Buffett: Still Misunderstood After All These Years

OPM. These three letters identify a concept that has played a huge role in Warren Buffett's financial success.

Of course - OPM stand's for "Other People's Money". In case you haven't realized it, the entire financial industry is based on making money off other people's money. Banks, money managers, insurers, etc...all make money on OPM.

Let's look at Warren Buffett. I have a book coming out that explains this in more detail, but Buffett first became rich as a hedge fund manager. OPM - I invest your money and I take a cut. No surprise - Buffett destroyed the averages as a hedge fund manager. Pretty smart guy this Warren Buffett. And he took his cut of hedge fund profits, making him a multi-millionaire (not bad for the 1960s).

Then he controls this crappy textile mill company (of which his hedge funds owned a big chunk). What does this have to do with OPM? Nothing, at first. Until he bought National Indemnity, an insurer. OPM - you give me insurance premium, I invest the money, and later I pay out claims. Because premiums are repetitive, the cycle continues. Oh yeah - I get to keep the investment income. OPM.

Buffett buys/starts more insurance companies. He likes OPM.

He buys a stake in Blue Chip Stamps. Blue Chip was able to collect money upfront and pay money at a later date. Buffett and friends could invest the money in the interim. OPM.

Anyone familiar with Buffett and Berkshire Hathaway (BRK.A) realize that the OPM is the same as the investment float that Buffett is famous for. If you don't think this has played a major role in Berkshire Hathaway's success, than you haven't followed Berkshire Hathaway's history.

Now there is a lot of hype and criticism over the put contracts that Berkshire Hathaway has written. Let's see if this makes sense - Berkshire Hathaway gets cash upfront, and gets to invest the cash. If any "claims" (to use an insurance term) are due in the future, Buffett will have the benefit of keeping all the investment income between the time the contracts were written and the time that the contracts are due. In some cases, this lag is over a decade.

Once again, we see Buffett taking advantage of OPM. My guess is that he keeps all the premiums that were written on these put contracts. To be honest, I have to take a closer look at the new derivatives that were written. But in the end, it is all still the same. OPM. No one individual has been better suited to take your money and make money for himself (and his company). Just ask the original (under Buffett) Berkshire Hathaway shareholders.

Comments

[weiwentg:]

He was criticizing hedgies for taking risks with OPM. They basically dupe others into investing and take huge fees whether or not they actually make money. In contrast, Berkshire is investing its own money, earned from float. Not quite the same as OPM.

May 20 10:56 AM

[Dan Braem:]

Weiwentg - respectfully disagree. Here are Warren Buffett's words from 2007 Letter to Shareholders.

"Insurance float – money we temporarily hold in our insurance operations that does not belong to us".

If it doesn't belong to Berkshire, it is OPM. Pretty clear IMO.

May 20 11:20 AM

[Advill:]

Buffet in beyond OPM management, he is playing his own game (just remember that ALL his fortune is already donated to Bill Gates foundation), when you follow the man for 25 years (my case) you realize that basics of sound management and price are the common rule in all his investments.

I recommend you to read the Buffet letters (all of them are in B/H web site) but read the first ones you will discover the original Warren before mass media.
Regards.

May 20 01:40 PM

[Dan Braem:]

Advilll - you are giving me a headache. You can't change history - Bufffett has always made money from OPM, whether you like it or not. By the way, that isn't a bad thing.

But you can't deny that Buffett made his money before Berkshire through his investment (hedge) funds. You also can't deny that Berkshire was built on investment float.

May 21 11:25 AM

[shandutt:]

Your argument is a oversimplified one. There are other insurance companies who were not able to make money like Buffet. Its OPM plus his investment abilities. I would put more emphasis on the second one, i.e abilities

May 22 12:13 PM

[Dan Braem:]

Standutt - I actually agree with you a little - the key is Buffett and his team's investment ability. But being able to investment 1 billion w/ incredible results is no big deal. Being able to invest $60 billion (recent BRK float) is a powerfull weapon in the right hands.

I honsetly believe the importance of 1) float or OPM plus 2) investment ability are equally important. But maybe now I am arguing semantics to your original point.

Have a good holiday weekend.


On May 22 12:13 PM shandutt wrote:

> Your argument is a oversimplified one. There are other insurance
> companies who were not able to make money like Buffet. Its OPM plus
> his investment abilities. I would put more emphasis on the second
> one, i.e abilities

May 22 05:17 PM

[Advill:]

Agree with the OPM approach....only that, the lost letters are interesting to read,

stableboyselections.co.../

Regards.

May 23 04:13 PM

[Dan Braem:]

They are very interesting - thanks for the post!


On May 23 04:13 PM Advill wrote:

> Agree with the OPM approach....only that, the lost letters are interesting
> to read,
>
> stableboyselections.co.../
>
>
> Regards.

May 25 10:45 PM