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Capitalism's ageing hero

The name Warren Buffett is revered in business, but his announcement he has cancer has triggered a shockwave

THIS week's announcement that he is suffering from prostate cancer is likely to mark the beginning of the end of the career of Warren Buffett -- the most successful investor of the modern era.

On Tuesday, the 81-year-old multi-billionaire investor revealed that he had early-stage prostate cancer. The announcement came in a letter to shareholders of his Berkshire Hathaway investment company.

According to Mr Buffett, the cancer is "not remotely life-threatening". He and his doctors have decided on a two-month course of treatment beginning in July. "I feel great -- as if I were in my normal excellent health," he wrote.

Despite Mr Buffett's optimism, the Berkshire Hathaway share price ended the week down almost 2pc.

Mr Buffett is that uniquely American character, the investor as superstar.

With his carefully cultivated down-home, aw-shucks public persona, he is a regular guest on TV chatshows, while his pronouncements on matters business and economic frequently adorn the op-ed pages of the leading American newspapers.

Jamboree

The annual meeting of Berkshire Hathaway shareholders, which takes place every year in Mr Buffett's hometown of Omaha, Nebraska, has become a jamboree of popular capitalism, while his letters to Berkshire shareholders, which are written in his folksy but pithy style -- with the help of 'Fortune' journalist Carol Loomis -- have long since acquired cult status.

It's not as if he hasn't something worthwhile to say. Despite being the son of Howard Buffett, a four-term Republic congressman, and a native of Nebraska, a state which has been rock-solid Republican since the days of the party's founder Abraham Lincoln, Mr Buffett's economic views are well to the left, not just of his fellow billionaires, but of the American mainstream.

Mr Buffett contributed to Barack Obama's 2008 presidential election campaign and publicly endorsed him for president. However, he was also financial advisor to Arnold Schwarzenegger, a Republican, even if a very liberal one, during the Governator's campaign to be elected governor of California in 2003.

He has argued that billionaires such as himself don't pay enough tax, and also that Mr Obama's healthcare law, which forces everyone to buy private health insurance, doesn't go far enough.

Testifying to Congress in August 2011, he pointed out that he pays a lower effective tax rate, just 17pc, than either his secretary or cleaning lady, who paid an effective tax rate of 33pc. This is because taxes on ordinary Americans are quite high by international standards.

When social security deductions, the equivalent of Irish PRSI, are included, the marginal federal tax rate can be as high as 41pc with state and local taxes on top of that.

It's a very different story for the super-rich. The Bush tax cuts reduced the American capital gains tax rate to just 15pc. By routing most of their income through capital gains, billionaires such as Mr Buffett can cut their effective tax rates to less than half of that paid by the people who work for them.

Inheritance taxes

Mr Buffett also testified to Congress in 2007 opposing former US president Bush's plans to abolish inheritance taxes.

"Dynastic wealth, the enemy of a meritocracy, is on the rise. Equality of opportunity has been on the decline," he told the Senate Finance Committee.

"A progressive and meaningful estate [inheritance] tax is needed to curb the movement of a democracy towards a plutocracy."

Mr Buffett is practising what he preaches on the subject of inherited wealth. He has already announced that he intends to give away the vast bulk of his $45bn (€34bn) fortune to charity rather than leaving it to his children.

"I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing," he told US chat show host Charlie Rose in June 2010.

To give away his vast wealth, Mr Buffett has teamed up with Microsoft founder Bill Gates and his wife Melinda.

In 2006 he pledged to give 99pc of his vast wealth to charity, with five-sixths of the money going to the Bill and Melinda Gates Foundation.

Mr Buffett reckoned that, as he was better at making money than giving it away, it made more sense for him to donate his fortune to an established foundation rather than going to the bother of setting up one of his own from scratch.

Since 2006 he has transferred 5pc of his wealth every year to the Gates Foundation.

While Mr Buffett may be setting a philanthropic example, it shouldn't disguise the fact that over the past 60 years he has been a hard-nosed investor, utterly unsentimental in his decision-making.

After graduating from the University of Nebraska-Lincoln in 1950 at the age of 19, with a degree in business administration, he went on to study under Benjamin Graham and David Dodd, the founders of "value investing", at Columbia University in New York, from which he graduated with a master's degree in economic science a year later.

For the next three years he was employed as a salesman at Buffett-Falk, the brokerage owned by his family, before spending two years with Benjamin Graham's investment partnership. When Mr Graham retired in 1956 Mr Buffett returned to Omaha and set up his own investment partnership. In 1965 the partnership took control of a listed Massachusetts textile mill, Berkshire Hathaway.

Mr Buffett closed his partnerships to new money the following year and Berkshire Hathaway became his primary investment vehicle. When Mr Buffett acquired control in 1965 the Berkshire share price was trading at less than $12.

Over the following four decades Mr Buffett transformed the one-time manufacturer of lining for men's suits into an investment powerhouse with interests in insurance, retailing, railroads, newspapers and jewellery as well as stakes in Coca-Cola and investment bank Goldman Sachs.

Berkshire Hathaway had sales of $143bn and recorded after-tax profits $10.2bn in 2011. The Berkshire Hathaway share price peaked at $149,000 -- the company has never had a share split -- in late 2007. This means that anyone who bought a $1,000 shareholding in Berkshire when Mr Buffet first took control in 1965 would have seen the value of their investment rise to more than $13.5m 42 years later.

Since then, the Berkshire Hathaway share price has stagnated. It closed this week at $119,000, down over 20pc on its peak. However, the Berkshire share price has still out-performed the Dow Jones Industrial Average by 10pc and the S&P 500 Index by almost 20pc over the past five years. Even at the current share price Berkshire has a market capitalisation of $197bn, valuing Mr Buffett's 23pc stake at $45bn.

Even before this week's revelation that he had cancer, attention had been turning to the question of who would succeed Mr Buffett, who will be 82 in August, as Berkshire chief executive and chairman. The fact that Mr Buffett's deputy Charlie Munger is 88 makes the question even more pressing.

David Sokol, who had been widely viewed as Mr Buffett's heir-apparent was forced to resign from Berkshire in March 2011 following an insider trading scandal. In February 2012 Mr Buffett revealed that the Berkshire board had agreed on a successor but refused to say who it was. Even if Mr Buffett stages a very rapid and complete recovery, the clamour for him to name a successor will grow ever louder.

Irish Independent