I have just finished the
The Snowball
, the first biography Warren Buffett has cooperated with. It’s full of surprises, such as how Buffett had three leading ladies for two decades, and how his 1960s home was an accidental outpost of the counterculture.
But I’m more interested in
how Buffett made his money. And while there’s few new facts about Buffett’s deals in
The Snowball, the biographical format does put them into context. You get to see what makes him tick.
Here are
seven interesting things I learned about Warren Buffett from
The Snowball, and some ideas on how they can help your investing:
1. Buffett set goals young. (He really started, really young)
Buffet began
obsessing over numbers as a child. He raced marbles with a stopwatch and calculated the lifespan of hymn composers when six-years old. He sold chewing gum at seven and Coca Cola when he was eight: the same year he began wearing a money-changer on his belt.
- His dad was a stockbroker. This gave him an early view of the markets
- At ten he was chalking stock prices at a local broker’s office
- The same year he visited the New York Stock Exchange, and was asked for a tip by senior Goldman Sachs partner Sidney Weinberg – an experience he never forgot
- His favourite childhood book was One Thousand Ways to Make $1,000
- At 11 he announced he was going to be a millionaire at 35, a seemingly crazy goal in 1941 (when a million really was a million)
- He filed his first tax return aged 14, having already made $1,000 (equivalent to around $12,500 in today’s money)
The takeaway: The power of compound interest takes years to work its magic. None of us has a time machine, so the main lesson is not to delay a day when investing for the future.
2. Buffett bought his first stock when he was 12-years old
Warren put everything his schemes had earned him into a stock, Cities Service Preferred, when he was 12. He also enrolled his sister, Doris.
Buffet was already learning how to hold shares through a slump
He paid $114.75 dollars for three shares, and
watched the stock price fall from $38.25 to $27 a share. His sister Doris was not happy. When Cities Service went back up to $40, he sold. He made $5 a share profit, and got Doris off his back.
After he sold, the stock rose to $202 a share.
Takeaway: We all learn the same lessons. Buffett’s business partner Charlie Munger says that because Warren started thinking about odds, stocks, and goals before he was a teenager, he’s years ahead of the rest of us.
I used to watch share prices rise and fall on the Teletext TV service when I was 11 or 12. At the same age Buffett was learning
real-world lessons on holding shares through a slump and selling too soon.
You’ll only discover whether you have the stomach to
invest through a bear market or whether you’ll be sucked up by the next
property bubble by being an active investor. Start with small sums, sure, but don’t delay that start.
3. Buffet lied, shoplifted, and played truant as a kid
This one was a real surprise. As a teenager Buffett revealed a wild streak. He says:
“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.
“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”
Takeaway: Even Buffett had to learn to be Buffett. I don’t know about you, but I found this heartening to read. Together with discovering that Buffett was a shy child who enrolled himself in Dale Carnegie’s public speaking course, it made him seem more human.
It’s easy to feel you haven’t got what it takes to make money. Some are born special, you might conclude. But Buffett’s history shows that even the world’s richest and most admired investor had to iron out his kinks.
Buffett’s history also makes me
proud to be an outsider. Many of my college classmates entered the city or became management consultants, and have earned six-figure salaries for a decade. When property prices were booming, I’d sometimes wonder if I’d made the wrong decision by deciding to go it alone – even though I know that working a nine-to-five in an office and answering to some buffoon of a manager would kill me.
Discovering
Buffett made being his own boss a top priority puts me in good company. I also suspect the unusual structure of Berkshire Hathaway grew out of Buffett’s non-confirming mentality.
4. Buffett is a businessman first, investor second
You’ll often read that Buffett evaluates stocks as if he’s buying the whole business. What I realised after reading
The Snowball was Buffett doesn’t do this because he’s an investor who thinks like a businessman.
Buffett is a businessman who is also an investor.
- Buffett ran multiple businesses while still a student: He sold refurbished golf balls, peddled stamps to collectors, ran a network of pinball machines when he was 17, owned a tenanted farm, and managed a 50-strong paperboy route
- He dealt hands-on with strikes and turf wars at newspapers from The Washington Post to the Omaha Sun
- Buffett didn’t just buy, hold and drink Coca-Cola – he engineered the replacement of its CEO
- With all the new businesses, from See’s Candies to GEICO, he added everything from their stock level reports to weekly sales projections to his endless daily reading
- Berkshire Hathaway is far from a simple holding pen for Buffett’s investments. He’s used his business acumen to produce an intricate money-making machine which takes cash from its subsidiaries and the float from its insurance businesses and reinvests it at higher rates of return, multiplying his returns
Takeway: Buffett’s success will never boil down to filters or ratios. Investors who try to ape him simply by reducing his methods to dubious cashflow projections or buying any old listed household name when its stock price falls 20 per cent will never replicate Buffett’s success. (Okay, rounding down roughly nobody is ever going to replicate Buffett’s success, but you know what I mean).
