Charlie Munger was visiting his hometown of Omaha, Nebraska, in the summer of 1959 when one of his childhood friends, Neil Davis, introduced him to a young man, twenty-nine at the time, who was managing a number of partnerships for several local investors, including himself.
Munger, a lawyer in Los Angeles, was immediately captivated by the man, suspecting that he shared his own "considerable passion to get rich." (Schroeder, p. 226) A few nights later, accompanied by their wives, the two went to dinner, and when Munger returned to Los Angeles, they "began talking on the phone with increasing frequency." (Schroeder, p. 228)
When his wife asked him why he was paying so much attention to Warren Buffett, Munger replied, "You don't understand. That is no ordinary human being." (Schroeder, p. 228)
Fifty years later, Munger's assessment has been confirmed a billion times over as his inveterate partner has amassed a fortune which, depending on the vagaries of the stock market, has elevated him to first or second place in the pantheon of the world's richest men, all the while maintaining a lifestyle of elegant simplicity.
In contrast to the profligance and hubris of Wall Street moguls like the recently-deposed Merrill Lynch CEO John Thain, the Internet's newest whipping boy, so labeled for his lavish expenditure of 1.2 million dollars to refurbish his Manhattan offices in the face of his company's looming insolvency, Warren Buffett still spends the majority of his time in Omaha, drives the one-and-a-half miles from the house he has inhabited for four decades to the office he has occupied almost as long, sits behind a desk owned by his father, answers first-time callers himself, and personally picks up visitors at the airport in his late-model Lincoln Town car.
The soul of the exquisite machine called Berkshire-Hathaway, which he has built over a lifetime of rigorous adherence to his rationalist investment strategy, he is a CEO like no other. Twenty thousand acolytes and curiosity seekers swamp his annual shareholders meeting at the Qwest Center in Omaha, where a miniature "Berkyville" rises to greet them: neighborhoods of booths displaying his family of companies and the products they sell: awnings, air compressors, knives, encyclopedias, vacuum cleaners, picture frames, furniture, kitchenware, candy, insurance, shoes, and boots. After all, it is the fourteenth largest business in the United States (in 2004) with 172,000 employees, sixty-four billion dollars in revenues, and profits of eight billion dollars a year. (Schroeder, pp. 790-791)
By eight-thirty Saturday morning every seat in the auditorium is filled. An introductory video rolls featuring Buffett as a super-hero in any number of guises, including a body builder gracing the cover of Muscle and Fitness Magazine, his face superimposed on the physique of Arnold Schwarzenegger. After a brief business meeting, Buffett, chomping on peanut brittle and a Dairy Queen dilly bar, launches into this year's lecture : "Why I'm down on the dollar and the perils of debt." (The dollar would decline in value against major currencies over the next four years, and the economy would collapse, overburdened by individual and corporate leverage.) He (with Munger as accompaniment) rambles on, talking and answering questions for six hours, doing what he has been doing since he was a little boy and "astonished his parents' friends with his precocity. . . As long as he can be teaching something to somebody, Buffett never stops talking." (Schroeder, p. 789)
Which means he assuredly enjoyed the hours he spent during the last five years with his hand-picked biographer, Alice Schroeder, a former Wall Street analyst, who has produced an engrossing account of his career, The Snowball: Warren Buffett and the Business of Life. Not only is Buffett's predilection for the spoken word evident -- every ten or twenty pages the Oracle himself opines, his recorded words transcribed into italicized passages -- so is his prodigious memory. He recalls the details (and earnings) of every job he ever had: delivering newspapers, shoveling snow, unloading sacks of feed in his father's warehouse, as if they were the assets and liabilities of the hundreds, even thousands, of companies which are forever engraved in his consciousness.
Instead of blindly following the path of other political and business notables -- like Donald Trump, Jack Welch, and Rudi Giuliani -- capitalizing on his name and reputation and publishing a memoir or a how-to book with the assistance of a ghost writer (such as the journalist Carol Loomis, who edits his annual meeting reports to shareholders), Buffett chose a course of characteristic iconoclasm. How to interpret his story, who else to interview, what to write, he left up to Ms. Schroeder. "Whenever my voice is different from somebody else's," he advised her, "use the less flattering version." (Schroeder, p. 4)
Aside from his current status as a cult figure, one, of course, is drawn to that story because it is so unique. Neither an industrialist, a technological pioneer, a real estate magnate, nor a financier, Buffett rose from modest origins to immense wealth solely on the wings of his investing acumen. Wall Street mutual fund managers, investment bankers, and hedge fund entrepreneurs have prospered through a similar track, yet Buffett dwarfs them all, in sheer numbers and in methodology. The author describes in workmanlike fashion how it was done: almost effortlessly, it seems, yet a feat unlikely ever to be repeated.
