Buffett: Still Misunderstood After All These Years

Includes: BRK.A, BRK.B
by: Dan Braem

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 (NYSE: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.