Notes – The Snowball, By Alice Schroeder: Part I, Chap. 1-4 (#buffett, #valueinvesting)

The following are reading notes for The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. This post covers Part I: The Bubble, Chap. 1-4

Why Warren Buffett is driven to make money

The first chapter of The Snowball opens with the author interviewing Buffett in his office at Kiewit Plaza. She asks,

Where did it come from, Warren? Caring so much about making money?

Interestingly, Buffett’s response is something of a non-sequitur:

Balzac said that behind every great fortune lies a crime. That’s not true at Berkshire.

Are we supposed to believe this means Buffett is ultimately a moralizer? That he’s driven to make money just to show it can be done in an honest fashion? If so, where does THAT come from? You see, Buffett didn’t answer the question posed to him.

We also learn that Buffett reads voraciously, and that he watches CNBC (on mute, just to get the scroll of news stories and market developments). Every good investor knows CNBC is a bunch of noise, it is not edifying and it is distracting. It’s peculiar that a long-term oriented, value investor like Buffett would make CNBC part of his daily routine.

Buffett travels to Sun Valley, Idaho, July 1999

We begin to see Buffett as a completely self-absorbed individual. As he travels with a contingent of his family (children and grandchildren) to the Allen & Co. “elephant-bumping” retreat in Sun Valley, the man never looks out the window of his G4 and

He sat reading, hidden behind his newspapers, as if he were alone in his study at home

where, apparently, he treats his significant other, Astrid Meeks, in similar fashion, as noted in a later chapter which depicts Astrid as something of a live-in hamburger-making, Coke-delivering otherwise-invisible person who tries not to disturb the Great Warren during his nightly routine of hours of online bridge and conversations with his insurance lieutenant, Ajit Jain, at 10PM at night. Everyone’s entitled to their flaws and interpersonal relationships seem to be one of Buffett’s.

Which is interesting, because he goes to great pains in Sun Valley to be liked by everyone. Buffett

liked few things more than getting a free golf shirt from a friend [Allen & Co.’s president and organizer of the outing]

and he

went out of his way not to be disliked by anyone

Somewhat peculiar juxtaposed social relationships for a man who waxes philosophical about the Inner Scorecard versus Outer Scorecard in life, one being a measure of self as seen by self, the other being a measure of self as seen by others. You’d think neglecting your family while making pains to impress social acquaintances would register on the Inner Scorecard, but no matter.

This isn’t a Beat Up Buffett blog– the man has a lot to teach and I have a lot to learn. I just find these items odd as I read.

The festivities in Idaho are noteworthy because of what an extremely above-average experience it is for the people involved when compared to daily existence for the Average American, let alone the Average Human Being. To wit, after “white water river rafting” down a stream lined with ambulances and quick response teams for safety (and, one might imagine, helicopter gunships for security),

the guests were handed warm towels as soon as they put down their paddles and stepped out of the rafts, then served plates of barbecue

In addition,

Reporters were banned [from covering the outing]… [the various money managers in attendance represented] more than a trillion dollars [in combined wealth under management]

This is unusual company, an elite group within society, wittingly or not. There is nothing wrong with this level of affluence, it’s simply worth mentioning to set Buffett’s life into context– he’s not of us, at least not at this point in his career.

The key scene at Sun Valley is Buffett’s economic-prediction-as-financial-market-lesson-speech in which he lectures the newly minted tech bubble millionaire crowd on economic cycles and sound investing. A few notes:

  • Most people treat stocks like chips in a casino; Buffett sees the chips represent ownership in businesses (entities that create more chips over time)
  • Technology is not a guaranteed win for investors; history is replete with new technologies that made huge improvements in everyone’s standard of living, yet few had made investors rich (ie, the automobile, and the 3,000 original manufacturers that had over time combined into 3 major firms in the US; airline industry, $0 made in the aggregate stock investments in the industry’s lifetime)
  • Valuing is not the same as predicting
  • 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.
  • As interest rates vary, the value of all financial assets change
  • Three ways the stock market can grow faster than the economy:
    • interest rates fall and remain below historic levels
    • share of the economy going to investors as opposed to employees, government, etc., remains above historic levels
    • the economy grows faster than normal
  • Book value: the amount of money that had been put into the business and left there
  • Ultimately, the value of the stock market can only reflect the output of the economy; on average, the return of the stock market is about 6% a year
Buffett also makes reference to “Lord Keynes”; not that it’s a big secret, but I don’t know anyone who isn’t a Keynesian who refers to Keynes that way (with prestige and respect for the State-granted honorific). If it wasn’t obvious otherwise, I’d say this is evidence enough of Buffett being a Keynesian.

Buffett also lives by the rule, “Praise by name, criticize by category.” That’s very Dale Carnegie-esque.

Enter the Munger

In Part I, we’re also introduced to Buffett’s curmudgeonly friend and business partner, Charlie Munger.

Munger is a graduate of Harvard Law School. He also

admired [Benjamin] Franklin for espousing Protestant bourgeois values while living as he damn well pleased

We also learn a curious fact about Munger’s charitable practice, which

took the form of a Darwinian quest to boost the brightest

but often took the form of “noblesse oblige” because he attached many strings to his giving which were “for the recipients own good, because he knew best” (Schroeder’s articulation). Munger and Buffett are famous for their hands-off, passive management approach to their acquired businesses; yet when it comes to charity, Munger is a world-saver who tries to micro-manage things to an almost tyrannical degree. It seems like a mismatch, but, when combined with his love of Franklin’s philosophical pragmatism and his background at Harvard, it fits the egotistical elitist mold quite well.

Munger, like Buffett, reads a great deal, tearing through newspapers and periodicals everywhere he goes. And Munger, like Buffett, seems quite impressed with his father– Munger carries his father’s old briefcase and vacations at his father’s old Minnesota cabin, while Buffett has a shrine-like portrait of his father in his office and claims he’s “never seen anybody quite like him.”

Revisiting the theme of “Why does Buffett watch CNBC?”, Buffett is subscribed to several newsletters about stocks and bonds and he reads the daily, weekly and monthly operating reports of the Berkshire subsidiary companies. For someone with a long-term orientation, it seems puzzling he would be fascinated or concerned with this kind of contemporaneous minutiae, but perhaps his is simply a mind that thrives on volumes of data to create patterns, impressions and meaning.

Finally, when we learn about Buffett’s two scorecards, we also learn that Buffett pays “close attention” to the rankings of the world’s wealthiest people. This standing would appear to reside on the Outer Scorecard which Buffett warns against measuring one’s life against.