Warren Buffett met Bill Gates on a Fourth of July holiday in 1991 at a gathering orchestrated by Kay Graham at the Bainbridge Island home of her Washington Post editorial page editor and friend, Meg Greenfield. As many of Seattle's best-known people circulated around them, Buffett and Gates struck up a conversation that went on all afternoon, to the palpable exclusion of the other guests. Buffett remembers: "At dinner, Bill Gates's father posed the question to the table: what factor did people feel was the most important in getting to where they've gotten in life. And I said, 'Focus.' And Bill said the same thing." (Schroeder, p. 623)
Ms. Schroeder writes that few people understand "focus" as Buffett has lived that word. "This kind of innate focus can't be emulated. It means the intensity that is the price of excellence. It means discipline and passionate perfectionism . . . It means the single-minded obsession with an ideal." (Schroeder, p. 604)
In 1940, when Warren was ten years old, his father took him to New York City and at his request to the New York Stock Exchange, where he watched a cigar made up by hand. That day "his future was planted." He saw "rivers, fountains, cascades, torrents of money gushing forth from the stock exchange, enough to hire a man for the frippery of rolling cigars, and he wanted some of that money." (Schroeder, p. 63)
He stumbled across a book in the library entitled "One Thousand Ways To Make A Thousand Dollars" and was fascinated by pennyweight scales. " 'The weighing machine was easy to understand. I'd buy a weighing machine and use the profits to buy more weighing machines' . . . The concept of compounding struck him as critically important. If $1000 grew 10% a year, in five years it became $1600; in ten years $2600; in twenty-five years $10,800." He could picture the numbers compounding and growing like a snowball rolling across the lawn. He announced to a friend that he would be a millionaire by the time he reached thirty-five. He had already saved $120. (Schroeder, pp. 64-65.)
Three years later earnings from his three newspaper routes had swelled his horde to $1000. By 1950, the year he entered Columbia University Graduate School to study at the knee of Ben Graham, he had increased his capital to $10,000.
Graham's book, The Intelligent Investor, mesmerized Buffett. "It was like he had found a God," said a roommate. Graham "blew apart the conventions of Wall Street, overturning what had heretofore been largely uninformed speculation in stocks . . . Through examples of real stocks he illustrated a rational, mathematical approach to valuing stocks. Investing, he said, should be systematic." (Schroeder, pp. 126-127)
From Graham, Buffett learned to analyze a company's intrinsic value -- its net worth after all assets were sold to pay liabilities -- regardless of how other buyers and sellers, or Mr. Market, priced it, and then to build in a margin of safety -- what the stock would be worth if the company were shut down and liquidated. Although Buffett became an enthusiastic follower of Graham, he disagreed with him about the need to own a large number of stocks. He sold three-quarters of his growing portfolio to buy 350 shares of the insurance company GEICO at $42 a share; he thought they would be worth $80 to $90 in five years. (Schroeder, p. 138)
In 1951 he earned 75%, boosting his capital to $20,000.
After a brief stint at his father's brokerage firm in Omaha -- he didn't like selling stocks because it pitted his interests, garnering commissions, against those of his clients -- and three years at Graham's firm in New York City -- he didn't like riding the train everyday -- he returned home to start a partnership including friends and relatives, Buffett Associates Ltd., modeled on a Graham hedge fund. On May 1, 1956, six partners put in $105,000; Buffet put in $100. He guaranteed his partners a four percent return. "I got half the upside above a four percent threshold and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited." (Schroeder, pp. 201-202) Within two years he was managing $1,000,000 and seven partnerships, plus his own money.
The snowball had started rolling. The boy who had reveled in collecting license plate numbers, stamps, and bottle caps was now a man collecting investments, businesses, and human beings.
