Warren Buffet: A Leader - Case Study Example

Warren Buffet: A Leader Good leaders are the ones who are able to achieve the desired end in spite of the adverse conditions and make the world follow their foot prints. The basic objective of any leader is to earn the confidence of the people around him for his leadership trait and then live up to their expectations by delivering positive results. Warren Buffet has been one of the biggest leaders of the world who has enjoyed a complete confidence of his investors by fulfilling their expectation of mammoth returns for over decades via his company Berkshire Hathways. He has earned such a reputation in the stock market that a stock jumps 10% as soon as it is realized that Warren has purchased the script. Not only has he made fortunes for himself, but his investors have also reaped extreme benefits by putting their trust on this investment wizard. Warren has never invested in any real estate because he thinks that stock market is the easiest means of earning money. He has an autocratic style generally where he alone is the sole decision maker for his company. One of the very important things that Warren follows is that he invests in the business of a company. He does not give any heed on the day to day fluctuations. Neither does he invest in any stock for short term trading; he always invests in pure fundamentals of the company. He analyzes the returns of the company and the fixed costs in order to make his investment decisions. Needless to say he considered every investment decision as a matter of life and death. His every investment decision is backed by solid research and complete study on the risk and reward ratio and this is completely visible in the kinds of return he is able to generate. Background and Context Warren Buffet was born in 1930 and his father was a congressman. It is said that business is ingrained in a true businessman’s blood. It is true to its maximum in the case of Warren. At an age of six, when children use to think about new ways to trouble their mother, he was thinking about making profits. He resold the packs of coca cola, purchased from his grandfather’s store at 25 cents, for a nickel each making a profit of 5 cents that is 20%, an impressive profit at any standard. At an age of just eleven years, he purchased his first share that he says he was too late purchasing his first share. The Cities Service, his first share, purchased for $38 soon went to $27. He took hold of it, until it touched $40 where he resold that. The stock soared soon to $200 teaching him the first lesson of his life. Patience is the key to success. Buffet started to sell newspapers at an early age and filed his first tax returns when he was just thirteen. The profession of a newspaper vendor not only generated him an extra income as he desired, but also gave him an opportunity to cultivate an interest in reading newspapers which, just like another great leader like Jack Welch having the same habit since childhood, made miracles for him too. At an age of seventeen he attended the Wharton business school in Pennsylvania and returned back after two years, having a feeling that he knows more than his professors. He applied for graduation at Harvard Business School. The school here made the biggest blunder of the century by turning his request down. He then completed his graduation from the University of Nebraska. Leadership is not a practice, not a study, but an art to getting the results in your favor by utilizing the inherent potential in your colleagues/subordinates. There are various approaches followed my multiple people in order to get the results in their favor, but it can predominantly be divided into the following three categories:- 1. Authoritarian Or Autocratic 2. Participative Or Democratic 3. Delegative or Free Reign 1. Authoritarian or Autocratic: - Leaders using this style will have total authority over any decision-making and will basically tell their followers what needs to be done and how the tasks should be completed. There are a few key benefits associated with this style of leadership which are as follows:- (i) The time taken to finalize any decision is really low and things start moving in a rapid manner. (ii) When the subordinates are naïve and inexperienced, it not only gives them a chance to groom up but also cultivates a lot of respect for their leader. (iii) It develops a sense of trust in the leader and motivates the subordinates if they are already well bonded. However if there are a lot of creative subordinates, then these style of leadership may not be recommended because it may develop grudges amongst them and they may lose the enthusiasm to participate. 2. Participative or Democratic: - The leader tries to take a democratic view of the situation in hand and tries to have the say from each and every employee. The key benefits of this process are as follows:- (i) The subordinates have a sense of belonging towards the team. They cherish on every favorable return for their team and strive hard to make the team result a success. (ii) It is particularly useful when team leader have some idea about the work and the team members possess the information about the remaining one and the contribution of both of them is an essence to make the event a success (iii) When the team members are enthusiastic and knowledgeable, it is bound to give good results as many minds thinking on a problem yields better solution than one. However one of the drawbacks of this method is that the decision making process is delayed and a prerequisite of team members being both smart and experienced. 3. Delegative or Free Reign: - In this kind of leadership everybody is free to take decision on himself with little or no supervision from the leader. There is not a continuous supervision on the team members. The key benefits of this method are as follows:- (i) This method is particularly effective when the leader does not have much time to supervise. (ii) The decision taken is mostly very accurate because the team member taking decision on behalf of the leader will be an expert in his field and may know his field much better than the team leader. (iii) The decisions are taken at a very quick pace. However, the team member should be highly experienced in order to take a decision by himself. Moreover, there is a always a bit of risk involved with this kind of arrangement. Leadership Style in Real Life In real life almost all the good leaders use a combination of the above mentioned three types of leadership. The effective leaders deal with different employees in different styles depending upon the skills inherent in the employee. However, there is almost every time one style which is dominant in a particular kind of a leader. If we consider the style of Warren Buffet, he also was quite apt in using all the three kinds of leadership style, he was an autocrat