The Snowball: Warren Buffett and the Business of Life

The Snowball: Warren Buffett and the Business of Life
Publisher:
Published: 10/27/2009
Here is THE book recounting the life and times of one of the most respected men in the world, Warren Buffett. The legendary Omaha investor has never written a memoir, but now he has allowed one writer, Alice Schroeder, unprecedented access to explore directly with him and with those closest to him his work, opinions, struggles, triumphs, follies, and wisdom.

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

You have probably heard of him as “the Wizard of Omaha,” the boy who, by eleven, had already saved up $120, which was a lot of money in 1941, and who used this money to make his first investment in the company Cities Served Preferred.

Warren Edward Buffett, one of the world’s few billionaires, has a net worth of $89,4 billion.

In her book, to understand how Buffett went from a broke young boy in Omaha to one of the richest and most successful men in the world, author Alice Schroeder leads us through his journey as the most famous investor of the twentieth and twentieth-first centuries in a way that anyone can learn how to get rich as Buffett himself did.

KEY POINTS

  • Start Them Young: How Warren Buffett Made His First Investment at the Age of 11

Warren Buffett was born on August 20, 1930, only a few months after the Great Depression hit the country, leaving most investors broke, to Howard Buffett, a stockbroker and member of Congress, and Leila Buffett (née Stahl).

Young Warren’s early interest for numbers, probabilities and statistics was noticed and encouraged by his family. When he was nine years old, he was already making money by working several jobs, such as selling peanuts and Coke at football games.

At the age of eleven, having saved $120, he bought six shares of the company Cities Service Preferred: three for himself and three for his sister Doris. In 1942, after his father was elected to Congress, Warren began working as a newspaper delivery boy; at some point, he was earning $175 a month, and it was not long before his savings summed up to $1,000.

At the age of fourteen, Warren Buffett would fill his first tax return.

Years later, during his college years at Columbia University, Warren would come to learn several of the most important lessons and fundamental investment strategies in his life: for example, the importance of investigating a company from top to bottom before investing in it. He took a particular liking to study his professor Benjamin Graham’s “buy and hold” investment theories, and would later call him “the Albert Einstein of the investments.”

It was also during his Columbia years that he would meet his wife, Susie Thompson. Though her father liked Warren immediately, it took a while before Susie herself finally fell for his nerdy, awkward charm. Their daughter, Susie Alice Buffett, was born in 1953, the very same year Buffett got his dream job at his mentor Ben Graham’s investment firm, Graham-Newman. Warren quickly became the company’s rising star, yet he realized he hated being a stockbroker for multiple reasons. He would eventually launch his own company, Buffett Associates, Ltd, in 1956, after the birth of his second child, Howie Graham Buffett.

Buffett Associates only included friends and relatives, and there were straightforward rules, which were listed in his company’s original partnership agreement, behind investments so that no one would be disappointed afterward or have unrealistic expectations. At this same time, Benjamin Graham decided to retire and closed his company, but on his way out made sure to recommend his pupil Buffett as a reliable man for his clients to invest their money with.

  • Like a Snowball: Why Warren’s Investments Never Go Wrong

During his first year as his own boss, Warren Buffett began a series of eight partnerships, and every time he started a new one he made sure the new partner understood his rules and his philosophy: he would only invest in undervalued stocks, and any earnings would be reinvested in the same shares. It was like rolling a snowball down the hill: what starts as something small eventually grows into something bigger and bigger. He also made sure to tell any potential clients that he wasn’t the kind of investor who cashed out when a stock hit a certain number — he was a very patient man.

And, boy, did his patience pay off! By 1956, his partnerships had hit the market by 4%; one year later, it was ten percent, and finally, three years later, at the end of 1960, it was 29%. Call it a snowball!

Before 1960 was over, Buffett was already managing more than a million dollars. He still searched for undervalued companies, and whenever he found something he wanted, he bought as many shares as possible, which also meant earning a seat on the board to make sure that the executives didn’t waste or do anything foolish with the money invested.

