Warren Buffett outran his billionaire peers in 2016 -- 2 business principles put him in the running

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Eleven billion dollars. That's a number Berkshire Hathaway Inc.(NYSE: BRK-A)(NYSE: BRK-B) CEO Warren Buffett, who has been obsessed with quantifying things since childhood, ought to appreciate. It's the increase in his net worth in 2016, according to the Bloomberg Billionaire Index -- that's an average hourly rate of accumulation of roughly $1.25 million!

Another fact may appeal to Buffett's competitive nature: He surpassed all his billionaire peers in terms of the dollar increase in his net worth. Beyond these headline figures, however, there are other numbers – and business principles -- that say more about how he achieved his uncommon success.

The following table shows the five billionaires who scored the largest dollar increases in their net worth in 2016. I excluded members of the Mars family, because their wealth is inherited and because Mars is a private company.

Name

Increase in Net Worth*

% Increase in Net Worth

Warren Buffett

$11.0 billion

17.6%

Bill Gates

$9.3 billion

11.3%

Harold Hamm (CEO, Continental Resources)

$8.1 billion

116.6%

Bernard Arnault (CEO, LVMH Moet Hennessy Louis Vuitton)

$7.2 billion

22.7%

Jeff Bezos

$6.9 billion

11.6%

*At Dec. 28, 2016. Data source: Bloomberg.

Sure enough, Berkshire Hathaway's stock soundly beat the S&P 500 in 2016:

BRK.A Total Return Price Chart

BRK.A Total Return Price data by YCharts

Names like Buffett, Gates, and Bezos are inextricably linked to the companies they founded: Berkshire Hathaway, Microsoft, and Amazon.com.

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Strictly speaking, Warren Buffett didn't found Berkshire Hathaway; he acquired a majority interest in a declining textile business. However, his stewardship of Berkshire over the past half-century has transformed the company to such a degree that the question of whether he founded it is academic. The same is true of Bernard Arnault's LVMH Moet Hennessy Louis Vuitton.

Note that while all the owner-operators in our list have retained the vast majority of their net worth in the companies they oversee (note that Bill Gates is not involved in the day-to-day running of Microsoft), Buffett is at the top end of that ranking, with nearly 99% of his net worth still held in Berkshire shares:

Name

% of Net Worth Still Invested in Founder's Company

Net Worth

Warren Buffett

98.5%

$73.6 billion

Harold Hamm

97.2%

$15.1 billion

Jeff Bezos

93%

$67.2 billion

Bernard Arnault

81.6%*

$38.9 billion

Bill Gates

12.6%

$91.1 billion

*Estimated. Data source: Bloomberg; author's calculations.

The second business principle

In Buffett's case, this is entirely deliberate. Indeed, the second "owner-related business principle" in Berkshire Hathaway's Owner's Manual, which he drew up in 1996, states:

2. In line with Berkshire's owner-orientation, most of our directors have a major portion of their net worth invested in the company. We eat our own cooking.

"Charlie's family has 90% or more of its net worth in Berkshire shares [that's Charlie Munger, Berkshire's vice chairman]; my wife, Susie, and I have more than 99%. In addition, many of my relatives -- my sisters and cousins, for example -- keep a huge portion of their net worth in Berkshire stock."

On the face of it, that lack of diversification runs contrary to basic rules of financial prudence, but two things are different here: One, Buffett runs Berkshire Hathaway, and, two, the fact that it is one stock masks the underlying business diversification. As Buffett writes in the next paragraph:

"Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a wide variety of truly extraordinary businesses. Indeed, we believe that Berkshire is close to being unique in the quality and diversity of the businesses in which it owns either a controlling interest or a minority interest of significance."

That willingness to keep his eggs in one basket is one of the reasons Buffett remains the largest single shareholder of Berkshire Hathaway:

Name

% Ownership

Harold Hamm

75.8%

Bernard Arnault

~33.3%* (through Groupe Arnault SAS)

Warren Buffett

17.9%

Jeff Bezos

17%

Bill Gates

2.4% (through Cascade Investment LLC)

*Estimated. Data sources: Bloomberg, Forbes, author's calculations.

The 10th business principle

Another deliberate factor that has kept Buffett's stake so high: He is extremely stingy when it comes to issuing new Berkshire stock, which would dilute existing shareholders. The reluctance to issue shares is not based on the mathematics of share dilution per se, but with the risk of value dilution, as the 10th owner-related business principle explains:

"10. We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance -- not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company -- and that is what the issuance of shares amounts to -- on a basis inconsistent with the value of the entire enterprise."

Refusing to diversify his stock portfolio for the sake of diversification, being a business-focused investor and a value-conscious owner: Those are some of the key traits that, along with the powerful effect of compounding, have set Warren Buffett up to make staggering wealth gains.

Of course, what the stock market gives over the course of 12 months, it can easily take away over the next 12. But that doesn't mean wealth is illusory; at roughly one and a half times book value or 20.4 forward earnings, shares of Berkshire Hathaway look fully priced, but not overvalued.

