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Tuesday, October 07, 2008

Review: The Snowball

The Snowball (kindle edition) is the official biography of Warren Buffet's life. It arrives at a timely moment, as the world is embroiled in a financial crisis (in fact, there's a tantalizing description of what Buffet & Co are doing as the crisis unfolded, and the approach they're taking is a major reason to buy some stock in Berkshire Hathaway)

Alice Schroeder provides a surprising opening to the book by starting with Warren Buffett's low point --- the height of the dot-com bubble in 1999, when even his shareholders were losing faith in the value-investing approach. She then back-tracks through the years to Buffett's formative years, his discovery of Benjamin Graham, and his first millions.

What does not come across from the primary sources (e.g., his annual letters to his shareholders) is how hard Buffett worked. This was a man who packed corporate ledgers on his honeymoon, who would later come to regret not having paid attention at all as his kids grew up. Clearly, there's a price to be paid for his success, and I am not at all certain many would have been willing to pay it:

As Buffett liked to put it, “Intensity is the price of excellence.” (Kindle location: 5461-62)

We are reminded that mortgage crises are not at all unusual in history:

Out in the countryside, farmers faced with foreclosure on mortgages backed by nearly worthless farmland rose up in civil disobedience. Five thousand farmers marched on the state capitol in Lincoln until panicked lawmakers hastily passed a mortgage moratorium bill. (Kindle location: 853-56)

We also get a good look at Buffett's relationships with his wife, his family, and his circle of friends. Time after time, Schroeder emphasizes how little Buffett enjoyed interacting with people, though in recent years with the death of his wife, Buffett has appeared to mature beyond that. What also comes through the book is how often Buffett was right, and how he reacted whenever he was wrong --- he did not make excuses, and tried to do the right thing.

One thing that came through in this book is Buffett's respect for capital --- he felt that he owed employees a salary, but none of the gains of businesses, and so did not consider profit-sharing plans something worthy of discussion, even in industries as highly talent dependent as the financial industry. The typical stock-option package handed out at Silicon Valley startups would undoubtedly horrify him. I wonder how he would have done as a Silicon Valley entrepreneur, but with the heavy people-involvement needed in Silicon Valley, he probably would have shied away from it as being outside his circle of competence.

Yet for someone who's so obsessed with money as Buffett is, he does not fall into the trap that many capitalists have, which is to attempt to short-change society in the long term (by crippling important social programs and providing essential services, as well as serving as a regulator to prevent people who would otherwise take insane risks from jeopardizing the entire system) in the interest of lowering short term rates --- here as in everywhere else, Buffett proves to be much more far-sighted than the typical libertarian:

If it was pointed out that risk did not disappear, those who participated in the market would explain with a sigh that securitization and swap derivatives “spread” the risk to the far corners of the globe, where it would be absorbed by so many people that it could never hurt anyone. (Kindle location: 13853-55)

All in all, The Snowball comes highly recommended as far as providing insight into what went into making the most successful investor of all time, as well as providing historical context for the current financial crisis. If you have substantial financial assets, you owe it to yourself to read this book.


md said...

Sounds like a good update to Buffett: The Making of an American Capitalist. I'm adding it to my list.

srini said...

Piaw, are u doing anything different with the current crisis, are u buying, selling, doing nothing?

Piaw Na said...

I've been mostly doing nothing, but the other day I couldn't help myself and bought some BRK.b. Probably should have waited, because I don't think the panic is over yet, but I'm not much of a market timer anyway. :-)

srini said...

so do you do DCA from the goog diversification/pay or how does that work ? Are you planning on /have any GLD precious metal exposre?

Piaw Na said...

I sell periodically from my GOOG holdings and then reallocate by putting more money to the stuff that's falling behind.

My sole precious metal exposure is the Vanguard Precious Metals fund.