Warren Piece

The Gist:  How the Oracle of Omaha refined his investment strategy to become a billionaire.

The second of a two-part review of multiple Buffett biographies.

Read the first part here: My Warren Report.

Where last we left off, Warren Buffett was just starting to get back into the stock market as it underwent a sustained downturn during the 1970s. In other words: businesses were on sale! 

Sale

Figure 1. “C’mon down to Wall Street because EVERYTHING MUST GO! Your favorite brands are 50 – 70 – even 90% off! We are SLASHING prices MARKETWIDE for this decade only – so get in while you can and tell ‘em Cowboy Pete sent you!” 

 

His vehicle was rather unusual: the publicly-traded Berkshire Hathaway, originally and ostensibly a northeastern textile manufacturer. Yet Buffett was using the profits of the manufacturer to invest in other companies – and those investments were paying off far better than the troubled underlying business. His partner in success – the man who refined Buffett’s investing approach from the pure bargain-hunting that had led to Berkshire’s acquisition in the first place – was Charlie Munger.

Munger was also an Omaha native but, unlike Warren, was determined to get out. Bouncing around different colleges but never getting a degree amidst military service in World War II, he was at one point assigned to California and quickly concluded he preferred western winters. As the grandson of a federal judge, Munger was able to solicit a family friend’s help in getting into Harvard Law School without the college prerequisite – and, despite the dean’s skepticism, wound up graduating in the top 10% of his class. Soon making a sizable income at a California law firm, Munger began investing with a notable caution: he did not want to put his money into people and companies that made good law firm clients because they had so many legal problems. 

While Munger was a great lawyer – he even co-founded a super-star law firm – he was an outstanding investor and soon was investing other people’s money. Wall Street Journal reporter and Buffett biographer Roger Lowenstein reports: “Munger was no Ben Graham disciple. In his view, troubled companies, which tended to be the kind that sold at Graham-like discounts, were not easily put right.” As Buffett would sum up, “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. Charlie understood this early; I was a slow learner.”

Troubadour

Figure 2. Literally bought for a song from a troubadour, Ye Olde Renaissance Fair franchisor turned out to have an array of pending lawsuits related to its attempt to genuinely recreate its time period with Bubonic plague infections, burning of heretics, malnutrition for most participants, and explanations of danger only available in hand-drawn Latin brochures sold for hard currency.

 

But what was a “wonderful company”? Munger was on a mission to find out and asked everyone he met “What’s the best business you’ve ever heard of?” In 1959, Munger was back in Omaha to settle his father’s estate when he got to ask his favorite question to a new acquaintance, the grandson of the owner of the grocery store he once worked at (in his words, “slaved” at) as a teenager: Warren Buffett. It was an instant friendship that would last a lifetime and they began talking every single day by phone. Soon, Buffett would be asking a variant of Charlie’s question: “If you were stranded on a desert island for ten years, in what stock would you invest?”

Wilson

Figure 3.  Among those actually castaway on a desert island for years, the answer was Anta Sports Products Limited, traded as ANPDF on the Hong Kong Stock Exchange, perhaps better known for its subsidiary, Wilson Sporting Goods. 

 

The understanding that drove the intensity of the duo’s search was that concentration on the right bets – the equivalent of putting it all in on the royal flush – would pay off better than diversification. The difference, of course, is that you know a royal flush is the best hand while you don’t know the future of a company. Diversification is really risk management because concentration can mean you lose it all as well – maybe you’re really putting it all in on a pair of twos. Buffett would later advise students that “You’d get very rich if you thought of yourself as having a card with only twenty punches in a lifetime, and every financial decision used up one punch. You’d resist the temptation to dabble.” 

For Buffett, that meant staying within your circle of competence and being as sure as you could be, after much intensive and obsessive analysis, that every decision was right. From Graham, Buffett understood that he needed a margin of safety and that Mr. Market might provide it to him at the right time. From Munger, Buffett began to see that there might be more to intrinsic value than merely the price at which a company could be liquidated. Munger wanted businesses that continuously threw up easy decisions rather than hard ones. But he also became interested in a specific feature: “Munger had a Caterpillar tractor dealership as a client. To grow, the business had to buy more tractors, gobbling up more money. Munger wanted to own a business that did not require continual investment, and spat out more cash than it consumed.”  