Buffett’s record suggests
investors should spend as much time reading about business and management as they do calculating P/E ratios. The trouble is, all manner of financial ratios are available at a touch of a button. Buffett’s sense of business value is far harder to emulate.
5. Buffet makes mistakes
He really does! I was even more heartened by Buffett’s stinkers than by his golf ball robbery.
Some
classic Buffett cock-ups include:
- Him and his friends spending $25,000 in 1957 on four-cent Blue Eagle stamps that the US government was about to take out of circulation. By securing and controlling the supply, they destroyed any chance of the stamps becoming valuable. His partners in the caper were still mailing him with postage paid for by sheets of the stamps decades later.
- He bought The Buffalo Evening News in 1977 and had lost $10 million within three years by becoming embroiled in a price war and a fight with the unions (though it later became very profitable)
- Buffett’s firm Berkshire Hathaway is living testament to his biggest mistake – spending millions to gain control of a doomed textile manufacturer
- Buying into Salomon Brothers in 1987 for $700 million eventually plunged him neck-deep into the Wall Street culture he so despised, when its rogue traders and poor management threatened his reputation and fortune
Takeaway: Mistakes happen even to the best of us. Sadly, having read
The Snowball cover-to-cover I haven’t found a Buffett blunder to rank with my own worst investment (an iffy company called Homebuy that went bust overnight). But I saw plenty of examples where Buffett dusted himself down after an investment misfired and tried to learn from what went wrong.
Virtually all Buffett’s purchases of major insurance companies seem to have gone awry in the early years, for instance, and yet it’s by reinvesting all the cash thrown off by these companies that Buffett has maintained Berkshire Hathaway’s incredible growth rate.
The moral is to not despair when an investment turns out badly, but try to figure out what you can takeaway from it, as well as what you can salvage the situation.
6. Buffett considered quitting investing in his early 30s
In 1969 Buffett wrote to his investors that he was going to close their partnerships:
“I know I don’t want to be totally occupied with outpacing an investment rabbit all my life. The only way to slow down is to stop. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.
“I do know that when I am sixty, I should be attempting to achieve different personals goals than those which had priority at twenty.”
Takeaway: What can anyone learn from this but humility? I already knew before reading
The Snowball that Buffett wound down his partnerships in 1970 because he thought the market too over-valued to deliver an adequate return for his investors. That move alone would seal Buffett’s place in history among value investors, even if he had retired.
Of course, Buffett didn’t retire. He is still compounding his investments at an average rate of over 20% a year, nearly four decades later.
7. Buffett treats becoming the world’s richest man as a game
I couldn’t even begin to quote examples from
The Snowball showing how Warren Buffett is in it for the scorecard, not for the payday: the entire biography is a testament to it.
No sports cars or private islands for Warren Buffett – even when he eventually bought a corporate jet he called it ‘The Indefensible’. For decades he bought suits from the everyman outfitter nearest his office, and his biography frequently mentions (and has photographic evidence of) his favourite threadbare jumper. And famously, his main residence is the first house he bought in 1961.
From setting that goal aged 11 of becoming a millionaire by 35,
Buffett seems to treat investing as an intellectual challenge. He probably learned this from his great mentor Benjaman Graham, who seemed
more bothered by being right than being rich, and for whom investing was just one of several high-end hobbies.
Buffett’s ‘inner scorecard’ helped him save and reinvest his money early on
Unlike Graham, however,
Buffett really cares about every penny. From ‘Buffetting’ a few cents off the price he paid for stocks to demanding his friends sell him shares they’d bought in companies he was interested in, right up to his close personal friendship with his rival for the title of world’s richest man, Bill Gates,
Buffett really wants to have the biggest snowball.
If you were to say there’s something rather peculiar about chasing money as a means to an end, I could certainly see your point. But when the recipient chooses to leave virtually all $62 billion of his winnings to charity, it’s hard to complain. I’d rather have Buffett as the world’s richest man than the Salomon traders who almost destroyed his reputation.
Takeaway: Spend less than you earn and reinvest the difference in the stock market. Buffett may have lived a remarkable life, but that central practice is something we can all aspire to.
Beyond that, I don’t want to get too moral. I’m happy to live below my means, but can I honestly say I’d be happy with Cherry Coke and a steak from the local shop if my means were sufficient to buy up The Maldives or launch me into space? Unfortunately I’m not qualified to comment.
I do think my attitude is closer to Buffett’s than to the more visible of the cityboys I’ve seen in London over the past few years, for whom cash is flash. Also, Buffett’s self-containment from materialism –
he calls it his ‘inner scorecard’ – undoubtedly helped him save and reinvest his money early on, and got his investing career off to a flying start in his 20s.
You have to accumulate before you can speculate. Good luck rolling your own snowball.
