Book Review: The Snowball – Warren Buffett and the business of life

Alice Schroeder has spun a compelling narrative of Buffett’s life. It illustrates both the business and personal side of a very complex man.

Buffett espouses a simple philosophy on investing, and seemingly makes it look easy. What we don’t see on the surface is that he spent untold hours investing himself into the craft. From the age of 7 he was researching stocks. By 11 he was investing in them. As he matured and got into the industry he became completely focused. On his honeymoon he stuffed the back of his car with Moody manuals to research stocks. This dedication to his craft channels a lot of what I talk about around total, utter focus. In accounting for Buffett’s success you can’t discount the sheer amount of time and energy he poured into it. There was a cost to this in the neglect of his personal life which may have played out with his marital and familial relations.

In addition to the intense focus and determination, it sounds like he was blessed with a certain personality and affinity for this type of work. He loved numbers. Had an almost photographic memory. He was able to memorize endless facts about companies from various industries. Able to quote numbers about thousands of stocks. This sheer mental horsepower no doubt allowed him to take stock of the overall landscape and identify the choice companies to acquire.

Finally, his personality also blessed him with an uber-rational approach to life. He seems to be exceptional at managing his emotions as it pertains to investments. In effect, an ability to shut down emotions and focus on facts. The importance of this emotional intelligence can’t be forgotten in the context of his success.

Compounding all of these factors, Buffett had fortuitous timing – he was a finance and investing whiz at a time in US history when finance and investing was taking off. He was starting his career while investments were still under-appreciated from the depression era. He rode a wave of increasing interest in investing, along with a massive inflation of financial assets and savings that poured into the stock market. One of the most productive and expansionary times in US history.

All of that said, one can’t take away from Buffett his extraordinary success. As pointed out in the book, Buffett and his colleagues all had tremendous track records. Leveraging simple principles and learnings that they shared over a lifetime, it is clear that those principles in someway enabled their respective success over such a sustained period of time. There were many with the opportunity to do what Buffett has done over the decades, but only few who have even come close.

As a final thought, I can’t help but recognize that despite his massive success, he is still only human and had to deal with life as we all do – taking the good with the bad. I like his view of life which was:

“The purpose of life is to be loved by as many people as possible among those you want to have love you.”

That seems like a pretty good metric to me.

Ramen-san


Buffett’s performance over the decades:

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Berkshire cash on hand… lack of attractive opportunities in 2018?

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On the 2000 tech bubble:

There were only three ways the stock market could keep rising at ten percent or more a year. One was if interest rates fell and remained below historic levels. The second was if the share of the economy that went to investors, as opposed to employees and government and other things, rose above its already historically high level. Or, he said, the economy could start growing faster than normal. He called it “wishful thinking” to use optimistic assumptions like these.

He walked over to the screen. Waggling his bushy eyebrows, he gestured at the cartoon of a naked man and woman, taken from a legendary book on the stock market, Where Are the Customers’ Yachts? “The man said to the woman, ‘There are certain things that cannot be adequately explained to a virgin either by words or pictures.’” The audience took his point, which was that people who bought Internet stocks were about to get screwed. They sat in stony silence. Nobody laughed. Nobody chuckled or snickered or guffawed.

On the inner scorecard

“The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: ‘Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?’ Now, that’s an interesting question. “Here’s another one. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best? “In teaching your kids, I think the lesson they’re learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll wind up with an Outer Scorecard. Now my dad: He was a hundred percent Inner Scorecard guy. “He was really a maverick. But he wasn’t a maverick for the sake of being a maverick. He just didn’t care what other people thought. My dad taught me how life should be lived. I’ve never seen anybody quite like him.”

Buffett family motto:

“I might mention that there has never been a Buffett who ever left a very large estate, but there has never been one that did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well.” “Spend less than you make” could, in fact, have been the Buffett family motto, if accompanied by its corollary, “Don’t go into debt.”

The cost and benefits of focus:

As the spring semester wore on, Warren’s classmates gradually accepted the routine of the classroom duet. Warren “was a very focused person. He could focus like a spotlight, twenty-four hours a day almost, seven days a week almost. I don’t know when he slept,” says Jack Alexander. He could quote Graham’s examples and come up with examples of his own. He haunted the Columbia library, reading old newspapers for hours on end.

