Warren Buffett and the Business of Life
by Alice Schroeder
Bantam. 960 pp. $35.00
Warren Buffett is a fabled investor and money manager who has earned a fortune for himself while enriching others, and done so without the aid of Arabian oil, a rich father, or clever financial arrangements. He is also a towering philanthropist, who in 2006 announced that he would be giving most of his wealth—some $40 billion—to support the charitable work of the Bill and Melinda Gates Foundation.
Although Buffett’s public life and utterances have been studied as closely as Abraham Lincoln’s, Alice Schroeder’s The Snowball is presented as the first comprehensive biography of the privacy-minded subject, who took a liking to Schroeder when she tracked his holding company as an analyst for Morgan Stanley and gave her unprecedented access to his world. Published this past fall at the height of a financial crisis that toppled many other reputations but only seemed to elevate Buffett’s, The Snowball has enjoyed several months on the best-seller lists. Despite its overheated prose and nearly unbearable longeurs (the 960-page volume opens with great-grandfather Zebulon and takes you through every hamburger dinner), the book manages to provide a clear portrait of a man who has achieved far more than anyone would ever have thought possible—and somewhat less than his legendary reputation would suggest.
Born in Omaha, Nebraska in 1930, Buffett was the son of an abstemious stockbroker and isolationist who believed Franklin Roosevelt had colluded in the Japanese attack on Pearl Harbor in order to draw the U.S. into World War II. In 1942, the elder Buffett ran for Congress on an antiwar, libertarian platform, and won. He served four disappointed terms in Washington, returned to his business in Omaha, and became a member of the conspiracy-obsessed John Birch Society.
The young Warren inherited his father’s business sense and found he had a knack for entrepreneurship as well. He started with a paper route and gradually expanded his portfolio to selling scavenged golf balls and installing pinball machines in barber shops. From the latter enterprise he learned about the miracle of capital—of something you owned that could pay you continuously–and from the totality of his ventures he discovered the principle of “compounding” that gives Schroeder her title: Like a snowball rolling down a hill, the returns from capital well invested and re-invested would grow exponentially. He purchased a few stocks and got hooked on their thrilling price swings. But he was missing a design, a grand stock-picking strategy, and to find this he made his way to Columbia Business School in New York, where his idol Benjamin Graham taught a seminar on investing.
Graham was a self-made man, the son of Jewish immigrants who brought a new analytical rigor to the field of stock investing, once dominated by speculators, in books like Security Analysis (1934) and The Intelligent Investor (1949). Graham advised looking at businesses not merely in terms of their operations but in terms of the assets they owned. A company whose stock had fallen out of favor because of stagnating profits might still trade at a significant discount to the “intrinsic value” of its balance sheet; eventually, he argued, that value would be recognized by the sometimes fickle “Mr. Market.” All you had to do was buy and wait—provided you could afford to wait, which meant you were unburdened by the carrying costs of debt. Graham’s books became the bibles of value investing, and remain in print today.
While his classmates lived it up in New York and awaited cushy managerial jobs at General Motors and IBM, Buffett scoured the stock listings and Moody’s manuals in search of what his mentor called the “cigar butts” that Mr. Market had discarded but that still had a few puffs left in them. After a brief stint working as the first Gentile in Graham’s own firm (which tended to hire Jews since they had few opportunities at the white-shoe brokerages), Buffett took the master’s principles back with him to Omaha, where he set up a series of partnerships for private investors.
It was a good time to get into the market. Stock valuations were depressed in the wake of World War II, and there were many cigar butts lying around. As widely-held fears of a severe deflation proved unfounded and the postwar economy expanded, the stock market enjoyed a robust period of growth. Buffett’s partnerships did even better, and he drew from the experience one of his famous maxims: “Be fearful when others are greedy and greedy only when others are fearful.” Eventually he picked up a struggling textile company called Berkshire Hathaway for the value of its looms. Berkshire would never again make money in textiles, but its investment arm, which gradually became the vehicle for all of Buffett’s interests, more than compensated for it.
