The Snowball is the "official" biography of Warren Buffett, one of the wealthiest persons in the world.
I found The Snowball a fascinating glimpse into the life of an obsessed and quirky man. The book itself is a bit overloaded with details and a few times I had to fight to read on.
The Less Flattering Version
He talks at length about human nature and memory's frailty, then says: "Whenever my version is different from somebody else's, Alice, use the less flattering version."
Among the many lessons, some of the best come simply from observing him. Here is the first: Humility disarms.
Every new pilot who flew with Buffett was shocked to see him carrying his own luggage from a car he drove himself.
Despite his fortune of more than $30 billion Buffett liked few things more than getting a free golf shirt from a friend.
"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." Interest rates – the cost of borrowing – Buffett explained, are the price of "when". They are to finance as gravity is to physics. As interest rates vary, the value of all financial assets – houses, stocks, bonds – changes, as if the price of birds had fluctuated. "And that's why sometimes a bird in the hand is better than two birds in the bush and sometimes two in the bush are better than one in the hand."
Creatures of Habit
He believed in what he called the Circle of Competence, drew a line around himself, and stayed within the three subjects on which he would be recognized as absolutely expert: money, business, and his own life.
He rationalized his distractedness by saying that he drove so slowly that, if he had an accident, the damage would be light.
Warren, What's Wrong?
"The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: 'Lookit. Would you rather be the world's greatest lover, but have everyone think you're the world's worst lover? Or would you rather be the world's worst lover but have everyone think you're the world's greatest lover?'"
"If the world couldn't see your results, would you rather be thought of as the world's greatest investor but in reality have the world's worst record? Or be thought of as the world's worst investor when you were actually the best?"
"In teaching your kids, I think the lesson they're learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world's going to think about you, forgetting about how you really behave, you'll wind up with an Outer Scorecard. Now my dad: He was a hundred percent Inner Scorecard guy. He was really a maverick. But he wasn't a maverick for the sake of being a maverick. He just didn't care what other people thought. My dad taught me how life should be lived."
The Inner Scorecard
The Urge to Preach
"Spend less than you make" could have been the Buffett family motto, if accompanied by its corollary, "Don't go into debt."
Buffett always credited most of his success to luck.
The Bathtub Steeplechase
He was learning to calculate odds. Warren looked around him. There were opportunities to calculate odds everywhere. The key was to collect information, as much information as you could find.
Warren liked anything that involved collecting, counting, and memorizing numbers.
It might seem easier to go through life as the echo – but only until the other guy plays a wrong note.
A Thousand Ways
"It [money] could make me independent. Then I could do what I wanted to do with my life. And the biggest thing I wanted to do was work for myself. I didn't want other people directing me. The idea of doing what I wanted to do every day was important to me."
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. He learned these two lessons by brooding over the $492 he would have made had he been more patient. 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.
Know what the deal is in advance.
"I may have been the lowest-paid person to ever work in the grocery business. I didn't learn anything – except that I didn't like hard work."
He had figured out the most efficient route and turned what could have been a boring and repetitive job delivering hundreds of newspapers each day into a competition with himself.
Shy in other ways, Warren was never timid when it came to money.
True Crime Stories
"It's great to have parents that believe in you."
Pudgy She Was Not
He thought like a businessman but did not look like one.
Warren's stone-faced, smart-aleck act covered up the feelings of inadequacy that had made his life so difficult since leaving Omaha. He desperately wanted to be normal, but still felt very much the outsider.
He felt so disadvantaged socially that he needed a system to sell himself to people, a system he could learn once and use without having to respond in a new way to each changing situation.
He decided to do a statistical analysis of what happened if he did follow Dale Carnegie's rules [from How to Win Friends and Influence People], and what happened if he didn't. He tried giving attention and appreciation, and he tried doing nothing or being disagreeable. People around him did not know he was performing experiments on them in the silence of his own head, but he watched how they responded. He kept track of his results. Filled with a rising joy, he saw what the numbers proved: The rules worked.
Warren had discovered the miracle of capital: money that works for its owner, as if it had a job of its own.
The Rules of the Racetrack
Warren was a master at using what he had efficiently, his own time especially.
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. Every penny was another snowflake for his snowball.
"The truth was that I knew the book even better than Dodd. I could quote from any part of it. At that time, literally, almost in those whole seven or eight hundred pages, I knew every example. I had just sopped it up. And you can imagine the effect that would have on the guy, that somebody was that keen on his book."