Warren may have said he wanted to become a millionaire, but he never said that he would stop there. Later he would describe himself during this period as “a lousy sport at doing anything I didn’t want to do.” What he wanted to do was invest. His children now ranged from five to ten years old, and one friend described Susie as “sort of a single mother.” Warren would show up at school events or toss around a football if asked, but he never initiated a game. He seemed too preoccupied to notice his children’s longing for attention. Susie taught the children that his special mission must be respected; she told them, “He can only be so much, so don’t expect any more from him.” That applied to her, too; Warren was obviously devoted to his wife, and showed that in public, caressing “Susan-o” affectionately and recounting tender, funny variations of how she, the gentle angel, had stooped to marry him, the ukulele-playing financial prodigy who was a secret wreck. At the same time he was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out the holes; he rattled around in the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that, she knew it was hopeless.

What the children lacked was attention. Their father was almost exclusively focused on work. Their mother was like a gardener with too many tomato plants, running with her watering can toward whoever was neediest at any given time.

The pieces of Buffett’s life began to come back together into some sort of coherent whole. But he had been shocked into realizing the truth of Susie’s insistence that sitting in a room making money was no way to spend a life; he began to see what he had missed. While he was friendly enough with his kids, he hadn’t really gotten to know them. The reality behind the jokes (“Who is that? That’s your son”) meant that he would spend the next few decades trying to repair these relationships. Much of the damage could not be undone. At age forty-seven, he was just beginning to take stock of his losses.

“Then at dinner, Bill Gates Sr. posed the question to the table: What factor did people feel was the most important in getting to where they’d gotten in life? And I said, ‘Focus.’ And Bill said the same thing.”

It is unclear how many people at the table understood “focus” as Buffett lived that word. This kind of innate focus couldn’t be emulated. It meant the intensity that is the price of excellence. It meant the discipline and passionate perfectionism that made Thomas Edison the quintessential American inventor, Walt Disney the king of family entertainment, and James Brown the Godfather of Soul. It meant the depth of commitment and mental independence that led Jeannette Rankin to stand alone as the only representative in Congress to vote against U.S. entry into both World Wars in the face of widespread ridicule. It meant single-minded obsession with an ideal. “Focus” meant the kind of person who could earn billions by allocating capital, yet be baffled by a sign that said “No TP.”

On associating with the right people:

“I learned that it pays to hang around with people better than you are, because you will float upward a little bit. And if you hang around with people that behave worse than you, pretty soon you’ll start sliding down the pole. It just works that way.”

On independent thought:

That didn’t make sense to Warren. Since 1929, the value of businesses had grown substantially. “It was absolutely the reverse effect of what you saw in other times, when the market was staggeringly overvalued. I had looked at companies. I just couldn’t see why you wouldn’t want to own them. It was on a micro level, not an assessment of the growth of the economy or anything like that, and I was working with micro money. But it just seemed to me that it was crazy not to own them. On the other hand, here’s Ben, with his two hundred IQ and all experienced, telling me to wait. And my dad, who, if he told me to walk out a window, I would have done it.” Still, to make this decision to defy the advice of his two great authorities—his father and Ben Graham—was an enormous step for him. It required him to consider the possibility that his judgment might be superior to theirs, and that the two men whom he most deeply respected were not thinking rationally. Yet he was certain he was right. He might have walked out a window if his father told him to—but not if it meant leaving a Moody’s Manual full of cheap stocks behind.

On building wealth through leverage and compound returns:

At the time, Warren Buffett probably understood the potential of money management to beget more money better than anyone on Wall Street. Every dollar added to a partnership would net him a share of what he earned for his partners. Each of those dollars, reinvested, would generate earnings of its own. Those earnings, reinvested, would beget still more earnings. The better his performance, the more he would earn, and the larger his share of the partnerships would grow, enabling him to earn even more. His talent for investing could exploit that potential of managing money to the hilt. And despite Warren’s apparent awkwardness, he was indisputably successful at merchandising himself. Even though he was nearly invisible in the investing world, the snowball was starting to roll.

On working for yourself first:

“Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.”

On buying great companies:

Munger bought cigar butts, did arbitrage, even acquired small businesses—much of this in Buffett’s style—but he seemed to be heading in a slightly different direction than Buffett. Periodically, he said to Ed Anderson, “I just like the great businesses.” He told Anderson to write up companies like Allergan, the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company’s balance sheet. Munger dressed him down for it; he wanted to hear about the intangible qualities of Allergan: the strength of its management, the durability of its brand, what it would take for someone else to compete with it.