Some people still couldn’t believe in his success, though: because Buffett was one of the few major players who didn’t work in New York City, several established moneymen remained skeptical. They predicted that he would go broke any day now. Yet, his doings were starting to go beyond Omaha to Wall Street.

One of the people who were quick to recognize Warren’s tremendous success and talent was lawyer and investor Charlie Munger. The two would quickly become good friends, and this friendship would later lead to a fruitful business partnership.

But it wasn’t until 1963 that Warren’s business became even more significant and his success, even louder for those who still didn’t believe him.

In the same year, President John F. Kennedy was murdered, few people were thinking about anything but what would be of their country under Lyndon B. Johnson. However, Buffett was far more interested in a story about a soybean scandal involving American Express. Sounds familiar?

Here’s what happened: a subsidiary of American Express had certified that individual storage tanks contained soybean oil, yet it turned out to be filled with seawater; you can imagine how bad that looked for American Express, and its stocks fell quicker than a lightning bolt. That didn’t matter to Buffett, though: he knew that, at some point, the company would be back on its feet.

So when prices were so low, Warren began gradually pouring money into the company, first $3 million, then, three years later, in 1966, $13 million. Of course, the company gained life again, and before Buffett knew it, he was a billionaire by the age of 35. He had bought entire businesses with the rewards provided by American Express’s shares, which were now being sold for $7,50 per share.

Now, in 1965, after some negotiation, Buffett got controlling interest in Berkshire Hathaway, the Massachusetts textile manufacturer, by purchasing 49% of it at only $11 per share. That was one of the first buyouts that would come to define Warren Buffett’s life and career.

Though Buffett is always associated with Berkshire Hathaway, it doesn’t mean his story with the company was still roses: it would come to be so problematic that he would regret buying it years later. Yet, he wasn’t the kind of investor to cut losses, a philosophy that came years before his involvement with Berkshire Hathaway: Buffett kept the company alive by purchasing winning stocks in its name every chance he got, something that would eventually give Berkshire Hathaway one of the best stock portfolios in the world.

His experience with Berkshire Hathaway would lead the way to another of his most treasured rules: he would never buy stock in a company that offered a product or service that he didn’t fully understand. Buffett liked things “easy, safe, profitable, and pleasant,” as he said himself numerous times, which led to another rule: no involvement with businesses that had potential or proven “human problems,” such as layoffs, plant closing or executives fighting each other or labor unions.

There were lots of things Warren Buffett cared about, yet one of the things he decidedly didn’t was appearance: even after he became a millionaire, he remained a shabby dresser, to his wife’s horror. He was far more concerned with the characteristics and personal details of the people who worked for him; you see, he was a prudent man, and he always made sure his businesses were being run by competent, smart, caring people just like himself, people in whom he made sure he could trust. One of his significant buyouts, Baltimore department store Hochschild-Kohn, was made mostly in consideration to the people who worked behind the scenes. For example, it wasn’t until Buffett knew he had found a great manager, namely Jack Ringwalt, that he decided to buy the Omaha insurance business National Indemnity; by the end of 1966, the company had outperformed the market by 36%.

When it came to home and family matters, one cannot say Warren was much involved: he was always working, and his wife Susie constantly hoped her husband might retire and dedicate more time and attention to their children, who were growing up fast and most often without Warren’s presence in their lives. She, meanwhile, was a very politically active woman: she took part in anti-war and pro-civil rights marches and movements during the 1960s and 1970s. Eventually, Warren himself would come to engage in politics as well, but after only the death of his father, who was a Republican Congressman and who didn’t share Warren’s political opinions. Finally, in 1967, Warren became the treasurer for the Nebraska office for Democratic presidential candidate Eugene McCarthy.

In 1969, after years of dreaming of owning his paper, Warren Buffett purchased a controlling interest of the local newspaper, the Omaha Sun, after making $16 million in earnings in the same year; it not only fulfilled Warren’s childhood dream, but it would also grant him an awards years later, in 1972, after the newspaper released an article called “Boys Town: America’s Wealthiest City?”, about a corrupted shelter for boys run by a priest which had been stockpiling donations, grants, and funds, amassing approximately $18 million per year. The scoop made Warren the Pulitzer Prize for outstanding regional journalism winner of that year, and the story immediately went national, leading to reform on how non-profit organizations are run, and all thanks to Buffett, who helped investigate the whole case.