He spent hours studying Moody's Industrial, Transportation, Banks, and Finance Manuals, looking for what Graham called "cigar butts -- cheap and unloved stocks that had been cast aside like the sticky mashed stub of a stogie, from which he could coax a light and suck out one last free puff." (Schroeder, pp. 184-185) He could speak from memory for five or ten minutes about any stock -- its financial data, its price/earnings ratio, the value of shares traded -- and he could do this for hundreds of stocks, as if he were quoting baseball statistics. (Schroeder, p.170)
Those long conversations with his new friend, Charlie Munger, expanded his horizons. Munger bought cigar butts too, but he was as interested in a company's intangible qualities as he was in its balance sheet: the strength of its management, the durability of its brand, what gave it an enduring competitive advantage. Munger urged Buffett to define Graham's margin of safety in terms other than the purely statistical. (Schroeder, pp. 256-257)
It was this kind of thinking that led him to place a huge bet on American Express in 1964. The company was rocked by a scandal in late 1963 which drove its stock down fifty percent; one of its subsidiaries had issued warehouse receipts guaranteeing tankfuls of soybean oil as collateral for speculative bank loans. When the oil turned out to be seawater, American Express was exposed to a $60 million loss.
With one-half billion dollars in Traveler's Checques floating around the world and its five-year-old credit card a huge success, Buffett, after scouting banks, restaurants, hotels, and credit card usage, concluded that the company's value was its brand name and that customers were still happy to be associated with American Express. He began pouring money into the stock, $3,000,000 dollars in six months, $13,000,000 dollars by 1966. He urged the company's president to pay the $60,000,000 it owed to the banks, saying that if he did so, the company would "be worth substantially more than an American Express disclaiming responsibility for a subsidiary's acts." (Schroeder, p. 263)
As the stock began to recover, Buffett was able to announce stupendous results to his partners at the end of 1965. American Express's goodwill had proved to be the competitive advantage Charlie Munger had meant when he spoke of "great businesses."
Berkshire-Hathaway was not a great business when Buffett began buying its stock in 1962. It was a textile maker in New Bedford, Massachusetts, that was selling at a discount to the value of its assets: $7.50 per share versus $19.46. His idea was to buy and liquidate, or sell the stock back to current management, which was headed by Seabury Stanton, a self-proclaimed savior of the New England textile industry, who was spending millions trying to modernize his plants. When Stanton, who was himself accumulating Berkshire-Hathaway shares, reneged on a deal with Buffett to purchase his shares at an agreed-upon price -- he lowered his offer $0.125 per share -- Buffett decided that, instead of selling, he would buy this "failing, futile enterprise" -- because it was cheap and because he resented being chiseled. (Schroeder, p.273)
Within a short period of time, propelled by the purchase of 2000 shares from Stanton's brother, Buffett pushed his ownership to forty-nine percent, which gave him effective control. Coincident with Buffett's being elected Chairman of the Board and tapping his own CEO, Seabury Stanton resigned.
Although Buffett had bought Berkshire-Hathaway at a good price, its inherent business was doomed. "This was a soggy cigar butt with not even one puff left in it," Buffett admitted. "I would have been better off if I had never heard of Berkshire-Hathaway." (Schroeder, p. 277)
After liquidating some of Berkshire-Hathaway's assets, Buffett put his capital to work by buying National Indemnity, an Ohio-based insurance company owned by local legend "Jet Jack" Ringwalt. Ringwalt had built his business and become a celebrity by pinching pennies and, for the right price, insuring the exotic: circus performers, lion tamers, the body parts of burlesque stars, the bank account of a missing, purportedly dead, bootlegger, and radio station treasure hunts. He coined the phrase often attributed to Buffett: "There is no such thing as a bad risk, only bad rates." By grafting National Indemnity onto Berkshire-Hathaway, Buffett could use the latter's capital to grow the insurance business, which could generate more capital to buy other businesses. (Schroeder, pp. 301-302)
A similar motive led him to invest in Blue Chip Stamps, whose stock had been hammered by an antitrust suit filed against it by the Department of Justice for allegedly monopolizing the trading stamp business in California. (The lawsuit was later settled.) Buffett wanted Blue Chip, because, like an insurance company, it generated float. The retailers who distributed trading stamps paid for them in advance; the prizes awarded for the stamps were redeemed later. In the meantime, Buffett could invest the steadily growing stream of float.
