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The world’s most famous investor, Warren Buffet, is a riddle wrapped in an enigma.
The Snowball: Warren Buffet and the Business of Life by Alice Schroeder details Buffet’s improbable rise from Midwest obscurity to the world’s most successful investor.
Although his investment prowess is well known, it is less widely known that Buffet is an odd person.
He has many quirks (like reading trade magazines at dinner parties), but the most obvious example is the decades-long, open relationship with Astrid Menks. His singular, obsessive focus on money and investing ultimately drove his wife Suzie away to California even though they remained married.
Buffet set Suzie up with a house in San Francisco, and, in return, Suzie set Buffet up with Astrid. Initially, Astrid simply the made the meals and did the house cleaning, but ultimately becomes one leg of a love triangle. As Buffet once said, “If you knew the people involved, you’d see that it suited all of us quite well.”
Far more interesting than the details about his personal life, though, is the trajectory of his business career. As a young boy, Buffet read a book about becoming a millionaire by age 35. He started many small businesses like delivering newspapers and worked at Sears. Unlike most kids who take on small jobs, Buffet graduated from college with savings of $83,000 in today’s dollars.
Several years later in graduate school at Columbia, Buffet finds his mentor in one of his professors, Benjamin Graham. In addition to teaching, Graham authored several investment classics and owned a money management firm where applied his techniques.
While Graham’s basic tenants are deceptively simple, they are not easy to execute. The first concept is that buying a stock isn’t simply taking ownership of a stock certificate; it is taking a partial ownership in a business. Therefore, when making an investment, it is critical to analyze the business before the security.
When analyzing the business, Graham tries to estimate the ‘intrinsic value’ of the company using basic fundamental analysis of the financial statements. While some of his specific methods are no longer useful, the basic concepts are completely intact.
Most importantly, investors must purchase a stock when the market price is trading well below the estimated intrinsic value. Graham refers to the discount between the estimate of intrinsic value and the market price is his ‘margin of safety’ reflecting the inherent uncertainty about the estimated intrinsic value.
Although initially unable to get work at Graham’s firm right out of graduate school, Buffet ultimately was able to land a position a few years later. In all, he spent eight years working for Graham in New York putting his formal education to work in the market.
When Graham decided to retired, Buffet went back to Omaha to set up his own shop. While working for Graham, Buffet built his nest-egg to $1.3 million in today’s dollars; he was 26.
Despite his recent criticism of the industry, Buffet essentially became a hedge fund manager by establishing private partnerships for the purposes of investment where he was the general partner and his clients were limited partners.
Unlike today’s hedge fund managers who typically assess a two percent management fee and earn 20 percent of the profits, Buffet earned a whopping 50 percent of the profits in excess of four percent (known as a hurdle rate).
However, he did not earn a management fee, and, most importantly, he would be personably responsible for 25 percent of the losses – something unimaginable today.
By the time he as in his early 40’s, Buffet was earning millions per year in through this compensation structure and nearly all of the money remained in the partnership while his lifestyle remained unchanged.
Even though his performance is often compared with the S&P 500, Buffet favored small companies on the ‘pink-sheets’ where prices were quoted weekly on the written page instead of on an exchange. He sought control of companies, installed himself on the board of directors and would often vote to distribute cash that wasn’t critical to operations.
Unlike Graham who staunchly believed in diversification, Buffet found much of his success in concentrated positions. At times, the partnership had well more than half of the money invested in a single company without the knowledge of his limited partners.
In the early 1970s, Buffet unwound the partnerships since he couldn’t find investments that he thought were worth buying. He did hold on to the now famous textile business, Berkshire Hathaway, and a few other odds and ends.
During the next three decades, Buffet transformed Berkshire into one of the world’s largest conglomerates through the acquisition of public and private companies. Although the most important segment of Berkshire is insurance, he bought all kinds of businesses from See’s Candy to Net Jets. He also famously invests in common stocks like Moody’s, American Express and Coca-Cola (despite having been a Pepsi drinker).
Some of the most interesting sections of the book are his investment mistakes. The purchase of Salomon Brothers stock (in large part because he liked the CEO at the time, John Gutfreund) may have paid off modestly as an investment, but it was a burden that cost Buffet an enormous amount of time, energy, and, to some degree, reputation.
Since the difficulties are as illuminating as the successes, it was nice to see Schroeder include them in the book, although it is obvious that Schroeder’s close relationship with Buffet highly influenced the hugely positive tone of the book. For example, the controversial appearance of his step-granddaughter in a documentary about the super-wealthy was relegated to the Appendix along with some unsettled lawsuits.
Despite the obviously friendly biographer and the sometimes grueling level of detail (especially before he is born), The Snowball is well worth the read since the subject is fascinating.
The Snowball: Warren Buffet and the Business of Life
By: Alice Schroeder
Bantam Dell, a Division of Random House, Inc. New York, New York 2008