In class, Dodd would ask a question and Warren's arm would shoot into the air before anyone else's, waving for attention. He knew the answer every time, wanted to give it, was not afraid of attention, and did not mind looking silly.
Warren saw a shareholder meeting as a time of accounting for the stewardship of the managers.
Warren was starting to grapple with the fundamental concept of business: How do companies make money? A company was much like a person. It had to go out and find a way to keep a roof over its employees' and shareholders' heads.
Just like people, companies have assets that they own, such as the products they make and sell, and debts – or liabilities – that they owe. If you sold all the assets to pay off the debts, what would be left was the company's equity, or net worth. If someone could buy the stock at a price that valued the company cheaper than its net worth, Graham said, eventually the stock's price would rise to reflect this intrinsic value.
Warrens former concept of a "stock" was derived from the patterns formed by the prices at which pieces of paper traded. Now he saw that those pieces of paper were simply symbols of an underlying truth. He instantly grasped that the patterns formed by trading these pieces of paper did not signify a "stock".
Graham used to talk about Class 1 and Class 2 truths. Class 1 truths were absolutes. Class 2 truths became truths by conviction. If enough people thought a company's stock was worth X, it became worth X until enough people thought otherwise. Yet that did not affect the stock's intrinsic value – which was a Class 1 truth.
From Graham's class, Warren took away three main principles that required nothing more than the stern discipline of mental independence:
- A stock is the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.
- Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.
- Mr. Market is your servant, not your master. Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don't make sense. Mr. Market's moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.
"I learned that it pays to hang around with people better than you are, because you will float upward a little bit. And if you hang around with people that behave worse than you, pretty soon you'll start sliding down the pole."
There was nothing he hated more than selling people investments that lost them money. He couldn't stand disappointing people.
"I don't want to be on the other side of the table from the customer. I never was selling anything I didn't believe in myself or own myself."
From his earliest childhood, Warren had always tried to avoid broken promises, burned bridges, and confrontation. Now Howard's struggles branded three principles even deeper into his son: that allies are essential; that commitments are so sacred that by nature they should be rare; and that grandstanding rarely gets anything done.
She devoted herself to fulfilling her husband's few but specific requirements: Pepsi in the refrigerator, a lightbulb in his reading lamp, some indifferently cooked version of meat and potatoes for dinner, a shaker full of salt, popcorn in the cupboard, ice cream in the freezer. He also needed help getting dressed, assistance in dealing with people, tenderness, head rubs, cuddling, and hugs. She even cut his hair, because he claimed he was afraid to go to the barber.
He [Ben Graham] was always thinking in terms of how much companies would be worth dead – what their assets would be worth if liquidated. Buying at a discount to that value was his "margin of safety" – his backstop against the percentage that presumably would go bankrupt. As a further backstop, he bought tiny positions in a huge number of stocks – the principle of diversification.
He was willing to put most of his eggs in one basket.
When someone observed, "That's an interesting pair of shoes", Graham looked down at the brown oxford on one foot and the black one on the other and said, without blinking, "Yes, as a matter of fact, I've got another pair just like them at home."
He was preoccupied with money. He wanted to amass a lot of it, and saw it as a competitive game. If asked to give up some of his money, Warren responded like a dog fiercely guarding its bone, or even as though he had been attacked. His struggle to let go of the smallest amounts of money was so apparent that it was as if the money possessed him, rather than the other way around.
The Side to Play
Visiting management was part of Warren's way of doing business. He used those meetings to learn as much as he could about a company. Getting personal access to management played to his ability to charm and impress powerful people with his knowledge and wit. And he also felt that by becoming friendly with the management of a company, he might be able to influence the company to do the right thing.
It would be unthinkable for Warren Buffett to let someone else invest his money.
He took care to handle everything of value personally, a pleasure in and of itself.
His expenses were as close to zero as he could get.
Except for more meticulous accounting and a great deal more thought, he ran the business much as though he were just anybody trading stocks through a broker for a personal account.
His solution to the problem of people being disappointed was that he wasn't going to give them the score after every hole, only once a year after playing eighteen holes. They would get an annual summary of his performance, and they could put money in or withdraw it only on December 31. The rest of the year, their money would be locked into the partnership.
