The Snowball: Warren Buffett and the Business of Life9 Oct 08 | Issue 259 | |||
By Gareth Brown Value investors the world over have been waiting years for this book. Finally, Christmas has arrived. I discovered my hero when I was 20 years old. It’s all a bit tragic really. When my mates were talking about Andrew Johns, ‘Plugger’ Lockett, Warnie and Axl Rose, I bit my lip because I knew no one wanted to hear about a retirement-aged Nebraskan investor. After several years of wandering aimlessly through the investing wilderness, discovering value investing was like a club to my head full of ignorance, and joining the Warren Buffett cult changed everything. Since then, I’ve read every one of Buffett’s Berkshire Hathaway chairman’s letters, every one of his partnership letters from before that, and every decent book ever written on him. I’ve attended the Berkshire annual meeting in Omaha four times, and I have a book, a dollar bill and a one hundred dollar bill signed by Buffett and partner Charlie Munger. OK, it’s more than a bit tragic. From Passion Pop to pinot noirLike many other Buffett fans, after a few years hoovering up everything ever written about him I found another hero – Charlie Munger. A Buffett fan becomes a Mungerophile much like a wine connoisseur progresses from Passion Pop to pinot noir. Where Buffett offers insightful homespun wisdoms and words of encouragement digestible to all, Munger offers long speeches on The Psychology of Human Misjudgement and A Lesson on Elementary, Worldly Wisdom. At age 20, I didn’t appreciate pinot noir or Charlie Munger. But with a bit of ageing, I've been drawn to the depth, complexity, and lack of sweetness. Not that I’ve ever given up on Buffett, of course. I knew there was a lot more going on behind that simple façade. As Forbes once wrote: ‘Buffett is not a simple person, but he has simple tastes.’ Unfortunately, though, the world’s yearning for easy answers had it focusing on whatever could be condensed into five golden rules. And Buffett’s compulsion to offer something for everybody effectively stonewalled those wanting more. That’s why I was so excited by the release of Buffett’s authorised biography,The Snowball: Warren Buffett and the Business of Life. Alice Schroeder was a financial analyst who covered Berkshire Hathaway and obviously made a significant impression on him. All previous biographies have been unauthorised and unassisted, but when Schroeder tried to convince Buffett to write an autobiography, he ended up convincing her to write this book. A simple instructionHe gave her seemingly unfettered access to both himself and his family and friends over a five-year period, with one instruction: ‘Whenever my version is different from somebody else’s, Alice, use the less flattering version.’ The result is extraordinary. As our company pre-ordered many copies of the book, I received a pre-release sample copy and set about trying to be one of the first Aussies to read it cover to cover. I’m sure someone beat me to the punch but, for the record, I was done by the evening of 6 October. The book’s 838 pages and my slow reading turned the event into a 30-hour readathon. But I came away with a very different, more complete picture of my hero. This is a very personal account that attempts to discover why Warren Buffett is who he is.
Not that there isn’t plenty of investment gold in the book. It goes into considerable detail on the key investments he’s made over the decades, and fleshes out those choices in a way that adds something to the thousands of pages already inked on Buffett’s approach to investment. We learn how he turned the first few snowflakes – money earned selling gum at age six – into a giant, ever-growing snowball. Hoard and compoundInfluenced by his Depression-scarred parents, and perhaps his own experience with war-time rationing, Buffett had a burning desire to collect and hoard from an early age. At first it manifested itself in a stamp collection, but pretty soon he switched his attention to cash, realising that wealth tends to increase one’s freedom. Aged 11, he declared that he would be a millionaire by the time he reached 35. In fact he got there by 30, and his many early business ventures make fascinating reading. Later in life, of course, he moved on to hoarding companies ... and managers ... and friends and admirers. This tendency, combined with a freakish mathematical talent, competitive spirit and single-mindedness, makes Buffett the compounding machine that he is. It enabled him to save $10,000 by the end of high school, and to compound his nest egg at the freakish rate of 61% per year in the first half of the 1950s. It explains how investors in the Buffett Partnership compounded their money at rates of 31% per year from 1956 up until 1969, and that’s after the deduction of Buffett’s hefty profit share. And he then parlayed everything into the snowball that is Berkshire Hathaway. Tough timesWe learn about the tough times in the mid-1970s, when Buffett’s portfolio was down nearly a third. Not unlike today, many investors were questioning their very involvement with the stockmarket, but Buffett famously quipped that he ‘felt like an oversexed man in a harem’.
