company such as Berkshire would be liable
for under the originally envisioned structure.
Mr. Buffett, who helped finance 3G Capital's buyout of H.J. Heinz Co. last year and has said
publicly he would like to team up again, negotiated a deal that would cover the cost of
Berkshire's higher tax bill, the person familiar with his thinking said. He wanted Berkshire to
be compensated for the more than $50 million in additional taxes it would pay because of the
planned move to Canada.
3G Capital agreed to accommodate Mr. Buffett's request rather than find another investor,
even though the two sides didn't have a written agreement at the time, the person said. The
preferred-stock investment will pay Berkshire a dividend of roughly 9%, or around $270
million a year.
"This is not a tax-driven deal," Alex Behring, Burger King's chairman and co-founder of 3G
Capital, said Tuesday. "It is fundamentally about growth and creating value through
accelerated expansion."
On Tuesday, commentators debated Mr. Buffett's role in the deal, but few were willing to
publicly denounce the prominent investor. Those familiar with his track record said the move
was consistent with the way he has managed Berkshire over 40 years.

The alternatives are to operate as you want the laws to be, and not as they are, to the
detriment of Berkshires shareholders. One only needs to put this into different contexts to
see that the economics of that are stupid.
Several of my colleagues at Bloomberg View and elsewhere have argued that the mortgageinterest deduction is a waste of taxpayer money, and an unfair subsidy to homeowners at the
expense of renters. However, all of them who own a home take the deduction on their
itemized 1040. That isn't hypocritical; it is simply intelligent tax preparation.
Many people think stock options should be expensed like any ordinary employment cost. I
guess these same people shouldn't accept stock options as part of their compensation because
they believe the way the law accounts for them is misguided.
There are many, many other examples, but I find this entire exercise so fatuous that I refuse
to continue.
Buffett has long maintained that societal obligations should be more equitably distributed,
that the top 1 percent (or even 10 percent) are undertaxed, and that the privileges of wealth
should be balanced by a duty toward those who have been denied such privileges. There is
nothing radical in these middle-of -the-road views, although you might not have guessed that
based on some of the invective hurled Buffett's way.
If you want to criticize Warren Buffett, I am sure you can find plenty of legitimate reasons to
do so. But making money for his shareholders by operating within the limits of law isn't one
of them.
Despite the criticism, Buffett says he believes he took a forceful stand against the Coke pay
package. Whats more, he says that he has little power to stop companies from handing out
excessive pay. Thats a big change from a few years ago, when Buffett wrote that large
shareholders like himself were the only ones who could turn back runaway executive
compensation within corporate America. Apparently, Buffett and others like him are
outmatched as well.
Buffett also confirmed the widely held belief that, at least for now, his picked successor is
male. Sorry, Tracy Britt Cool.
Warren Buffett: Well, I dont think it is out of whack with the value an outstanding executive
could bring. If you run a multibillion-dollar company the difference between a 10 and an

eight is huge in terms of value. I dont think it is out of line in terms of entertainers or sports
figures. Still, almost on a voluntary basis, I think it should be somewhat restrained in some
cases.
Some of the critiques of Warren Buffett are silly. There are so many misstatements and
omissions in the group (See this, this, this, this and this) that time and space don't permit a
review or debunking of them all.
The willful failure to recognize the difference between what laws are at present and
arguments for what they should be are at best hypocritical and, at worst, silly. One can surely
operate
within what is allowable by law while still arguing for changes in that controlling legal
framework.
Billionaire investor Warren Buffett argued in a New York Times opinion piece on Monday
that the federal government should tax the wealthy more to reduce budget deficits. His
argument has been widely cited by liberals, but conservatives and libertarians have pointed to
factual errors in his writing.
In the editorial, Buffett said that as a billionaire, he pays a lower tax rate than his middle
income employees: What I paid was only 17.4 percent of my taxable income-and thats
actually a lower percentage than was paid by any of the other 20 people in our office. Their
tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay
practically nothing in payroll taxes. Its a different story for the middle class: typically, they
fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy
payroll taxes to boot, Buffett added.
Buffett says in order to raise revenue to reduce budget deficits, Congress should leave the
current tax rates in place (which would mean making the Bush tax cuts, set to expire in 2013,
permanent), and continue the reduction in the payroll tax paid by employees (which was
initially part of the stimulus bill and is set to expire in 2012).