Buffett was joined at Berkshire by Charlie Munger, who would become his lifelong partner and sidekick. Eager to make a buck and willing to take a few calculated risks to do so (unlike Buffett, he was not averse to borrowing money to finance a good deal), Munger considered Graham’s investment philosophy, with its focus on a company’s doomsday-liquidation value, excessively bleak. There were other, often intangible assets to be exploited—the good will of an established business, its future earnings potential, a good management team. With this expanded horizon, Berkshire bought and never sold the stocks of classic franchises like Coca Cola, GEICO, Gillette, and American Express.
A third element of Buffett’s investing genius was his ability to inspire trust. In a delightful chapter, Schroeder relates Buffett’s professional courtship of Rose Blumkin, an indomitable Lithuanian Jewish immigrant who had pieced together a retail-furniture emporium in Omaha. Though she had been offered significantly more for her business by a German conglomerate, Buffett assured her that he would take care of her baby. She signed with him. In an instant, he had picked up a $30 million discount. Buffett would do many such simple deals with quick, eye-to-eye negotiations, no armies of lawyers and bankers.
Trust for Buffett meant above all fiduciary trust. Profits and dividends at Berkshire were reinvested. He never diluted the stock, never sold a share of his own, and resisted using stock to finance acquisitions, always preferring to buy companies with slower-growing cash. He appeared to be the anti-Wall Street, avoiding modish get-rich schemes as well as periodic blowups. (In the last decade alone, he issued prescient warnings about “bubbles” in technology stocks and financial products). When those blowups happened, the walking wounded came to him, as did many others in good times and bad, politicians and porn stars alike making the pilgrimage to Omaha to share a burger and coke with the Sage at the local diner.
Schroeder’s admiring account by and large subscribes to the aw-shucks view of the plain-spoken Midwesterner with the humble tastes. But she also lets slip how Buffett carefully tailored that image. For one thing, he didn’t shy entirely away from Wall Street and its innovations; he famously and wrong-headedly purchased the hard-charging Salomon Brothers because he liked its arbitrage trading, which involved taking on enormous debt.
Nor has he really avoided the high life. In the 1960’s, he entered into a long-term intimate relationship with Katharine Graham, the publisher of the Washington Post Company who, partially through his guidance, became the most powerful and successful businesswoman in American history. He has spent a great deal of his time in New York and Washington, and very much enjoys the company of fellow pooh-bahs.
Having escaped his father’s paranoid outlook, he absorbed the attitudes of Graham’s milieu, and the conservative sensibility that had served him so well in business hardened into the conventional liberal orthodoxy of the East Coast when it came to politics. On trade policy, his ideas came very close to protectionism. He didn’t particularly care for inherited wealth, so he elevated his prejudice into support for a confiscatory estate tax. And with his market-moving powers of speech, he was not above using his policy pronouncements to his own advantage. He might warn about deficits while shorting the U.S. dollar, betting that its purchasing power would drop. The more intrusive regulatory regimes he advocated helped solidify the established corporations he owned in their positions while crowding out the field for smaller competitors.
Buffett’s risk aversion made him a great steward of money, but it meant that his investments were confined primarily to safe business. Technological innovations that would alter and improve society were of little interest to him. He spurned Intel and Microsoft while they were growing, and if he had lived in an earlier time, he would have avoided the railroad, the automobile, the airplane. (He once remarked that nobody made money in those stocks.)
Business and life were inseparable for Buffett, and he could not escape his parsimony in personal dealings. He carefully monitored his wife’s allowance for years after he became spectacularly rich, and he excluded an adopted grandchild from his will. He came to charity relatively late, having for many decades hoarded his wealth apart from the odd foray into a cause like population control in Africa or stopping nuclear war, something that is very difficult to finance.
Through Bill Gates, who became his friend in the 1980’s, Buffett came to admire the ideas of Andrew Carnegie, whose The Gospel of Wealth (1889) advised rich men to give everything away. But in disposing of his own money as generously as he has, Buffett has displayed a poverty of imagination. He wrote a colossal check to the Gates Foundation, but provided no real sense of what he thought might be accomplished with it.
There is no question that Buffett has been a genuinely noble businessman, that he has done more than right by his investors, in part because he has made certain to share the risks he has taken with their money. His honesty, forthrightness, and good sense do seem almost heroic, especially at this moment. But unlike other men of extraordinarily great wealth in American history who have preceded him, who built lasting institutions and made lasting contributions to the public weal, Warren Buffett will, it appears, leave no monument. In the end, no matter how large it becomes, a snowball always melts.