Schroeder’s “The Snowball”

There are very few people in the business world that I respect more than Warren Buffett (hereby referred to as “WB”).  His skill, success, conviction, simplicity, and humor are all characteristics that I have a deep admiration for.  In the past I’ve read several books which cover WB’s investment style but lack significant biographical detail.  The latest book about his life entitled, “The Snowball and the Business of Life” fills the gap where previous books have failed by focusing on his life including details about his upbringing, family, and business.

The book was written by Alice Schroeder who covered Berkshire-Hathaway as an equity analyst in her previous career.  According to the inside cover WB & Schroeder became friends over the years.  WB eventually encouraged Schroeder to pursue a writing career and offered her unprecedented access to interview family and friends with the goal of producing a cohesive book on his life.  The results are spectacular.  With the exception of “Atlas Shrugged” this has been my favorite book that I’ve read on our trip.

If you like what WB stands for or have an interest in his investment style this book is definitely worth a read.

In reading the first part of the book about his upbringing I took notes on some of the lessons that WB learned along the way.  These lessons would ultimately help WB achieve unprecedented investment success.

Here are the lessons:

a) “Inner Scorecard”- pg. 33- from father:  WB learned to have an “inner scorecard” from his father who always made decisions based on his principles instead of following trends or crowds.  This obviously helped WB make investment decisions later on in life when Wall Street considered them unpopular (or vice versa: not make investments when Wall Street considered them popular).

b) “It might be easier to go through life as an echo, but only until the other guy plays a wrong note.“- pg. 58- from a band experience.

c) Care about opinion- pg. 62- Sidney Weinberg- When WB was young his father took him to a Wall Street investment company where he got to meet the CEO, Sidney Weinberg.  WB remembers that Weinberg paid attention to him and asked him about his opinion which he appreciated.

d) Don’t fixate on what was paid for a stock- pg. 65- self-lesson from his investment days at the age of 12!

e) Don’t rush unthinkingly for a small profit- pg. 65- self-lesson from his investment days at the age of 12!

f) Investing other’s money- a loss may make them upset- pg. 65- self-lesson from his investment days at the age of 12!

g) Know the deal in advance- pg. 74- shoveling snow for his grandfather

h) Didn’t like hard manual labor- pg. 75- working in grocery

i) Don’t criticize others- pg. 99- Dale Carnegie’s “How to Win Friends and Influence People“.

j) Calculating odds, betting when odds are in favor, emotional decision-making- pg. 108- horse racing.

k) Thinking for yourself- pg. 134- Lou Green

l) A stock is the right to run a small fraction of a business- pg. 147- Ben Graham

m) When investing always use a margin of safety- pg. 147- Ben Graham

n) Mr. Market is your servant- pg. 147- Ben Graham

o) On not allowing money to change how he lives.- pg. 186- Ben Graham

p) “It pays to hang around with people who are better than you.“- pg. 158- His experience in the National Guard

q) Power of customer loyalty- pg. 169- owning a gas station business at a young age

r) Scuttlebutt/ qualitative analysis- pg. 263- Charlie Munger (who learned it from Phil Fisher which I wrote in this book review)

s) The retailing business is about merchandising, not finance- pg. 291- H-K retail company which he bought early on in his investment career.

t) “Far better to buy a wonderful company at a fair price than a fair company at a wonderful price.“- pg. 388- Gurdon W. Wattles

u) Ovarian Lottery- pg. 646- trip to China with Bill Gates

Other notes from the book:

*WB’s memory for #’s is remarkable.  There are various points in the book where he recalls details about dates and numbers in business dealings he had had 30 years earlier.  I have also met other financially successful individuals and this is a trait that stood out in my mind with these people as well.

*Quote: “In the short run, the market is a voting machine.  In the long run, it’s a weighing machine.

*Quote: “Praise by name, criticize by category.

*On WB & Charlie Munger: “They thought alike and had the same fascination with business as a puzzle worth spending a lifetime to solve.  Both regarded rationality and honesty as the highest virtues.  Quickened pulses and self-delusion, in their view, were the major causes of mistakes.

*WB’s focus: There are multiple sections of the book that describe WB’s focus.  In one instance he is on his plane with his family.  As the plane entered a period of turbulence he kept his nose down in his papers.