The business that fit the bill and fueled Buffett’s success would be insurance. Buffett had first gotten to know the industry through studying Ben Graham’s greatest payoff, Geico, which originally and brilliantly sold insurance through direct mail (thereby removing the commissions and costs of agents) only to government employees (who, on average, filed fewer claims). While Buffett would eventually buy Geico, he started out with a profitable Nebraska insurer whose owner was a bit moody and had a reputation for getting irritated enough to threaten to sell the business – but only for about fifteen minutes once a year before calming down. Buffett let it be known that if he could get in during those 15 minutes, he’d buy. Soon enough, he did – or, as one might put it, 15 minutes saved him 15% or more on insurance.

What Buffett understood faster and better than the rest of the insurance industry was the opportunity to invest the float – that is, the money available between when premiums are paid in and claims were paid out. Most of the industry then just stashed it away in long term bonds (conventionally safe but soon ravaged by inflation). Buffett, while insisting on relatively safe and conservative underwriting, put the float to work in the market and in piecing together his own conglomerate. The float meant he did not have to take on debt but instead had access to his own cash source: “Charlie Munger has said that the secret to Berkshire’s longterm success has been its ability to ‘generate funds at 3 percent and invest them at 13 percent.’”

Flight attendant

Figure 4. “Welcome aboard the New York Stock Exchange! Thank you for your attention while important margin of safety information is reviewed. Your cash may be placed in an overheard compartment or completely under the seat in front of you – but taking on additional leverage is prohibited. In case of an emergency, please follow the lighted ticker signals reflecting a downward price movement and buy as much as you can. If you are an insurance company, your float is an approved cushion device. If you are seated in an exit row, you may be called upon to get as many bargains as you can as terrified sellers pass you by. If you are unable or unwilling to perform that function, you will lose a lot of money.”

 

Buffett’s success ultimately came from laddering up his investments and, as he put together a conglomerate, redistributing capital to its best and highest use. Buffett had a single goal: for every dollar he could get from profits or float or wherever, where would it go the farthest? Buffett insisted “I’d rather have a $10 million business making 15 percent than a $100 million business making 5 percent… I have other places I can put the money.” William Thorndike authored a study of Buffett and other unconventional CEOs with outsized returns and concluded that their success related to this magic of capital allocation. “Whenever Buffett buys a company, he takes immediate control of the cash flow, insisting that excess cash be sent to Omaha for allocation.” Once Buffett had all the cash in one place, he would decide where to invest in existing operations, whether to acquire a new business altogether, whether to invest in Berkshire’s own stock if it was cheap, whether to pay off debt, or whether to keep powder dry – all depending on what might have the highest return.

Buffett’s style had another related feature: “Except on June 30 and December 31, when [a CEO of a subsidiary] was obliged to transfer his profits to Omaha, he felt as if the business were his. In a practical sense, he was free to run it for the long term, as a private owner would.” Buffett’s corporate offices had an anorexic staff – even by the time it was a Fortune 500 company, HQ had less than a dozen people. One CEO reported that he “delegated to the point of abdication” and would “always praise [his team] while he gave [them] more to do.” But “while remarkably tolerant of others’ quirks and flaws, he was less so of quirks and flaws that cost him money.” It was all about the return – and if you couldn’t deliver, none of the profits would be given back to you. 


Given the attractive features of the insurance business, you won’t be surprised by the business that ultimately brought together Munger and Buffett as partners: Blue Chip Stamps. Essentially a rewards program, super-markets paid Blue Chip for the ability to distribute stamps that their customers could earn by making purchases and redeem for prizes. For Buffett and Munger, the magic was that they got immediate control over the money that would only have to be given back over time – if at all (lots of customers lost their stamps). “To Buffett, Blue Chip was simply an insurance company that wasn’t regulated” – with a float of almost $100 million.