People thought it was nervy of him to ask for money to invest without telling them what he would be buying.
The Omaha Club
He [Charles T. Munger] had developed the habit of expecting little so as never to be disappointed.
When things went wrong, Munger would set out toward new goals rather than let himself dwell on the negative. That could come across as pragmatic, or even callous, but he viewed it as keeping the horizon in sight. "You should never, when facing some unbelievable tragedy, let one tragedy increase into two or three through your failure of will", he would later say.
"I had a considerable passion to get rich", Munger said. "Not because I wanted Ferraris – I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people."
"Be fearful when others are greedy, and greedy when others are fearful."
The Windmill War
Warren applied his cigar-butt technique, which was to keep buying a stock as long as it continued to sell below book value. If the price rose for any reason, he could sell out at a profit. If it didn't, and he ended up buying until he owned so much stock that he controlled the company, he could sell off – that is, liquidate – its assets at a profit.
Haystacks of Gold
Warren may have said he wanted to become a millionaire, but he never said that he would stop there.
When something new came into his life, something else went out. The two exceptions were money and friends.
"One day Herb [Wolf] said to me: 'Warren, if you're looking for a gold needle in a haystack of gold, it's not better to find the gold needle.' I had this thing that the more obscure something was, the better I liked it. I thought it was a treasure hunt. Herb got me out of that way of thinking."
Buffett would forever go to extremes to control his overhead by paying for expenses in ways that could be shut off as needed, or, better yet could be covered in ways that made them effectively free.
He felt the partners ought to know a new "ground rule": "We diversify substantially less than most investment operations. We might invest up to forty percent of our net worth in a single security under conditions coupling an extremely high probability that our facts and our reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment."
"I would have been better off if I'd never heard of Berkshire Hathaway."
Warren had strong views about specialization; he defined his special skills as thinking and making money. When asked to donate, his first choice, always, was to donate ideas, including ideas that would get other people to give money. But he would also give money himself – not a lot, but some – to politicians and to Susie's [his wife] causes. He never labored in the trenches stuffing envelopes; volunteering directly for causes, no matter how urgent and important, would consume time he felt was more efficiently spent thinking of ideas and making more money to write bigger checks.
What a Worsted Is
"Buying Hochschild-Kohn was like the story of a man who buys a yacht", says Munger. "The two happy days are the day he buys it and the day he sells it."
Buffett knew that he wanted to be in business with the kind of guy who would leave a black-tie party to count sheets of toilet paper; a guy who might screw the guy across the table but never his own partner.
Warren was about as likely to stop working for the sake of his back as he was to fork down a big plate of broccoli for the sake of his health.
He did not relax his rules in search of ways to keep the money at work. Instead, he laid out two new restrictions that would make it even harder for him to invest. These personal preferences now became part of the official canon.
- We will not go into businesses where technology which is way over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz.
- We will not seek out activity in investment operations, even if offering splendid profit expectations, where major human problems (layoffs, plant closings) appear to have a substantial chance of developing.
The Scaffold Sways the Future
Buffett was notably loyal to his close friends. His enthusiasm for more distant acquaintances, and especially for public figures was fickle, however, waxing and waning with their stature in others' eyes. In his insecurity, he worried constantly about how associating with others reflected on him.
Easy, Safe, Profitable, and Pleasant
One compromise he would never make was to give up his margin of safety. This particular quality – to pass up possible riches if he couldn't limit his risk – was what made him Warren Buffett.
Doing business with him [Eugene Abegg] cinched Buffett's instinct that strongwilled and ethical entrepreneurs often cared more about how they and the companies they had built were going to be treated by the new owners than about grabbing the last nickel in a sale.
Except for his letters to the partners, he had gone through the sixties with his lips sealed – he didn't want anyone coattailing him. He didn't talk about how he invested and he didn't broadcast his results.
Buffett posed the Desert Island Challenge. If you were stranded on a desert island for ten years, he asked, in what stock would you invest? The trick was to find a company with the strongest franchise, one least subject to the corroding forces of competition and time: Munger's idea of the great business.
They wanted businesses that would marmalade them with money, businesses that had some sort of sustainable competitive advantage and could outwit the natural cycle of capital creation and destruction as long as possible.
Time is the friend of the wonderful business, the enemy of the mediocre.
In his anxiety over whether people accepted and liked him, Buffett valued loyalty more than almost anything. He looked for loyalty in all of his relationships.
