When they say Warren Buffett is worth $62 billion...

Factual Questions
1

What exactly does that number mean? I figure that Buffett doesn’t have a big bin of cash he swims around in a la Scrooge McDuck, so where exactly is his money and how do they know exactly how much he has?

This is probably a stupid question, coming from someone who has no knowledge of economics beyond “it’s good when the stock market is ‘up’, whatever that means”. According to Wikipedia, net worth is total assets minus total liabilities. Trying to figure out exactly what that means leads me down an unending path of other financial terms I don’t understand. If most of his fortune is wrapped up in investments, aren’t those at the mercy of the stock market? Wouldn’t that make it impossible to really say for sure how much money he has?

I bare my ignorance to the world, with the hopes of getting an answer I can understand.

Bonus question: Is there any way to actually conceptualize how much money that is? I mean, if he did have the big old vault of cash, would there really be any appreciable limit to what he could afford to buy, or would it just be whatever he wanted he could have?

2

At billionaire ranges any determination of the amount of money they have is more of a statistical blur than a discrete number.

3

Most of his assets are stock. Take the amount of stock he owns and multiple by its value on that particular day. On a bad day he could lose billions. That’s called a paper loss.

4

Warren Buffett (or anyone else) has assets that he can exchange for cash, as well as a certain amount of cash. His net worth is estimated by figuring out what those assets would sell for at current prices, and by estimating how much of each asset he has. astro’s point is a fair one: that $62 billion number is just a very educated guess, because billionaires tend not to publicize their exact holdings.

The best way I’ve seen to conceptualize how much money that is to divide the net worth of the average American family by $62 billion to get the exchange rate between an average person’s dollar and Warren Buffett’s dollar, and then to convert all the prices to that currency. If the average American family is worth $100,000, then one Buffett dollar is equal to $620,000 for the average person. If he drops $400,000 on a sports car, that’s the rough equivalent of buying a candy bar from the vending machine for the rest of us.

5

Warren Buffet could not just decide one day to hang out with his $62 billion personally in actual bills. It is tied up in stocks, businesses, and other complicated ways. Furthermore, he would affect the stock market itself if he tried to sell it all. He would cause his own stocks to tank just by trying to liquidate them making them worth much less than they are currently valued. The same is true for Bill Gates and every other billionaire that is heavily invested in one company.

6

To a certain extent this is true, basically the valuation comes down to massive extrapolations based at current stock prices. However, there’s something fairly meaningful at the core of it.

To start with a concrete example, looking at Warren Buffet I find a reference to Berkshire Hathaway. He’s the CEO and he’s a well-known investor, so I’m making an educated guess that a decent chunk of that net worth is BH stock. BH is a huge diversified company, and some of the subsidiaries or divisions of it that I recognize offhand are Geico insurance, Dairy Queen, and World Book Encyclopedia.

A corporation like BH is basically a company doing business by committee - a lot of people can own tiny bits of it, and for important decisions (and hiring key management to take care of less important decisions,) the stockholders get together and vote according to how much of a share they own. A lot of small shareholders don’t worry much about voting their shares, (or giving proxy votes to people they trust to vote wisely with them,) but the shares still have value in that someone who could use them as voting leverage could buy them from the current owner, if the buyer and seller agree on a price. Shares are also important if the corporation decides to give its shareholders a cut of profits, (a dividend,) or if somebody wants to attempt a corporate takeover, (which is sort of an extreme case of doing share voting.)

Now, say Warren Buffet has a 20% share in BH and hasn’t sold any of it for years. But today in wall street, some guy sold some lady a fraction of a percent of share in BH for twenty thousand dollars. Based on that, and possibly an average of other recent trades, they estimate Warren Buffet’s share of the company as being worth so many hundreds of million dollars, or even more.

One thing that this doesn’t usually cover is that if a major investory actually decided to sell out of his company, the first few trades would inevitably ‘flood the market’ somewhat and drive the price down, so it doesn’t really reflect the amount of cash that a billionaire could raise quickly. It does reflect how much financial power they have, exercised through the company, fairly well I think.

waves to the people whose answers appeared on preview

7

As of July, 2007 he owned 2,567,445 shares of Berkshire Hathaway which was trading at $110,000 US /share. As of yesterday, March 7, 2008, it was trading at $134,000 US/share.