And yet the maneuvering of Buffett and Munger at Blue Chip did attract the unwanted attention of the SEC. Between them, Munger and Buffett owned 3/4 of Blue Chip and were using the investment committee to pursue more good deals, including making a substantial run at a savings and loan, Wesco Financial, trading at “less than half its book value”. But Wesco’s management soon announced they were going to be taken over at what Munger and Buffett thought to be a terrible price, so they maneuvered to kill the deal and then eventually themselves acquired a majority stake. The SEC, however, suspected stock manipulation and were further suspicious of Blue Chip’s convoluted and complicated ownership structure – often a sign of attempted fraud. The problem was that though Munger and Buffett controlled Blue Chip, they did so through lots of different entities, each of which may have required fiduciary duties, where Munger’s partnership owned a portion, but also a portion of a third company that owned a portion, and that third company was owned in part by Buffett’s Berkshire Hathway, which also owned a portion of Blue Chip, and then there was Buffett himself who personally owned part of Blue Chip along with other companies, and so on and so on.

Football

Figure 5. Meanwhile, thousands of kids would kill for some attention from the SEC.

 

An investigation ensued, and Munger and Buffett decided to cooperate in full. By the end, instead of an indictment, the SEC “named [Buffett] to a blue-ribbon panel to study corporate disclosure practices.” By all accounts, they really were totally above board – and unusual in that they each interviewed alone without a phalanx of attorneys. But it may have helped that the SEC had been taken over by a former law partner of Munger’s. Regardless, the duo realized that their structure had organically grown into something too complicated and they decided to consolidate everything into the single entity of Berkshire Hathaway. (And Munger might have had extra motivation because, unlike Buffett, he had not returned all capital in 1970 and so his record took a rough dip as the market declined).

In the meanwhile, Buffett found another kind of wonderful business – and this one Ben Graham did not approve of. The specific company was California chocolatier See’s Candy, which Buffett bought at 3x book value – very expensive in Graham’s outlook and Buffett had held his nose to offer that absolute maximum. But one of the problems with book value is that it does not take into account the power of a brand – the difference between whether you’d buy a generic cola or Coke, the difference between the price of machinery on the open market versus what its capable of producing – Mustang or Edsel. See’s had established a consumer franchise where customers were willing to pay an irrational price well above cost. Around this time, Ben Graham invited Buffett to be the coauthor of a revised edition of the Intelligent Investor; Buffett wanted to add a chapter about See’s Candy and identifying great businesses but “Graham didn’t think the average reader could do it.” Buffett ultimately declined – his foundation was still Graham but Munger had helped him go beyond it. And if the stock market was as cheap and inflation as bad as the 1970s, he was ready to invest a far greater percentage in stocks than Graham’s 75% ceiling. Relatedly, 

Fear of inflation was a constant theme in Berkshire’s annual reports throughout the 1970s and into the early 1980s. The conventional wisdom at the time was that hard assets (gold, timber, and the like) were the most effective inflation hedges. Buffett, however, under Munger’s influence and in a shift from Graham’s traditional approach, had come to a different conclusion. His contrarian insight was that companies with low capital needs and the ability to raise prices were actually best positioned to resist inflation’s corrosive effects.

Coke

Figure 6. Pro tip for your budget: look up all the companies considered consumer franchises – and immediately and forever more replace them with generics. With Coke, a cheap alternative generic comes right out of your faucet! 

 

But, of course, people could still buy chocolate elsewhere. What Buffett really wanted was the only toll-bridge in a river town, a business where people had to use the product. The best equivalent he could find was a local newspaper where businesses felt obligated to advertise. He shopped around for a few years, bought an alternative weekly in Omaha and even helped it win the Pulitzer Prize, bought Washington Post shares at a bargain and went on the board to further get to know the industry, and finally he was able to acquire, in his biggest purchase then to date, the Buffalo Evening News. 

Acquiring the evening newspaper (with a strong morning rival once edited by Mark Twain) without a Sunday edition (published by the rival) in a declining manufacturing town with unfavorable labor laws did not seem to be the kind of wonderful business that continuously threw up easy decisions – and it’s possible that Buffett and Munger were too influenced by their love of newspapers. And yet what happened next was even more difficult than they could imagine: when the Buffalo News tried to publish a cheap Sunday edition, their rival sued them for antitrust – and a local federal judge, perhaps skeptical of non-local interlopers, held them up in court for years. But Buffett made the bet that his balance sheet was stronger than the owners of the other newspaper and so they bitterly fought it out until the rival went bankrupt. Suddenly, Buffett had his toll bridge and the printing presses at the Buffalo News started figuratively printing money, spurring new purchases for the Berkshire conglomerate. Interestingly, Buffett was very clear on who won the classic newspaper war:

Soon after the [rival] Courier’s demise, Buffett attended a meeting for the newspaper’s middle-level managers, in Buffalo’s Statler Hotel. “What about profit-sharing for people in the newsroom?” Buffett was asked. On its face, this seemed reasonable. The newsroom had certainly done its bit. Buffett replied coldly, “There is nothing anybody on the third floor [the newsroom] can do that affects profits.” The staff was shocked, though Buffett was merely living up to his brutal-but-principled capitalist credo. The owners of the Buffalo Evening News had run very great risks. Employees had not come forward during the dark years to share in the losses. Nor, now, would they share in the gains. 