After the tremendous success, the story brought him and the Omaha Sun, Warren had his sight set on a celebrated national newspaper: the Washington Post. One year later, in 1973, he already owned 5% of the company and even developed a close friendship with its publisher, Kay Graham, whose father had started the newspaper. He attended several of Graham’s lavish dinner parties, always awkwardly trying to not embarrass himself in front of diplomats, respected senators, actors, and international dignitaries.

Still, life isn’t always a wonderland for wealthy entrepreneurs and investors like Warren Buffett: actually, there were several difficult times in his life, notably when Santa Barbara Financial Company filed a complaint with the Security Exchange Committee (SEC) claiming that both Buffett and his partner, Charlie Munger, had purposely overpaid the acquisition of a company called WESCO to ruin its merge with SBFC, which was not valid. What happened was that Buffett and Munger were planning to acquire WESCO when Santa Barbara Financial Company — a company that, according to Buffett himself, was “bad news” — became interested in buying it too. So Buffett flew to California to convince Betty Caper Peters, the last surviving member of WESCO’s founding family, to sell the company, which she eventually did, deeply infuriating Santa Barbara Financial Company. This was 1974, a tense year for Buffet after the SEC launched an investigation on both his and Munger’s companies, including Berkshire Hathaway and Blue Chip.

What truly made the SEC suspicious of Buffett and his partners was the structure of his companies: there were five big parent companies, such as Berkshire Hathaway, that owned five or more companies individually, which in turn owned more companies, and so on. That confused the investigators and only made Buffett more anxious about the investigation that, thankfully, ended up without any damage to his or his companies’ reputation.

Back home, Susie wasn’t pleased with the proximity between her husband and The Washington Post’s editor Kay Graham, with whom she thought he was having an affair. She eventually began her romance with her tennis instructor. She ended up writing a personal letter to Graham, declaring that she was free to have a relationship with Warren, who was still much more focused on work than on his relationships.

In 1977, when Susie decided to move to San Francisco now that the children no longer lived with them, she hired a young woman she knew from a nightclub to cook and look after Buffett, who was still shocked by his wife’s departure. Years later, in 2006, this young woman, Astrid, would become Warren’s second wife.

Amidst all of this, Buffett would engage himself in a legal battle that would take years to resolve: he and Charlie Munger had acquired another newspaper, the Buffalo Evening News, which they planned to introduce by offering the first five issues for free, followed by a discount price. But their competition in the area, the Buffalo’s Courier-Express, didn’t like the idea and consequently filed a lawsuit, claiming that such an offer constituted unfair practice. The judge would later rule in favor of the Courier-Express. However, Buffett naturally appealed, and would only win the battle years then, in 1981, after the paper had already lost millions of dollars.

  • Keep Them Always by your Side: How Friends like Kay Graham and Bill Gates Helped and Influenced the Wizard of Omaha

It is no secret that keeping loyal friends by your side is one of the best decisions you can take in life, and Warren Buffett certainly knew that: when GEICO, a company whose board Warren was part of, was facing several financial problems, an executive called John Gutfreund, who worked for the Wall Street trading house Salomon Brothers, helped him raise funds for the company to get back on its feet. Buffett was so grateful that, when Gutfreund’s own company had its problems, he was more than willing to help.

At the beginning of the 1980s, hostile takeovers became the primary way of doing business in Wall Street: everyone was racking up debts by making deals based on credit, and no one hated this practice more than Warren, who was a firm believer in the cash-only practice. Therefore, when Gutfreund asked for his help in ’86, Buffett agreed to join the board of Salomon Brothers to help them solve their problems this time; he had such a reputation for being associated with only the most stable and most reliable companies that his sole presence in the board was a clear sign that the company was in good hands and fully protected.