In 1966 Buffett's partnership (by then he had rolled all of them into one) beat the Dow by thirty-six points, the best record in its thirty-six year history. By 1968 it had amassed a 31% annualized return over the dozen years of its existence compared to the Dow's 9%.
By 1969 with his investments worth over $100,000,000 and himself 25% of that, Buffett had become wary of an overheated stock market and discouraged by a dearth of buying opportunities. He turned down lucrative offers to sell the partnership and decided to unravel it instead. His partners had the option of redeeming their shares in cash or Berkshire-Hathaway stock; the wiser ones, of course, chose to retain ownership in Berkshire-Hathaway and the other companies that comprised the partnership's assets.
One of those was the Omaha Sun, a purchase which reflected Buffett's youthful newspaper career, his growing awareness of the profitability and influence of media organizations, and his latent desire to be a publisher. He encouraged the Sun to investigate Boys Town, an Omaha refuge for homeless boys and a local sacred cow. In a story for which it won a Pulitzer Prize, the newspaper exposed the Home's egregious fundraising activities; it was sending out 40 million pieces of mail a year, taking in 10 million dollars annually, and had accumulated a net worth of over 200 million dollars, when it needed less then five million dollars to fund its annual operations. (Schroeder, pp. 358-359)
The Sun's luster (it was only temporary; not long afterward, it started losing money) only whetted Buffett's appetite. Thwarted in his attempts to buy whole newspapers (the prices were too high) he began accumulating stock in the Washington Post -- fresh off its success reporting the Watergate cover-up. His notoriety piqued the interest of its publisher, Katherine (Kay) Graham, and sparked an unusual friendship that was to last until her death. Initially, the two could not have been more mismatched: the impeccably-dressed, powerful, patrician doyenne of Washington society and the rather seedy, corn-fed, Midwestern hick, who wore a suit that seemed tailored for some other man. (Schroeder, p. 381) When invited to a black tie dinner party at Graham's magnificent Georgetown mansion, Buffett had to scramble to find suitable attire.
"He had never attended a gathering of such formality or grandeur." The waiters "offered him food he would never eat and wine he would never drink." When the hostess rose to read an original toast to him, her guest of honor, he was too intimidated to return the favor. All he wanted to do was escape -- especially since his wife Susie's dinner companion, Senator Edmund Muskie, had been fawning over her all night, even inviting her to his Senate office building as they were leaving. (Schroeder, pp. 385-386)
And yet Buffett was enamored of all the glitter that surrounded Ms. Graham. Fascinated by her, he began a courtship. Soon she was calling him for advice on how to give a speech and inviting him to join her Board of Directors.
He "became her personal Dale Carnegie instructor." (He had taken the course himself years ago to build self-confidence.) "He could sympathize with someone who tended to freeze in front of a crowd." (Schroeder, p. 400)
I
In return Kay Graham tried to refine and polish Buffett, especially his dining habits, a hopeless task. "I follow a simple rule when it comes to food," said Buffett. "If a three-year-old doesn't eat it, I don't eat it." (Schroeder p. 603) "He ate his foods in sequence, one at a time, and did not like the individual foods to touch." Broccoli, asparagus, brussel sprouts, cauliflower, carrots, sweet potatoes -- he despised them all. He liked spaghetti and grilled cheese sandwiches, meatloaf, hamburgers. (Schroeder, p. 425)
Meanwhile capital from Blue Chip and his insurance companies was pouring into Berkshire-Hathaway, at the same time the stock market was collapsing. Buffett was exuberant. "This is a time to start investing," he said in an interview." I feel like an oversexed man in a harem." (Schroeder, p. 406)
One of the beauties was GEICO, whose stock had crashed to two dollars a share when it reported a loss of 190 million dollars in 1975. After Buffett interviewed and blessed its newly hired CEO, Jack Byrne -- whom he immediately recognized as the dynamic, energetic, obsessed personality the company needed -- and after John Gutfreund at Salomon Brothers agreed to underwrite a 76 million dollar convertible stock offering, Buffett jumped at the opportunity. Under Byrne's extraordinary leadership, GEICO turned into another American Express. (Schroeder, p. 437)
In 1977 Buffett and Munger finally found the daily newspaper they had been coveting; they bought the Buffalo Evening News for 35 million dollars. It was Buffett's largest single investment up to that time and almost his worst. It survived poor management, a protracted anti-trust lawsuit filed by a competitor newspaper, a teamsters union strike, and ten million dollars in losses before new management was able to cut costs, the competitor folded, and the paper started churning out profits. (Schroeder, p. 473)
Buffett's business philosophy was spelled out in his 1983 letter to shareholders. "Although our form is corporate, our attitude is partnership. We do not view the company as the ultimate owner of our business assets, but, instead, view the company as a conduit through which our shareholders own the assets . . . We don't play accounting games. We don't like a lot of debt. We run the business to achieve the best long-term results." (Schroeder, p. 480)
Another of Buffett's entrepreneurial collectibles was Rose Blumkin, whose Nebraska Furniture Mart he purchased in 1983. At age sixteen Rose boarded the trans-Siberian railroad and traveled nine thousand miles across the continent of Asia before securing steerage passage on a cargo boat bound for America carrying peanuts. She eventually landed in Omaha and opened a pawn shop with her husband, but soon expanded into furniture and carpet. When her customers demanded more furniture, she opened a store in a nearby basement. Her business grew rapidly because she swore by the maxim: "Sell cheap and tell the truth; don't cheat anybody; and don't take no kickbacks." When a carpet supplier filed a lawsuit to enforce its minimum pricing policies, which she was undercutting, the judge threw the case of out court, went to the Furniture Mart, and bought fourteen hundred dollars worth of carpet.