while making a decision to buy any particular business but was used to chose the style of delegating the work, once the work has been streamlined, which is quite apparent in his behavior with respect to Berkshire Hathways, which will be discussed further, in this article. The basic idea of taking this research onto Warren yields from the fact that not only he is the wealthiest person on this earth at the moment, but he has generated that wealth from a very unique style. He was not a son of any industrialist but he was smart enough to apply his shrewd brain in the game of stock market that no other individual, not even in the top 20 list would be having a forte in. It was this application of this sharp mind, in the field of stocks that gave him an edge over the others to generate enough capital to finally own any business in 1965. With his leadership style he drove multiple companies for rags to riches and is indeed a role model for any student to study his style of leadership and take the path of success and prosperity. Diagnosis of the Warren’s style and success and challenges When Warren was just 25 years old, he started his own company by himself investing a meager sum of 105 dollars. It was an investment firm which had seven limited partners whom Warren convinced to invest a thumping sum of 105,000 dollars. It was decided that Warren will be paying them 6 percent interest per year and 75% of the profits generated above this level. He will have 25% of the profits, if any above this level, in his kitty. This clearly indicates the exuberance and the self confidence ingrained in the blood of an autocratic leader. In a span of 13 years, Warren generated a return of 29.5 percent, fair in excess of the market. By 1965, Buffett decided to put a full stop to the partnership and cashed out a hefty sum of 25 million dollars. The cash was utilized to buy the controlling stake in cotton manufacturing firm, called Berkshire Cotton. Warren accumulated 49% of the stake in the company with his pile of cash which marks the autocratic style of this leader. He was sure that the horrible management practices of the company has put the company in dire straits and with a slight change in the management, he could turn the tables for the company. Immediately Mr. Buffett made Ken Chace President of the company, giving him complete autonomy over the organization, thus giving thrust to his delegative style of leadership. He refused to award stock options to the president as it was unfair to the existing share holder but he shelled him out a loan of $18, 0000 for him to purchase 1000 shares of the company. Initially, it was really hard to manage the Berkshire. The Cotton Company was facing challenges from exports and also the manufacturing costs were quite higher. Warren arranged for the company to buy two insurance firms, again an autocratic decision which went completely in his favor. It was the insurance companies, that used to generate the study cash flow which was then utilized to pay the claims and remaining got invested in stocks and bonds. The combined business insurance plus the textile was renamed Berkshire Hathways. The stock portfolio for the company was $7.2 million in 1967. With Warren taking control of the proceedings, it jumped to a whopping $42 million dollars in just two years. Here, the profit generated by the insurance business was much higher than the profits from the textile business. This gave Warren a boost to buy three more insurance companies and start another five. After some time, Warren Buffet bought another company called Sees Candy. The gourmet chocolate maker sold its own brand of candies to its customers at a premium to regular confectionary treats. The balance sheet of the company indicated quite clear that it was a healthy business to buy things out as the customers very well liked the quality of product offered by the company and did not hesitate to pay the extra price for the better quality they used to get. Warren decided to stamp the deal for 25 million dollars on behalf for Berkshire. Following several investments and SEC investigation investors saw the Berkshire’s net worth rising sharply. From 1965 to 1975, the company’s share price rose more than 400% to $95 from a mere $20. Recommended Strategies for other’s to emulate The key things to emulate from Warren Buffet as a leader are:- 1. Never invest in any company’s stock. Always understand the business of the company and invest with intent of purchasing the business of the company and not stock. 2. Be very prudent while investment, Warren use to think that he has only twenty chances to invest through his life, if he makes a mistake then only nineteen are left throughout his life. This resulted in him making a decision backed by a solid research and almost hit his target every time. 3. Do not give heed to day to day fluctuations in the stock market. The day to day fluctuations are a part of market correction exercise and exist just to introduce more and more buyers in the market. 4. Seize the opportunity when you are getting an opportunity to buy a business at a heavy discount. Do not give importance to earning per share, pay heed to return on your investments. 5. Invest with an intention of a long term profit in the company after checking the transparency of the management with the stock holders. You should consider the operating history of the company before purchasing the stocks and not be worried of economy in general. Future of this leader and organization:- Warren keeps a target compounded growth of 15 percent per annum. Berkshire Hathways has given an annual compounded return of more than 21 percent continuously over a span of 43 years, which is a dream come true for the investors of the company and much above the expectation of Warren Buffet. As on February 19 2009, the stock is quoting at around 80,000 US Dollars per share. Warren never believes in giving dividends to the share holders, he believes in generating profits for their invested capital. Berkshire has given dividends to its share holder that too as Buffet remarks that the dividends might have been declared when he was in bathroom. With sound leadership and experience of Warren, the company is expected to deliver the profits of similar magnitude in future as well. References: Clark, D. R. (21 August, 2008). Leadership Styles. The Skagit Watershed Council. Retrieved 13 February, 2009, from Hagstrom, G. Robert. The Warren Buffett way. Simon Fraser University. Retrieved 18 February, 2009, from Kennon, Joshua. (2001). Warren Buffet Biography: Taking Control of Berkshire Hathaway. About.com. Retrieved 14 February, 2009, from Lowenstein, Roger. (2008). Buffet- The Making of an American Capitalist. United States of America: Random House Publisher. Schroeder, Alice. (2008).The Snowball: Warren Buffet and The Business of Life. London: Bloomsburg Publishing. Read More