8

If a major investor wants to get rid of their shares in a company, they’ll generally set up a deal with someone to sell them all at a fixed price for exactly this reason.

9

How come when I multiply the shares x the value I get 344 billion? That’s a lot more than 62 billion.

10

Yeah, it looks like Yahoo’s numbers are… wrong. Here’s the full breakdown: Yahoo Finance - Stock Market Live, Quotes, Business & Finance News

It looks like they got a wrong number from somewhere, because he didn’t acquire a few hundred billion dollars worth of shares in July 2006. Then they calculated from there using public filings. Maybe the initial value was BRKB shares or something?

Anyways, MSN says it’s 350k shares, or $38 billion: MSN

The whole thing is confused a bit by the deal with the Gates Foundation.

11

Other people have talked around this, but I’ll put it in the simplest possible terms.

Yes, it is impossible to say how much money Buffett or any rich person has.

Yes, you can look at their stock holdings but the total will change at the end of every day. That total can fluctuate by billions or tens of billions in a very short time if the market starts acting funny. Lots of examples to point to.

Yes, there are many more things to look at than just stock holdings. The rich own tangible assets and other kinds of wealth that need to be counted in, although even a billion dollars in homes and yachts is just rounding error compared to Buffett’s stocks.

Yes, it’s silly and futile to come up with “a” number of a person’s wealth, and that’s true whether the person is super rich or an ordinary homeowner. But everybody wants simple, “tangible” numbers that seem to mean something even when they don’t and the world will always conspire to fill that need.

12

Ah, that’s pretty much what I was looking for. I figured as much, but wasn’t sure.

Further and reaaally stupid question: one ‘share’ of a company is what’s traded at the given price, right? If Company Whatever is trading at $50 and I have 100 shares that I want to sell, I would walk away from the deal with 5 grand, right? (It’s a serious question; I really am that much of an idiot when it comes to these things.)

13

There was a story on NPR’s Morning Edition last week about the Forbes list; in the story, a spokesman for Forbes said that the numbers were based on information gathered from public & private sources, and were based on stock prices as of February 11, 2008.

14

Yes, you would walk out with 50,000 dollars, minus a small broker fee for the transaction. However, in the world of finance, dollars are just one of many monetary instruments. You didn’t make any money from the transaction, you just converted what you already had to another form.

I mention this because even if Buffet’s wealth was entirely in one dollar bills stored in a huge Scrooge McDuck safe, it would still be difficult to assess its worth precisely. For instance, his 63 billion USD is worth about 6,630 billion yen. Six months ago, it would have been worth 7,560 billion yen. Dollars aren’t different from stocks, their value depends on how much people want them.

15

It would be worth precisely 63 billion USD. You have a good point about how what you could buy with it would fluctuate, but if we’re reporting “net wealth” in US dollars, there’s really no ambiguity here.

16

The point is that there is no fundamental difference between 63 billion USD and 471,000 shares of BRK-A. They’re both precise figures but their actual value is fluctuating. The only difference is that you can more easily exchange dollars for doughnuts.

17

If I were walking down the street carrying a box of doughnuts, I would happily exchange that box of delicious creullers and jelly-filled for a share of BRK-A with most anyone.

18

I’d argue that that is a fundamental difference and an extremely important one.

19

It’s important and a fundamental characteristic of cash is its liquidity, but, to quote the OP:

If most of his fortune was in cash it would be at the mercy of monetary markets and inflation. From a value perspective, dollars and shares aren’t that different. That’s all.

20

To try to wrap my head around the magnitude of the numbers we’re dealing with, I tried to calculate a “daily budget” for Bill Gates a few years ago. Basically, I assumed that he could convert all of his “stuff” to cash, and then bury that cash in Mason jars in his backyard. Assuming he lived to the age of 90, he could spend something on the order of $3 million dollars each day before his money ran out at age 90. You could have a different car every day for the rest of your life, eat every meal at Charlie Trotter’s, have numerous homes on every continent. Want a G550 executive jet? Just save up for a few weeks.

Obviously such a scenario is meaningless in the real world, but it really was the only way I could get a handle on the kind of money we’re dealing with here.

I also tried to figure out what kind of annual income would result from putting it all in savings accounts at 3% interest (again, just for grins and giggles). I don’t remember the number (it was substantial), but what was even more impressive was the number of accounts that would be required if one wanted it to all be FDIC insured. Again, a very, very large number.