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Investor Warren Buffett answers reporters' questions during a press conference to announce that Walt Disney will buy Capital Cities/ABC July 31.
Billionaire investor Warren Buffett of Omaha makes a rare public appearance during an autograph session outside Borsheim's Jewelry Store in Omaha, May 4. Buffett was signing autographs for shareholders in his company, Berkshire Hathaway, which is having its annual meeting May 5.
Billionaire businessman Warren Buffett sits with his wife Susan (R) and daughter Susie, prior to the annual Berkshire Hathaway shareholders meeting in Omaha, May 5. This marks a rare public appearance for the reclusive Buffett.
Arnold Schwarzenegger, Republican candidate for governor of California in the October 7, 2003 recall election listens as world famous investor, Warren Buffett (L), one of his financial advisors, speaks to reporters after a meeting of Schwarzenegger's Economic Recovery Council in Los Angeles August 20, 2003. REUTERS/Fred Prouser FSP
Billionaire financier Warren Buffett looks on after a meeting with U.S. Senator Arlen Specter (R-PA) and chairman of the Senate Judiciary Committee, at the Hart Senate Office Building on Capitol Hill in Washington June 29, 2005. Specter is the co-author of a bill seeking to create a $140 billion asbestos compensation fund. REUTERS/Shaun Heasley SH/TC
Billionaire Warren Buffett arrives at the Sun Valley Resort in Sun Valley, Idaho July 10, 2007. The world's biggest media chiefs gather this week at the 25th annual Allen & Co. conference at the resort starting today. REUTERS/Rick Wilking (UNITED STATES)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at a Senate Finance Committee hearing about "Federal Estate Tax: Uncertainty in Planning Under the Current Law" on Capitol Hill in Washington, November 14, 2007. Billionaire Buffett warned of widening U.S. income disparity and endorsed the estate tax as a check on wealth accumulation, while two senior lawmakers said they want the tax repealed. REUTERS/Jason Reed (UNITED STATES)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett greets shareholders during the Berkshire Hathaway Annual Shareholders meeting in Omaha, Nebraska May 3, 2008. REUTERS/Carlos Barria (UNITED STATES)
Billionaire investor Warren Buffett laughs as he appears with Microsoft Corporation founder Bill Gates for a town hall style meeting with business students broadcast by financial television network CNBC at Columbia University in New York, November 12, 2009. REUTERS/Mike Segar (UNITED STATES BUSINESS)
Berkshire Hathaway Chairman Warren Buffett kisses his ukulele at the Berkshire Hathaway annual meeting in Omaha May 1, 2010. Buffett played "I've Been Working on the Railroad." REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS TRANSPORT)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett (L) and Microsoft founder Bill Gates gesture at the national launch ceremony for the BYD M6 vehicle in Beijing September 29, 2010. Chinese battery and car maker BYD, backed by Buffett, launched its first premium multi-purpose vehicle (MPV) in Beijing on Wednesday to tap rising demand in the world's biggest auto market. REUTERS/Jason Lee (CHINA - Tags: TRANSPORT BUSINESS)
Billionaire Warren Buffett, wearing a traditional tikka or a red mark on the forehead, speaks during a news conference in Bangalore March 22, 2011. Buffett on Tuesday said he is looking to invest in large countries like India, China and Brazil, but added that restrictions on foreign ownership in India's insurance industry could be a deterrent. Buffett also said and the U.S. economy was improving and that the devastating earthquake in Japan would not hurt global growth. REUTERS/Stringer (INDIA - Tags: BUSINESS)
Berkshire Hathaway Chairman Warren Buffett tours the floor of the New York Stock Exchange September 30, 2011. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS)
Berkshire Hathaway chairman Warren Buffett holds his hand over his heart during the singing of the national anthem, at the start of a 5km race sponsored by Brooks Sports Inc., a Berkshire-owned company, in Omaha May 5, 2013, a day after the company's annual meeting. Buffett at the meeting on May 4, 2013 gave the most extensive comments to date about the future of Berkshire Hathaway Inc after he is gone, saying he still expects the conglomerate to be a partner of choice for distressed companies. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS SPORT ATHLETICS)
Warren Buffett, Chairman of the Board and CEO of Berkshire Hathaway, poses for a portrait in New York October 22, 2013. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS)
Roberta Buffett Elliott sits with her brother Warren Buffett as they attend an announcement ceremony at Northwestern University in Evanston, Illinois, January 28, 2015. The sister of financial investor Warren Buffett has given Northwestern University more than $100 million to create the Roberta Buffett Institute for Global Studies, the largest single gift in the school's 164-year history, the university said on Wednesday. REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS EDUCATION SOCIETY)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune's Most Powerful Women's Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque/File Photo
Warren Buffett, chairman and CEO of Berkshire Hathaway, smiles before speaking with Bill Gates (not pictured), at Columbia University in New York, U.S., January 27, 2017. REUTERS/Shannon Stapleton
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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