Buffett had a buoyant optimism about the long-term economic future of American business, which had enabled him to invest in the market against his father’s and Graham’s advice. Yet his investing style still reflected Graham’s doom-laden habits of looking at businesses based on what they were worth dead, not alive. Munger wanted Buffett to define the margin of safety in other than purely statistical terms. In doing so, Munger was working against a subtle tendency toward catastrophism in Buffett’s outlook that sometimes cropped up when solving theoretical problems. His father, Howard, had always prepared for the day the currency became worthless, as if that day were imminent. Warren was far more realistic. Nonetheless, he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong, it eventually will. This style of thinking was the proverbial double-edged sword: It made Buffett a gifted visionary whose thoughts oriented toward doomsday. He would come to use this sword often to slice through knotty problems, sometimes in a very public way.

Time is the friend of the wonderful business, the enemy of the mediocre. You might think this principle is obvious, but I had to learn it the hard way…. After ending our corporate marriage to Hochschild-Kohn, I had memories like those of the husband in the country song ‘My Wife Ran Away with My Best Friend and I Still Miss Him a Lot.’…It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements. That leads right into a related lesson: Good jockeys will do well on good horses but not on broken-down nags.

On company owners and managers:

Buffett knew that he wanted to be in business with the kind of guy who would leave a black-tie party to count sheets of toilet paper; a guy who might screw the guy across the table but never his own partner. He made a deal with Rosner for $6 million. To make sure that Rosner would stay on the job after he bought the business, he flattered Rosner, made certain he got the numbers to evaluate its performance, and otherwise left him alone.

Sure enough, Abegg accepted his offer. And doing business with him cinched Buffett’s instinct that strong-willed and ethical entrepreneurs often cared more about how they and the companies they had built were going to be treated by the new owners than about grabbing the last nickel in a sale.

Buffett and Munger turned this story into a jokey parable, saying that they wanted more businesses that could be run successfully by a manager with Alzheimer’s.

Simple investment advice:

The method was the same: estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work. Anyone could understand these simple ideas, but few could execute them.

“No. Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market.

On inheritance:

“I love it,” he says, “when I’m around the country club, and I hear people talk about the debilitating aspects of a welfare cycle, where some woman had a child at seventeen, and she gets food stamps, and we’re perpetuating a cycle of dependency. And these same people are leaving their kids a lifetime supply of food stamps and beyond. But instead of having a welfare officer, they have a trust fund officer. And instead of having food stamps, they have stocks and bonds that pay dividends.” Peter Kiewit, he wrote, “made major deposits in society’s bank…but his withdrawals have been few.” He left about five percent of his wealth to his family. The rest went to a charitable foundation for the benefit of the people of the region in which he lived, the same causes that Kiewit had supported when alive. Most of the company continued to be owned by his employees, and Kiewit had ensured that they could sell only to one another. “Peter Kiewit could not have better served his community and his compatriots,” Buffett concluded.

“My kids are going to carve out their own place in the world and they know that I’m for them, whatever they want to do,” Buffett said. But “just because they came out of the right womb,” setting them up with a trust fund—which he considered “a lifetime supply of food stamps”—could be “harmful” and an “antisocial act.”31 This was the rational Buffett. This Buffett had once written to a friend when his children were toddlers that he wanted to see “what the tree has produced” before deciding what to do about giving them money.

On dangers of debt:

“If you are going to drive 10,000-pound trucks across a bridge repeatedly, it is well to build one that can withstand 15,000-pound loads rather than one that can withstand 10,001 pounds…. It is a big mistake to have lots of financial obligations and no cash reserve…. Personally, I have never used more than twenty-five percent borrowed money in my life, including when I had only $10,000 and had ideas that made me wish I had $1,000,000.”

Hence Buffett’s sayings: Rule number one, don’t lose money. Rule number two, don’t forget rule number one. Rule number three, don’t go into debt.

On ‘inversion’:

Munger’s favorite construct was to invoke Carl Jacobi: “Invert, always invert.” Turn a situation or problem upside down. Look at it backward. What’s in it for the other guy? What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead—through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and you will succeed. Tell me where I’m going to die, that is, so I don’t go there.

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