The 1980s would be defined by the image of the corporate raider: an aggressive outsider who used debt to buy companies he could not otherwise afford with the hope of paying it off by better management (or liquidation). Buffett hated that this helped Mr. Market go manic: “A raider with access to somebody else’s dough would pay a lot more than a company was worth. And Wall Street’s soaring appetite for junk bonds was providing a vast supply of easy money.” But he soon found that he could secure special deals by being the antidote to the era: as a folksy debt-shy Midwesterner with a hands-off management style, he was the perfect white knight to fend off raiders looking for easy prey. Indeed, this was a business Buffett understood well: he was going to be management’s insurance. 

But while pursuing private opportunities and cutting deals of special consideration throughout the decade, Buffett saw less opportunity in the public markets. In 1985, he “sold every stock in the portfolio” except for the “permanent” three: Geico, the Washington Post, and Capital Cities (lots of local television stations that wound up buying ABC). In the same year, he finally ended Berkshire’s textile business: “The equipment would have cost as much as $50 million to replace. Put to the auction block, it sold for $163,122.” For three long years between 1985 and 1988, he did not buy a single common stock. When he did, “he staked a fourth or so of Berkshire’s market value” on the sufficiently cheap consumer franchise of Coca Cola, which had been trying to concentrate on its core business after some bumps in the road. Over the coming years, Berkshire’s holdings would grow in value by nearly $19 billion, up over 1,000%.

The New Coke fiasco merely made the company more compelling to him. As Buffett explained it, Coca-Cola knew that Americans had preferred the sweeter New Coke, but when people were told about the switch, they wanted their old Coke back. The drink had “something other than just the taste—the accumulated memory of all those ballgames and good experiences as children which Coke was a part of.”

The 1990s began with a white knight deal gone wrong. Buffett had long been critical of the investment banking industry, quipping that “the bankers should be the one wearing ski masks” and “you won’t encounter much traffic taking the high road on Wall Street.” But he had a personally good experience with Salomon Brothers and when they asked for his help to fend off a raider – and offered an extremely sweet deal – Buffett took it. A few years later, however, a rogue trader repeatedly defrauded the worst possible victim: the U.S. government. When management discovered the problem, they dithered and procrastinated until it was too late – the culture of the firm tending to encourage employees to walk the line. But this scandal threatened the destruction of the entire business, either through criminal action or, even more significantly, the cutting of U.S. Treasury bond sales to the firm. As a board member and substantial investor, Buffett realized he was the only one who could put it right and took over as CEO. Quickly finding the right person to run day-to-day, more than anything else Buffett provided moral leadership. Buffett sent a short memo to all employees, “insisting they report all legal violations and moral failures to him. He exempted petty moral failures like minor expense-account abuses, but, “when in doubt, call me,” he told them. He put his home phone number on the letter.” He pledged complete cooperation with the government, stating before a Congressional committee “ I would like to start by apologizing for the acts that have brought us here. The Nation has a right to expect its rules and laws will be obeyed. At Salomon, certain of these were broken.” Through extreme cooperation, Buffett saved the company – and salvaged his investment.

Knight2

Figure 7. For Solomon Brothers, twas but a scratch

 

The 1990s also saw the return of a big bull market led by technology – and many thought that Buffett had lost his touch. The market run had gone on for so long that some thought it could only go up – the old bargains weren’t there and Buffett’s record didn’t look quite as shiny next to the ridiculous instant returns of tech (including from the company of Buffett’s personal friend Bill Gates). In 1999, near the height of the bubble, Buffett gave a famous speech that conceded the internet would change the world – but he wasn’t sure where or even whether money could be made over the long term. Buffett noted two technologies in particular had upended the 20th century: automobiles and airplanes. Of some two thousand auto companies at the beginning, only three had survived: could anyone be so confident that those were the three that would? As for the other innovation, “As of a couple of years ago, there had been zero money made from the aggregate of all stock investments in the airline industry in history.” Buffett had gotten past the mechanical analysis of Graham but he could not get to the magical analysis of Silicon Valley. “Charlie Munger… said that if he were giving a test calling for an analyst to value a new dot-com internet company, he would fail anyone who answered the question.” 