*On pg. 28-29 Schroeder writes out an average day for WB.  Worth finding the book to read for yourself.

*A hilarious practical joke WB played when he was younger.  Here’s his quote about it:  “I made up a letterhead from the American Temperance Union, Reverend A. W. Paul, President.  I’d write letters to people on that letterhead saying that for years I’d lectured around the country on the evils of drink, and in these travels my appearances were always accompanied by my young apprentice, Harold.  Harold was an example of what drink could do to men.  He’d stand there on stage with a pint, drooling, unable to comprehend what was going on around him, pathetic.  Then I said that, unfortunately, young Harold died last week, and a mutual friend had suggested that you might be a replacement for him.

*By the time WB was a senior in high school he had the following income sources:
a newspaper route, calendar sales, magazines sales, golf balls, car buffing business, and pinball machines.  In each of these instances he’d fund the business and hire a “partner” to do the work.  With his work he was earning more money than his teachers.

*WB originally began as a stockbroker but did not like the conflict of interest  that was inherent in the stockbroker- client relationship.

*Investing in yourself for 1 hour each day- “Charlie (Munger), 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 page 253 WB likens his value approach to investing as “buying dollar bills for forty cents…“.

*One of the main engines of growth for WB in his career is the ‘float’ money he receives through his insurance business.  Through ‘float’ his business received insurance premiums in advance of paying our claims.  During the time in which his insurance business had the money he was able to invest the funds and earn a return.  This profit on the money is what is known as ‘float’.  Banks also have a business structure that profits from ‘float’.

*Retail businesses are very difficult to invest in.  Charlie Munger explains: “Retail is a very tough business…  Practically every great chain-store operation that has been around long enough eventually gets in trouble and is hard to fix.  The dominant retailer in one twenty-year period is not necessarily the dominant retailer in the next.

*WB’s methodology for buying stock/ companies: “…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.

*From 1978 to 1983, the Buffett’s net worth increased from $89 million to $680 million.

*On page 514-515, the book describes the era of junk-bonds & hostile take-overs.  It sounded a lot like the 2003-2005 when financing was cheap.  The new name for “hostile take-over” however was “private equity”.

*Munger & WB on defining risk as volatility- they thought it was “twaddle and bullshit“.

*Schroeder provides a great explanation of derivatives on page 544.

*Chapter 48 covers the Salomon Brothers debacle where WB temporarily served as CEO.  In a great section of the chapter the author defines Munger’s term “thumb-sucking” as not speaking up or handling an problem as soon as it arises.  In the end leadership at Salomon at the time of the problems were guilty of “thumb-sucking”.  Had they acted fast and been transparent they likely would have avoided the issues.

*WB’s ‘front-page rule’ for conduct: “I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.

*When asked what one factor was most important in getting to where he’d gotten in life WB said, “focus”.  It turns out that Bill Gates at the same dinner replied with the same answer.

*Schroeder describing WB’s focus: “This kind of 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.

*The book covers briefly WB’s idea of the “institutional imperative” which is defined as, “the tendency for companies to engage in activity for its own sake and to copy their peers instead of trying to stay ahead of them.”  Obviously, WB isn’t too keen on buying companies that suffer from the institutional imperative.

*Munger & WB on using math models for investment decisions: “…using models to make investment decisions was like driving a car on cruise control.  The driver might think he was fully alert and attentive, but would find out differently when the road turned winding, rain-slicked, and full of traffic.

*WB’s advice for college graduates: “…go to work for whom they admire the most.

*As WB became more famous he got more demands on his time.  Here is how Schroeder described how he handled it:  “He did only what made sense and what he wanted to do.  He never let people waste his time.  If he added something to his schedule, he discarded something else.  He never rushed.  He always had time to work on business deals, and he always had time for people who mattered to him.

*WB describes an ideal business: “The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns.  That becomes a compounding machine.  So if you had your choice, if you could put a hundred million dollars into a business that earns twenty percent on that capital-twenty million-ideally, it would be able to earn twenty percent on a hundred twenty million the following year and on a hundred forty-four million the following year and so on.  You could keep deploying capital at those same returns over time.