He thought of partners as people who had come together out of a complex set of shared values and interests, not out of short-term economic convenience. He often said that he tried to treat his partners the way he would his family. His partners were people who trusted him, people to whom he owed a special duty. In return, he expected loyalty from them.
One longtime employee described Buffett's Dale Carnegie management style this way: "He'd always praise you while he gave you more to do."
Two Drowned Rats
From his childhood hobby of collecting license-plate numbers to reforming the jiggery-pokery of journalism, three roles invariably interested him. The first was the relentless collector, expanding his empire of money, people, and influence. The second was the preacher, sprinkling idealism from the lectern. The third was the cop, foiling the bad guys. The perfect business would allow him to do all of these at once: preach, play cop, and collect money to ring the cash register. The perfect business, therefore, was a newspaper.
"I didn't have the nerve to stand up and offer a toast, which you're supposed to do. I blew it totally. I was so uncomfortable. I even thought I might throw up, actually. I could not stand up there in front of half the cabinet and talk. I wasn't up to it."
"You don't have to think of everything, you know. It was Isaac Newton who said I've seen a little more of the world than others because I stand on the shoulders of giants. There's nothing wrong with standing on other people's shoulders."
"If a policeman follows you down the road for five hundred miles", he [Munger] said to Buffett, "you're going to get a ticket."
Sporkin felt he had as great a duty to absolve as to convict. He thought that a prosecutor had to differentiate between a fundamentally honest person who had made a misstep and a crook. When it came to crooks, his job was to put 'em away. His view of Buffett and Munger was that they had certainly misstepped, but that they were not crooks.
How Not to Run a Public Library
His idea of a feast was a half gallon of chocolate chip ice cream. He ate his food in sequence, one at a time, and did not like the individual foods to touch.
"He [Jack Byrne, CEO of GEICO] was always interested in what made sense rather than what had been done in the past."
And Then What?
At age forty-seven, Warren had already accomplished everything he had ever imagined he could want. He was worth $72 million. He ran a company that was worth $135 million. His newspaper had won the two highest prices in journalism. He was one of the most important men in Omaha and increasingly prominent at a national level. He was serving on the boards of the largest local bank, the Washington Post, and a number of other companies. He had been CEO of three companies and had bought and sold successfully more stocks than most people could name in a lifetime. Most of his original partners were now enormously rich. All he wanted was to keep on making money for the thrill of it without changing anything else about his life.
He had been shocked into realizing the truth of Susie's insistence that sitting in a room making money was no way to spend a life; he began to see what he had missed. While he was friendly enough with his kids, he hadn't really gotten to know them. The reality behind the jokes ("Who is that? That's your son") meant that he would spend the next few decades trying to repair these relationships. Much of the damage could not be undone. At age forty-seven, he was just beginning to take stock of his losses.
Rarely did anything pierce Buffett's pleasant demeanor, but if he felt someone was trying to cheat him out of money, his eyes would flash pain and rage and revenge all at once. Within seconds, at most, the emotion would subside while he considered a businesslike response.
"Uncertainty actually is the friend of the buyer of long-term values."
Munger was famous for getting into cabs while people were talking to him as if he did not hear them and for disappearing through doors the second he finished talking without waiting for a response.
The King of Wall Street
The great engine of compounding worked as a servant on his behalf, at exponential speed and under the gathering approval of a public gaze. The method was the same: estimate an investment's intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work.
Call the Tow Truck
Buffett by now had a clear-cut pattern: He rationalized to avoid the confrontation of firing losing managers. He gave criticism to his managers indirectly, often by withholding, sometimes resources, but especially by withholding praise.
When enough time passes and nothing bad happens, people who are making a lot of money tend to think it is because they are smart, not because they are taking a lot of risk.
It [a private jet] gave him an extraordinary degree of privacy, as well as control over his travel schedule – privacy and control over his time ranking in the top handful of things that Buffett cared most about on earth.
"I never talk to brokers or analysts. You have to think about things yourself..."
"Wall Street is the only place people ride to in a Rolls-Royce to get advice from people who take the subway."
"I don't enjoy battles. I won't run from them if I need to do it, but I don't enjoy them at all."
Thumb-Sucking, and Its Hollow-Cheeked Result
"It takes a lifetime to build a reputation and five minutes to ruin it."
