Saturday, June 21, 2008

Warren Buffett profits from others' bad credit

Warren Buffett is known as the Oracle of Omaha. Investors watch his every move, hoping to see where he is investing, hoping to make just a portion of what he makes. According to Wikipedia, he's worth about $62 BILLION the richest man in the world.

About six months ago, Buffett started a bond insurer. This is the kind of company that insures bonds (DUH!). Put another way, say your city wants to build a highway. It borrows money (via bonds) from a lot of sources. But in order to guarantee that they won't go bankrupt, they buy insurance, bond insurance (shaken, not stirred). Sometimes, bond insurers also insure subprime mortgage debt. Most likely not for individuals, but think of providing insurance to Countrywide mortgage.

So, fast-forward through the commercial, to present date. Some of these bond insurers are getting a lower credit rating because of the subprime mortgage problems. Buffett on the other hand has the highest credit rating, so he gets the best interest rates and can run his business more efficiently.

So technically, he's profitting from other companies bad credit. (see this story for more detail).

But rather than hate him, we can learn from him. Warrren Buffett is one of the most frugal ever investors. He looks for investments with value (he buys things on sale). He is against the government being involved in gambling (lotteries, etc - see here). And he only buys things when he has money (which is most of the time, since he's rich)

5 comments:

Anonymous said...

Buffett has many traits to emulate, but I strongly disagree with him on a couple.

Estate taxes are ghoulish. It may seem noble of him to favor them, but he has profited greatly by buying business on the cheap that families had to sell to pay estate taxes (according to Forbes).

He is also very pro-legalized abortion and has donated to causes to get more efficient abortion equipment (i.e., killing machines) to different countries. Ick.

Randy said...

Neil,
I didn't realize he was in favor or estate taxes until I did some research on him this morning. Not high on my list either.

And while I've never studied the man or his beliefs, I must say I'm not surprised. The man is all about making money over the long run.

While I don't endorse all his views, the business world can learn a lot from him. Thanks for pointing out some of his errors, we can also learn from where he's wrong.

Tom said...

Hi Randy. I decided to check out your blog after you told me about it when you were on vacation. I have to admit i was a little surprised to see your first story was about Warren Buffett since i work for a company that Berkshire Hathaway owns.

I don't particularly understand how what Buffett is doing is any different that what financial institutions do every day with regards to those with bad credit. In fact in the story you related to, you failed to mention that there were at least two other bond insurers that also may benefit... not just Buffett.

I don't agree with everything the man does, but you do have to admit that Buffett seems to have future visions when most of us appear to be quite blind or near sighted.

Randy said...

Tom, thanks for visiting. If you scan my blog, I think this is the first time I ever posted about Warren Buffet, kind of odd coincidence this is your first visit.

I guess my tone didn't come out right on this post. My "headline" was meant to grab attention, it looks like that worked. I saw a short article in the local paper and then read some more detail in the article I referenced. I think his company's actions in this case are morally neutral. Probably helpful as they provide a service that is required (not unlike Private Mortgage Insurance).

Buffett's business timing is very good. Until Neil's post, I had never heard anything about his moral views, other than his donation to the Gates' Foundation. My personal opinion is that he should have looked for a better place, but I don't think he spends much time thinking about the charties. I think he just spends time thinking about ways to make money.

Thinking that through, that sounds bad too, but it's not intended to be that way. I honestly don't know much about his personal life.

Anonymous said...

Now if only I had the money to invest. Sigh.