Alice Schroeder, “The Snowball (Warren Buffett and the Business of Life)”, Bantam Books, Sept. 2008, Pages 838
Author Alice Schroeder was a noted insurance industry analyst and writer who was a managing director at Morgan Stanley. She first met Warren Buffett when she published research on Berkshire Hathaway; her grasp of the subject and insight so impressed him that he offered her access to his files and to himself. I really enjoyed reading this; I could not put it down.
This book is a biography of Buffett's life, of his values and his strategies, of his total experiences. It is truly a great American story and exceptionally important in an analysis of today’s financial crisis. Buffett warned about most of what is happening today yet was made fun of by people like Greenspan. Yet even he is not immune to the current crash; mostly because he owns business’s and can’t just cash them in to wait out the storm. By the end of 2007, BRK traded above $140,000 per share and Buffett’s personal fortune exceeded $60 billion. However, during the current panic every stock, no matter how well the company(s) are managed, are being impacted mostly the same. BRK traded at $73,195 on 3/6/09 as I write this.
Notes:
The Title: Warren Buffet states: “Life is like a snowball. The important thing is finding wet snow and a really long hill.” He did not mean this in just an investing sense: it applies to knowledge, relationships, health, etc…
The teenage Warren was actually dislikeable. Also, his congressman father comes across as being out of touch with reality, so conservative that he opposed everything FDR proposed, including Social Security and later, under Truman, the Marshall Plan. Finally, his father joined the John Birch Society. Yet, Warren admired his father’s integrity if not his judgment. Warren’s Mother was a screamer; Warren avoided her throughout her entire life. So the book is not a whitewash job.
In 1973 the Omaha Sun weekly newspapers, then owned by Buffett with Lipsey as publisher, won a Pulitzer for its expose of fund raising and lack of spending by Boys Town. Father Flannery had died and the clergy that took over became dedicated to fund raising, not the boys. A friend of mine was brought up in Boys Town but would never talk about it. He became uncharacteristically mute when anyone asked him about it. The most he ever said was “It isn’t like the movie.”
Pg. 126: Graham’s book, “The Intelligent Investor”, was published in 1949. This book of practical counsel for all types of investors—the cautious (or defensive) and speculative—blew apart the conventions of Wall Street, overturning what had heretofore been largely uninformed speculation in stocks. It explained for the first time in a way that ordinary people could understand that the stock market does not operate through black magic. Through examples of real stocks such as the Northern Pacific Railway and the American Hawaiian Steamship Company, Graham illustrated a rational, mathematical approach to valuing stocks. Investing, he said, should be systematic.
Pg. 185: Graham knew that a certain number of cigar butts would turn out foul, and thought it futile to spend time examining any individual cigar butt’s quality. The law of averages said most of them were good for a puff. He was always thinking in terms f how much companies would be worth dead—what their assets would be worth if liquidated. Buying at a discount to that value was his margin of safety—his backstop against the percentage that presumably would go bankrupt. As a further backstop, he bought tiny positions in a huge number of stocks—the principle of diversification. Graham’s idea of diversification was extreme; some of his positions were as small as $1,000.
Warren, who had such confidence in his own judgment, saw no reason to hedge his bets this way and inwardly rolled his eyes at diversification. Warren wanted to know all the basic information about every company. Once he had looked over the field, he narrowed it down to a handful of stocks worth even more careful study, then concentrated his money on what he considered the best bets. He was willing to put most of his eggs in one basket. He never invests in something he does not understand; hence, he never invested in any of the dot.com stocks and kept warning people that a bust would be coming. Many people left Berkshire to participate in that bubble.
Pg. 478: Warren’s method: estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in your circle of competence, let it roll as compounding did the work.
Pg. 480: In the Berkshire 1983 annual report, Charlie Munger and Buffett spelled out to shareholders a set of principles from which they would operate. They called them the “owner-oriented principles.” No other management told its company’s owners these things: “Although our form is corporate, our attitude is partnership,” they wrote. “We do not view the company as the ultimate owner of our business assets, but, instead, view the company as conduit through which our shareholders own the assets.” “We don’t play accounting games, Buffett and Munger said. We don’t like a lot of debt. We run the business to achieve the best long-term results. This statement amounted to a throwback to a former generation of corporate governance. The modern-day corporate chief viewed the shareholders as a nuisance, a noisy or quiet group to be appeased or ignored.
Pg. 531: To make big money, arbitrage was used: buying and selling two nearly identical things to profit from their difference in price. This required scaffoldings of debt, in which more and more assets were sold short to buy more and more assets on the long side The expansion of leverage from hedge funds and arbitrage was related to the rise of junk bonds ad takeovers occurring at the same time. The models that supported the argument for leveraged buyouts using junk bonds were, like the models used by arbitrageurs, variations of the efficient-market hypothesis. Leverage, however, was like gasoline n a rising market, a car used more of it to go faster. In a crash, it was what make the car blow up. This is why Buffett and Munger considered defining risk as volatility to be “twaddle and bullshit,” as Munger would later put it. They defined risk as not losing money. To them, risk was inextricably bound up in your time horizon for holding an asset. Someone who could hold an asset for years could afford to ignore its volatility. Someone who was leveraged did not have that luxury—leverage costs; moreover the lender’s (not the borrower’s) time horizon defines the length of the loan. Thus a risk of leverage is that it takes away choices. Te investor may not be able to wait out a volatile market; he is burdened by the “carry” (that is, the cost) and he depends on the lender’s goodwill.
Pg. 721: The estate tax was technically not a death tax; it was a gift tax. Anytime someone gave a large gift of money, he paid a gift tax. All gift taxes were a blockade against the return of the robber barons, who controlled so much of the nation’s riches through gifts and inheritance in the nineteenth century that they became like a government unto themselves—a plutocracy-a ruling class based on wealth. The estate tax, however, was paid at a lower effective rate than the tax imposed on gifts from living persons, allowing relatively large posthumous gifts to go untaxed. Buffett, Gates, and many others like them opposed George W. Bush’s campaign to get rid of the estate tax. They did not want the country to be ruled by a plutocracy.
Pg. 735: In 2003 Buffett wrote that he believes that derivatives should be regulated, more disclosure should be required, they should be traded through a central clearinghouse, and the Federal Reserve should act as a central banker to the major investment banks, not just the commercial banks. Greenspan, however, defended the unregulated market and made sport of Buffett’s wariness.
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