Unfortunately, Buffett had no idea of the troubles that laid ahead of him.

Because an employer called Paul Mozer had been caught in a significant financial scandal related to illegally bidding in government auctions and the company had failed to take proper action after finding out about it, Warren was made interim-CEO and put together a whole new leadership board and new reforms, using his contacts to plead his case to prevent the Treasury Department from barring the Salomon Brothers from future auctions.

And even though Buffett didn’t integrate himself to the new technologies arising, his career and reputation still took a downward turn in the 1990s, a proof that he managed to stay relevant and successful while steering clear of the newborn NASDAQ: between 1978 and 1991, his net worth jumped from $89 million to $3.8 billion, which is more than merely successful, I might say.

It was then that he would come to meet Bill Gates, who he agreed to meet at a Fourth of July part in 1991 because Warren wanted to invest in Gates’ rising company, Microsoft. Both went to the party thinking that nothing would come out of it, though, to their surprise, the meeting led to a conversation that lasted the rest of the weekend, and Warren ended up buying 100 shares of the company at once. After that, Gates began attending Warren’s annual shareholder meetings, along with Charlie Munger and Kay Graham.

They both competed for the title of “richest man in the world” throughout the 1990s and 2000s, yet their friendship lasted through everything and anything. Eventually, a trip with Gates to China helped open Warren’s eyes to his lucky place in the world, which would only reinforce his humble and thankful attitude.

In the 2000s, Buffett faced personal losses that made him stop and reevaluate what’s truly important in life, starting with family and friends. First, it was the loss of Kay Graham, who passed away in 2001 due to having fallen down and striking her head while visiting Sun Valley, Idaho, which put an end to their 30-year friendship and left Warren genuinely devastated. Then, two months later, September 11 happened, and things only became worse and opened Warren’s eyes to the fact that times were changing. Therefore one needed to invest in companies that offered some degree of certainty and secureness. That was the period during which he would invest in companies that made the farm’s equipment and children’s clothing.

In 2003, when Susie was diagnosed with stage 3 oral cancer, Warren took time off to take care of his wife, even though they no longer lived together, and he was in a relationship with Astrid. She would sadly pass away one year later, in 2004, and Warren would spend weeks in bed after her death, not talking to anyone; when he finally emerged, it was now with the desire to be closer to his children and to help other people with his money: he donated 85% of Berkshire Hathaway, which was worth approximately $36 billion, to the Bill and Melinda Gates Foundation. He divided another six million between Susie’s charitable foundation and his children’s foundations.

The key message in this book is: though Warren Buffett’s life was almost always focused on rolling the “snowball” — investing and reinvesting his earnings in companies — he never lost sight of the human side of the business. He paid attention not only to the monetary side, but also to the sentimental one, and always made sure to see more than just money and success in a company. He, one of the richest men in the world, will also go down in history as one of the humblest and most charitable.

About the Author

Alice Schroeder is an American author and former insurance analyst.

As a project manager for the US FASB, she managed SFAS No. 113. She was a columnist for Bloomberg News. She graduated with an MBA from McCombs School of Business at the University of Texas at Austin. She worked as a CPA at Ernst and Young in Houston. She then worked as a project manager for the Financial Accounting Standards Boards in Connecticut.

In 1993, she left FASB to work as an insurance investment analyst for Downling Partners in Hartford.

In 2000, she started working for Morgan Stanley, where she was voted the #1 Property-Casualty insurance analyst for a period of two years after being ranked a member as the Institutional Investor All-America Research team for seven years.

In 2003, Schroeder began traveling to Omaha to research and write Buffett’s official biography. She was the first and only analyst at Morgan Stanley to be granted an interview with Buffet, who gave Schroeder full access to the going ons of his life. The Snowball was published in 2008 and debuted at #1 on The New York Times. The New York Times reviewer Janet Maslin called it one of her ten favorite books of 2008. Time and People named it on the ten best books of the year. The Snowball is a comprehensive overview of Buffet’s life, wisdom, and philosophy.

Schroeder currently works as a Bloomberg News columnist.

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