Ultimately, what made Buffett truly remarkable was that he became so rich as an investor as opposed to an inventor or someone who plied a specific trade. Rockefeller had oil, Vanderbilt had transportation, Walton had discount retailing, Gates had software, but Buffett didn’t invent anything – he just knew a good deal when he saw it. And knew it from a very young age, so his successes compounded decade after decade, such that over 90% of his wealth has been generated after he turned 65. He had created the structure that fueled still more success, reallocating capital time and time again to quickly take advantage of operations or the market. The books reviewed here end in the late 1990s and early 2000s, but Buffett has continued to apply similar principles sometimes with non-obvious elements: Berkshire’s largest public holding would become Apple, which many think of as a tech company but Buffett prefers to see as a luxury manufacturing company with the customer franchise model he has long sought to invest in. And Buffett continues to pursue private deals – his biographer Alice Schroeder argues that “Buffett’s real brilliance was not just to spot bargains (though he certainly had done plenty of that) but in having created, over many years, a company that made bargains out of fairly priced businesses.” In the final part of his career, he reaps the rewards:

Remarkably, Buffett has created a system in which the owners of leading private companies call him. He avoids negotiating valuation, asking interested sellers to contact him and name their price. He promises to give an answer “usually in five minutes or less.” This requirement forces potential sellers to move quickly to their lowest acceptable price and ensures that his time is used efficiently. Buffett does not spend significant time on traditional due diligence and arrives at deals with extraordinary speed, often within a few days of first contact. He never visits operating facilities and rarely meets with management before deciding on an acquisition.

Of course, there’s significant academic commentary that Warren Buffett is not necessarily an uber-talent but in fact the winner of an investor lottery. As Nassim Nicholas Taleb has argued, “I am not saying that Warren Buffett is not skilled; only that a large population of random investors will almost necessarily produce someone with his track records just by luck.” The related formal hypothesis – the efficient market theory – has won economists the Nobel Prize. EMT concedes that individual investors can beat the market average – but insists that it’s impossible to predict in advance which investors would do so. EMT insists that the market’s pricing reflects the collective wisdom of participants and that you’re far better off just investing in an index. Buffett himself famously participated in a debate about the topic in the 1980s and argued that if investing really was just coin-flipping but that a certain group consistently got the right side more often, that group’s technique was worth investigating. Buffett related the outstanding records of disciples of Ben Graham and insisted that “observing correctly that the market was frequently efficient,” the academic theoreticians “went on to conclude incorrectly that it was always efficient.” In other words, Mr. Market was a manic-depressive who could be profited from. In subsequent years, the two sides have gotten a bit closer to each other. Academic theorists have found a long-term pay-off to value investing (in fact, one of the very small number of explanations for differing performance) but have differed on whether this was due to increased risk (as conventional economics would insist – perhaps because of the more troublesome companies involved) or due to cognitive biases dismissing cheap stocks (as behavioral economics would argue). Despite Buffett’s move toward Munger’s concept of wonderful companies at a fair price, he dismisses being paid for risk: if the same company with the same assets has a much lower price one day than the day before, Buffett insists that means a greater margin of safety and inherently less risk. And yet, in the end, Buffett has recommended that the typical investor be defensive and just invest in an index fund – and has even gone so far as to successfully bet that active management would not beat a typical index fund.

Caveman

Figure 8. Rather than try to find the next Geico yourself, why not just go with index funds? They’re so easy, a Caveman could do it!