Buffett would undertake almost any item from his short list of most-loathed tasks – get into an angry, critical confrontation; fire someone; cut off a long friendship carefully cultivated; eat Japanese food; give away a vast sum of money; almost anything – than make a withdrawal from the Bank of Reputation.
The Angry Gods
"I follow a very simple rule when it comes to food. If a three-year old doesn't eat it, I don't eat it."
"Huge markets attract people who measure themselves by money. If someone goes through life and measures themselves solely by how much they have, or how much money they earned last year, sooner or later they're going to end up in trouble."
"Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless."
He wanted to run things by what he called the "front-page test". Don't just obey the rules, he said. I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter.
"I was at my best at giving financial advice when I was twenty-one years old and people weren't listening to me. I could have gotten up there and said the most brilliant things and not very much attention would have been paid to me. And now I can say the dumbest things in the world and a fair number of people will think there's some great hidden meaning to it or something."
"I've had it so good in this world, you know. The odds were fifty-to-one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different."
"Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, 'One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one that is born in the United States?' It says something about the fact that society has something to do with your fate and not just your innate abilities. The people who say, 'I did it all myself', and think of themselves as Horatio Alger – believe me, they'd bid more to be in the United States than in Bangladesh. That's the Ovarian Lottery."
To Hell with the Bear
Rule number one, don't lose money. Rule number two, don't forget rule number one. Rule number three, don't go into debt.
"You can't do well in investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You're right because your facts and reasoning are right. In the end, that's what counts."
"It's what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now."
The Last Kay Party
"People ask me where they should go to work, and I always tell them to go to work for whom they admire the most", he said. He urged them not to waste their time and their life. "It's crazy to take little in-between jobs just because they look good on your resume. That's like saving sex for your old age. Do what you love and work for whom you admire the most, and you've given yourself the best chance in life you can."
To the students, he explained his "Twenty Punches" approach to investing. "You'd get very rich", he said, "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. You'd make more good decisions and you'd make more big decisions."
By the Rich, for the Rich
"Cash combined with courage in a crisis is priceless."
"The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine. So if you had your choice, if you could put a hundred million dollars into a business that earns twenty percent on that capital – twenty million – ideally, it would be able to earn twenty percent on a hundred twenty million the following year and on a hundred forty-four million the following year and so on. You could keep redeploying capital at [those] same returns over time. But there are very, very, very few businesses like that... we can move that money around from those businesses to buy more businesses."
"Basically, when you get to my age, you'll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don't care how big your bank account is, your life is a disaster. That's the ultimate test of how you have lived your life. The trouble with love is that you can't buy it. You can buy sex. You can buy testimonial dinners. You can buy pamphlets that say how wonderful you are. But the only way to get love is to be lovable. It's very irritating if you have a lot of money. You'd like to think you could write a check: I'll buy a million dollars' worth of love. But it doesn't work that way. The more you give love away, the more you get."
The Seventh Fire
The man who was, at the time, the second richest person on earth was giving away his money without leaving a trace of himself behind. He had spent all his life rolling up the snowball as if it were an extension of himself; yet he would establish no Warren Buffett Foundation, no Buffett hospital wing, no college or university endowment or building with his name on it. To donate the money without naming something after himself, without controlling personally how it would be spent – to put the money in the coffers of another foundation that he had selected for its competence and efficiency, rather than creating a whole new empire – upended every convention of giving. No major donor had ever done such a thing before.
"I have been very lucky. I was born in the United States in 1930 and won the lottery the day I was born. I had terrific parents, a good education, and I was wired in a way that paid off disproportionally in this particular society. If I had been born long ago or in some other country, my particular wiring would not have paid off the way it has. But in a market system, where capital-allocation wiring is important, it pays off like no other place."
"All along, I've felt the money was just claim checks that should go back to society. I am not an enthusiast for dynastic wealth, particularly when the alternative is six billion people who've got much poorer hands in life than we have, getting a chance to benefit from the money."
"It was clear that Bill Gates had an outstanding mind with the right goals, focusing intensely with passion and heart on improving the lot of mankind around the world without any regard to gender, religion, color, or geography. He was just doing the most good for the most people. So when the time came to make a decision on where the money would go, it was a simple decision."
There are always people who say that the rules have changed. But it only looks that way, he said, if the time horizon is too short.
"Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don't think you can outsmart the market. If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors."