Monday, April 23, 2012

The Snowball by Alice Schroeder

Wow! This is a TOME! Reading The Snowball occupied many of my waking hours for several weeks. Ms. Schroeder has done a great job of thoroughly chronicling the life and times of Warren Buffett, one of the U.S.A.'s leading billionaires - one who has been much in the news of late, and who may be immortalized by the Buffett Rule being proposed by the Obama Administration.

Buffett's formative years were in the era of the Great Depression, and it may be the single most important factor in determining the man he became. Of course, in the nature vs. nurture debate, the other factors were his relentless pursuit of information, reading every bit of information on a subject that obsessed him, and his urge to collect. He has lived around Omaha throughout his life, and never felt any need to move to the centers of financial and political power - people he needed to see tended to come visit him, instead.

Buffett's main claim to fame, of course, is the holding company he founded and controls, Berkshire Hathaway, which has created phenomenal wealth for those who placed their trust in him decades ago. At one of the legendary shareholders meetings, Buffett shared the following bit of wisdom, which we can all take to heart.

"What you're doing when you invest is deferring consumption and laying money out now to get more money back at a later time. And there are really only two questions. One is how much you're going to get back, and the other is when. Now, Aesop was not much of a finance major, because he said something like, 'A bird in the hand is worth two in the bush.' But he doesn't say when."

Buffett began his habit of earning and investing money when he was quite young. In 1942, he convinced his sister to go in on an investment with him, and when the price dropped, then recovered mildly - at which point he sold the stock - and then it went on to much bigger gains, he learned some valuable lessons:

"One lesson was not to overly fixate on what he had paid for a stock. The second was not to rush unthinkingly to grab a small profit...And there was a third lesson, which was about investing other people's money. If he made a mistake, it might get somebody upset at him. So he didn't want to have responsibility for anyone else's money unless he was sure he could succeed."

Young Warren, unsurprisingly, was a touch socially inept, and Schroeder relates wryly,
"He bought a ukelele to compete with the uke-playing boyfriend of a girl he was pursuing, but wound up holding only the ukelele instead of the girl."

Buffett figure out one thing at an early age - the effect of compounding on money - and he always used it to his favor. In fact, he was extraordinarily frugal in his personal life for someone his age. When he went off to get his MBA at Columbia 1950,

"...he found the cheapest lodgings available: joining the YMCA for a dime a day and paying a dollar a day for a room at the Y's Sloane House on West 34th Street, down near Penn Station. He was far from broke, enriched by $500 from the Miller scholarship and $2,000 from Howard (his father), a graduation gift and part of a deal not to start smoking. He also had $9,803.70 saed, some of it placed in stocks...But since Warren looked at every dollar as ten dollars someday, he wasn't going to hand over a dollar more than he needed to spend."

Another time when Buffett thought about compounding differently than most everyone else was when he bought a house for his growing family.
"Warren paid $32,500 to Sam Reynolds, a local businessman and promptly named it 'Buffett's Folly.' In his mind $31,500 was a million dollars after compounding for a dozen years or so, because he could invest it at an impressive rate of return. He felt as though he were spending an outrageous million dollars on the house."

If more of us thought like this, it would be great for our pocketbooks, but perhaps not so great for the real estate business.

By the way, "profiling" has been going on for a long time, sometimes quite profitably.

"GEICO sought to make auto insurance cheaper by marketing through the mail without an agent...To make it work, GEICO needed a rule that would allow it to avid the folks who drive thirty miles over the speed limit after downing half a bottle of tequila at three am. Borrowing an idea from a company called USAA that sold only to military offices, GEICO's founders, Leo Goodwin and Cleves Rhea, had decided to sell its insurance only to government employees because, like military officers, they were responsible individuals who were accustomed to following the law."

I'm not sure that last sentence is true any more, but it worked for a while.

One great Buffett quote:

"Time is the friend of the wonderful business, the enemy of the mediocre...It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price...when buying companies or common stocks, we look for a first-class business accompanied by first-class managements."

Buffett loved businesses like insurance companies with "float" - they take in large amounts of cash up front in premiums, and there may be a long delay before they have to pay out benefits. In the meantime, that money can be successfully placed in investments with high rates of return, and allowed to compound. When he and his business partners gained control of such a company, they used the cash to buy other companies, or stock in them. "It was a homeostatic business model - the idea of grafting float onto a holding company so that it could respond internally to the changing environment...(and)...the power of compounding, as float and investments doubled and redoubled over time" that made Berkshire Hathaway owners very wealthy.

Buffett seemed to know instinctively something our politicians never did. In the context of a local minority banker who wanted Buffett to subsidize home loans for poor minorities, "he knew the bank couldn't help anyone by relaxing its lending standards and making uncollectible loans, which would only teach the wrong financial lesson."
We could have avoided the whole housing crash if Fannie Mae and Freddie Mac and the regulators had kept this in mind.

Schroeder does tend, every once in a while, to go off on tangents about people with whom Buffett was involved in business deals at various times, which can be distracting, and certainly adds to the time it takes to read this 800 page plus extravaganza. Kaye Graham, Walter Annenberg, and Bill Gates all get extensive coverage here.

On a slightly political note, Buffett hasn't always been concerned about the plight of the middle class working stiff. When he and Charlie Munger managed to turn around the fortunes of the Buffalo Evening News in 1982, "Buffett and Munger went to a meeting of employees at the Statler Hilton downtown. Somebody asked about profit sharing. 'There is nothing that anybody on the third floor' - where the newsroom sat - 'can do that affects profits,' Buffett said...The workers got a paycheck for the time and effort they put in - no more, no less."

Buffett has been talking about his secretary's wages far longer than I'd realized. He mentioned that she paid more of a percentage of her wages out in taxes than he back in 2001. You'd think maybe he could have done something about the way she is compensated by now, wouldn't you?

This was an interesting read, fascinating at times, but it was a long haul.

1 comment:

Mae West said...

what percentage his secretary pays in taxes is all about the tax code and deductions, or lack of deductions actually... not about the way she is compensated....