 

Whether Buffett’s intensity had a reward may be debatable, but it did have a price. As a friend put it, Buffett’s “real marriage was to Berkshire Hathaway,” not to his wife Susie. Their original courtship had been uneven, with Susie eventually falling in with Buffett, a family friend, because her father disapproved of her serious college boyfriend. Through the years, as he made more and more money, Buffett was not especially interested in spending any of it (or giving it away). Susie, meanwhile, liked the good things in life and was also a full-hearted philanthropist always giving her time to those she deemed in need of help. As an example, even as a multi-millionaire, when he visited New York he’d stay at a college buddy’s mom’s house. When she came with him, she insisted on their staying at the Waldorf. Buffett has always taken a relatively small salary and refused to sell any of his Berkshire shares – only in midlife did he do some extracurricular investing that gave millions in spending money. When he paid $31,500 for the home in Nebraska he still lives in, he called it “Buffett’s Folly.” Susie would eventually get him to spring for additional properties – but he spent most of his time in Omaha. Buffett would come to enjoy celebrity and high social contacts, and he would eventually even spring for a private jet he dubbed “The Indefensible,” but his principal vice was cheap: playing bridge for 12 hours a week (and even then, he kicked Susie out of his group because she was not competitive enough.)

As Buffett made his fortune, “the family swirled around him and his holy pursuit” – his focus was so intense that at one point he came downstairs from his office and asked about “new” wallpaper in the living room that had been installed years earlier. After their three kids went off to college, a neglected Susie rekindled her romance with her college boyfriend while pursuing a new career as a cabaret singer. Within a couple of years, Susie told a shocked Warren that she was leaving him to move to San Francisco (she did not tell him that she was also bringing along her tennis coach, a new beau). And yet the marriage didn’t end. A depressed Buffett called her everyday and part of Susie’s heart was still with him. She wound up encouraging the hostess at an Omaha nightclub she used to sing at to look in on her husband. Soon, apparently unanticipated, the hostess, Astrid Menks, moved in. They wound up in a bizarre arrangement where Astrid would accompany Warren around Omaha, Susie around the world; they’d send Christmas cards from the three of them; and Astrid would become Warren’s second wife upon Susie’s death. When Susie did die, Warren was so emotionally overwhelmed he could not attend the funeral.

Meanwhile, all of his kids would drop out of college, enter short-lived marriages, and sell their Berkshire stock for questionable purposes. If they had held, “they could have been millionaires without working a day.” Instead, Susie Jr. sold to buy a Porsche. Later, pregnant during her second marriage, she asked her dad for a $30,000 loan to redo their kitchen, thinking that’d be easier to acquire than a gift. He told her to try a bank. A visiting Katherine Graham was so shocked at her modest living – a black and white television! – she paid for a redecoration. “When Buffett gave his kids a loan, they had to sign a loan agreement, so that it would be plain, in black and white, that they were legally on the hook to him.” (Somewhat relatedly, his sister got herself into over $1 million in debt with some questionable stock speculation and when she asked for help, he declined to bail out her debtors, leading her to default). Howie (Howard Graham, named after Buffett’s two heroes) at least sold his stock to try to finance a business, but it went under. Howie worked for See’s for a while but his real dream was to buy a farm. Buffett tried to argue with him and tell him, based on his insights about franchise businesses, “nobody goes to the supermarket and asks for Howie Buffett’s corn,” but Howie was persistent. “After ‘torturing’ himself,” Buffett “offered to buy a farm and rent it to Howie on standard commercial terms” but insisted on getting a bargain of a price on the land. After about a hundred bids and years of looking, Howie finally got one at the bottom of the market. Buffett’s only non-commercial terms were an agreement to lower the rent if Howie lowered his weight, which never happened. Finally, Peter would wind up quitting Stanford and sold his stocks to help finance a sound studio as he pursued a career in music. Eventually, Howie got swept up into another questionable business, leading his mother to successfully pry open Buffett’s purse strings for million dollar gifts to each child every five years on their birthday.

Porche

Figure 9.  A great car, perhaps, but has not quite multiplied in value 30x.