And the book continues all the way up to the Bear Stearns collapse in March 2008, and offers Buffett’s thoughts on the current credit crisis. Buffett the ‘implacable acquirer’ – as Munger called him – is a big part of the story. But the real gold in this book is the way it cracks open the man’s personality. Readers of The Snowball, especially those that thought they knew Warren Buffett, are likely to spend a lot of time with jaws dropped. He comes across as rather fragile and very human. Buffett hero-worshipped his father but had a tremendously strained relationship with his mother, Leila. It turns out she was rather devoid of love for her son and, prompted by Schroeder, we wonder whether this led to his complete reliance on the kindness of other women. To this day, the many women in his life seem to have all slotted into a motherly role. The strong moral example set by his father, a highly principled Congressman, obviously influenced the man he became. But I found it reassuring to see that, like many of us, in adolescence he came to a fork in the road and nearly took the wrong path. Actually, he started off down that wrong path before turning things around. In those early teen years he was a nightmare for his teachers, and despite his obviously prodigious talents, he was racking up Cs and Ds in the classroom, even in mathematics. And he led a life of petty crime, filling up his closets with ‘hundreds of golf balls’ stolen from a Sears department store. A study in contradictionBuffett is brave and fiercely independent when it comes to financial decisions. And yet we learn that he habitually craves the praise of others and is deeply wounded by criticism. He’s obsessed with weight, putting himself on a 1,000 calorie a day diet in the lead up to the Berkshire annual meeting, yet typically eating nothing but hamburgers, french fries, ice cream and Cherry Coke. He reads and files away the thousands of letters sent to him by fans across the world, seeking an affirmation he’s unable to find within. Yet we learn about his ‘Inner Scorecard’, a wonderful concept at odds with his need for praise: ‘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 ... It helps if you can be satisfied with an Inner Scorecard’. Perceived as a technophobe, by 1994 Buffett had grasped ‘how the internet was going to affect the auto-insurance industry in the coming decades – better than the auto-insurance industry itself had’. While the general public assumed technology was beyond him, he was pushing change within Berkshire’s auto-insurance subsidiary GEICO, proclaiming: ‘He who wins the internet, wins the war’. Coldly rationalBuffett is able to empathise with the underdog, campaigning for the rights of Jews and African Americans in a segregated America and, more recently, committing his entire wealth to charity, mostly to the Bill & Melinda Gates Foundation to help solve difficult problems like AIDS and malaria in the poorest parts of the world. Yet he struggles to empathise with his own children, viewing them as winners of the ‘ovarian lottery’ and perhaps therefore already spoiled. And while we’re obviously not privy to the full story, I was astounded by his coldly rational approach to his son’s adopted daughters. He hasn’t embraced them as his own granddaughters, despite the issue being very much outside their control.
We learn of his fear of death and illness. When Buffett’s beloved father, Howard, was in hospital dying, his wife made sure he visited regularly, but he struggled to come to terms with it all and was totally unable to grieve after he passed away. We then share a tender moment in 2003–04 when he put that all aside to be there for his wife, Susan, through her illness and eventual death. Ultimately, this book is about the character of Warren Buffett, flawed and human like the rest of us, and yet able to inspire an urge for greatness and goodness in people who’ve never even met him. The inside scoopIn 2005 I got the sort of inside scoop others might kill for. My friend and alleged boss Greg Hoffman and I were queuing with perhaps 1,500 other Berkshire shareholders in the ‘international meet and greet’ session at the Berkshire annual meeting. It’s a chance for shareholders who’ve travelled from outside of North America to briefly meet the duo and get some memorabilia autographed. We aimed to be dead last in the queue, plotting to hog a little more than the necessarily short periods granted to others. In front of us was a young Asian couple: Buffett (loosely paraphrased from my leaky memory): Howdy, where you from? Young couple: Korea Buffett: Oh, I’ve been looking at stocks over there; they seem very cheap. At least a year before the rest of the world, we got a very clear signal that Buffett was looking at and likely buying Korean stocks. Over the next week, we thought about how we might do the same. We looked at funds and direct shares, and wondered how we might get our heads around Korean accounting. After a little work, we decided it was too much like learning a foreign language, and our attention floated off elsewhere despite the fact that we were struggling to find outstanding ideas in the Australian market at the time. A different approachWe now know that Buffett, already fabulously wealthy, was spending ‘night after night’ thumbing through a Korean stockmarket almanac, and digesting a book on Korean accounting to ‘reduce the odds of getting hornswoggled by the numbers’. Working through a list of thousands of Korean stocks, he narrowed it down to a shorter list of potential gems and got to know them better. He set up a special account with a bank in Korea, and apparently ‘that’s not easy to do’. He then put $100m of his own money into a portfolio of about 20 securities. That’s probably the equivalent of a few hundred dollars to you or I, but where we saw difficult hurdles he saw a puzzle to be solved. That’s why he’s Warren Buffett and why we’re not. Thank you Alice Schroeder for writing this wonderful book, for putting five years work into it and for resisting the urge to sugar coat. Honest biographies of living legends are all too rare, and it must take a lot of courage to write one. And thank you Warren Buffett for encouraging the development of this book and, as Schroeder put it, ‘for not meddling with the book for more than five years – right up until the day it went to the printer’. I could never imagine what it’s like to have my whole life laid bare like that. You’ve inspired a great many to become better, and not just at investing. That’s why you’re my hero, and I look forward to getting my copy of The Snowball signed at next year’s meeting. |
Saturday, 21 August 2010
The Snowball: Warren Buffett and the Business of Life. ‘Buffett is not a simple person, but he has simple tastes.’
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