 

Buffett had always assumed that his first wife Susie would be the one to give it all away after he died. Because Buffett was so enthralled with compound interest and confident of his own ability to generate outsized returns, he did not give much away for most of his life, insisting “When I am dead, I assume there’ll still be serious problems of a social nature as there are now.” When Buffett did occasionally dabble, he was disappointed. On the board of a small college, he helped grow their endowment substantially through profitable investments – and then was distressed by their spending it down too aggressively, and not to his preferences for students’ actual educational benefits. On the board of a bank chartered with the intention to help minorities with credit, Buffett became frustrated that it was generously lending at the expense of its own sustainability as a business and refused to bail it out. Beyond civil rights, Buffett’s charitable interests were eclectic, controversial, and difficult to finance: population control and the prevention of nuclear war. The first translated into gifts for an unusual combination of abortion providers and immigration restriction advocates. More than anything else, Buffett was looking for a long-term return (as he saw it), even asking friends a version of Munger’s business question, “If you had to give money to one charity to do the most good, which would it be?” Ultimately, for better or worse, Buffett decided his highest and best use was making money and others would give it away: without Susie, he has given more than a billion dollars to each of his three kids’ charities – and the remainder to the measurement-obsessed foundation of his close friend Bill Gates.

If you can somehow mimic Buffett’s investment record without his personal life, then you’ve really got something going – but you’re probably better off mimicking his fanatical saving, investing the proceeds with index funds, and spending the saved time with your family!

Snowball

Figure 10. Click here to acquire Alice Schroeder’s the Snowball (9/10), titled to evoke the wintry sphere growing in size as it rolls down a mountain – just like what compound interest does to your money.  Click here to acquire Roger Lowenstein’s Warren Buffett: the Making of an American Capitalist (8/10). These two comprise the foundation of this double review and I’d recommend both, with Schroeder having a lot more detail about his personal life (including covering, before linking up with Astrid, a possible affair with Katherine Graham. Lowenstein has the better anecdote about their relationship though as Warren convinced Katherine to finally visit him in Omaha and, when they got on the plane, asked her to draw a map of the United States and mark the location of their destination. It was so awful she tore it up. Such is the knowledge of our media elites.) I also explained at some length Buffett’s father’s politics because they were central to his life but Warren’s politics are interesting as well, and I don’t know that Lowenstein fairly labels them even as he describes them. Warren drifted away from his father over time, eventually joining the Democrat Party, but, even after hosting George McGovern at his home in Omaha, he wound up voting for Richard Nixon after McGovern announced his welfare policies. Buffett has been especially vocal about taxation, advocating for a confiscatory tax on short term capital gains, a high death tax, and replacing the income tax with a progressive consumption tax – not all ideas easily placed on the spectrum. Perhaps his best idea has been a single constitutional amendment: if the federal budget has not been balanced for the last two years, no incumbent is eligible for re-election.

Damn Right

Figure 11. Click here to acquire Janet Lowe’s Damn Right! (5/10), a wandering biography of Munger, unfortunately just about the only one. It’s hard to recommend, though I did learn some things, especially about how Munger’s law practice affected his investing philosophy. Also notable: while both Warren and Charlie are voracious readers, Warren is nearly completely focused on financials while Charlie reads extremely widely into psychology, physics, biology, history, etc. 

The Outsiders

Figure 12. Click here to acquire William Thorndike’s The Outsiders (8/10), which studies a select number of CEOs with outsized return to shareholders and concludes their secret was capital allocation. Remarkably, Buffett is not only profiled but was a key investor in and adviser to others profiled such as Katherine Graham at the Washington Post and Tom Murphy at Capital Cities. Buffett argues that most CEOs get the job due to relatively narrow skills in their previous junior position – they were great at marketing or manufacturing efficiency or legal maneuvering or whatever – but they really have no experience in allocating capital, which Buffett believes is the #1 job of the CEO. The book is most applicable to public corporations and it does have a winners’ bias – among the reasons these CEOs had such a good record was buying back their company’s public shares at cheap prices before their management made them more valuable again, but it’s plausible that other CEOs used the special sauce of buying back shares – but at the wrong time – and their management wasn’t up to snuff. Regardless, a great exploration of capital allocation.

Value investing

Figure 13. Click here to acquire Value Investing (7/10), an exploration of the concept followed by a series of profiles of practitioners. The Buffett section is almost entirely excerpted from Berkshire annual reports – which are worth reading and very accessible (Buffett liked to imagine that his not-financially-sophisticated sister was traveling for a year and he was updating her on the family business). Of particular interest might be how Graham’s disciples have been jiggering his mechanical rules that are far harder to apply in today’s market. If you’ve gotten this far, you have no doubt repeatedly seen my evangelization of index funds, which most people think of as taking on the whole market, but it’s also worth noting that there are passive index funds that capture the cheapest parts of the market, too (though they are best held in a tax-advantaged account).

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