After several futile passes, Buffett finally persuaded Rose, who was eighty-nine, and her son Louis to reject a more lucrative offer and sell the company to him, which by that time had become the largest furniture store in the United States, grossing 100 million dollars. That other buyer, he said, "will have his own way of doing things and will at some point believe his methods are better," a serious flaw for sellers whose "business represents the creative work of a lifetime and remains an integral part of their personality." It could only remain so if the owners sold to Buffett, who wanted them to stay on as his partners. (Schroeder, p. 497)
In 1985 Berkshire earned 332 million dollars from a single transaction, when General Foods was taken over by Phillip Morris. Its shares were trading at $2000, and Buffett was a billionaire, one of only fourteen in the world, according to Forbes Magazine. He bought a jet airplane, which, he rationalized to a friend with great earnestness and obvious embarrassment, was going to save him money by getting him around faster. (Schroeder, p. 536)
"Never in history had anyone climbed from the ranks of those who manage other people's money to join the celebrated few on top of the feeding chain of riches. For the first time ever, the money from a partnership of investors had been used to grow an enormous business enterprise through a chess game series of decisions to buy whole businesses and stocks . . . Buffett's first group of partners had reaped 1.1 million for each $1000 put into the partnership." (Schroeder, p. 537)
It didn't happen without some cost -- a dysfunctional family life, which Ms. Schroeder depicts in excruciating detail -- perhaps too excruciating, since it was recently reported that, after a five-year collaboration, the author has been removed from the guest list for Buffett's traditional pre-Board-meeting dinner.
From the earliest days of his marriage to Susie Thompson in 1952, Warren Buffett had depended on her to order his life. While he retreated to his study to read and think, she devoted herself to fulfilling his requirements and raising their three children. But she also developed a host of her own interests, surrounding herself with people, joining social service and civil rights organizations, and assuming the role of sounding board, counselor, and provider for friends and family members in times of trouble. As their wealth grew, she urged Buffett to be more generous and to indulge in a few luxuries, like the Laguna Beach home she finally convinced him to buy in 1972. Not long after that, she embarked upon her own career: singing at local night clubs. In 1977 her need to be separate, to realize her own ambitions, and "to find her own identity -- which she could not do if she were spending all her time taking care of him" -- led her to move to San Francisco. (Schroeder, p.453)
The two never divorced, maintaining a cordial, even loving, relationship for the next twenty-seven years -- making public appearances, attending family gatherings, and vacationing together. Well aware of her husband's domestic helplessness, Susie encouraged Warren to take in a housekeeper, Astrid Menks. He married her in 2006, on his 76th birthday, two years after Susie's death.
In 1987 Buffett switched from his favorite drink -- his own concoction of Pepsi-Cola combined with cherry syrup -- to the newly-introduced Cherry Coke. The price of the stock was also sweet, beaten down to a tasty $38 a share by a price war its bottlers were fighting with Pepsi. Within eighteen months he had acquired 1.2 billion dollars worth, six percent of the company. "In March 1989, when his position was revealed, it caused so much demand that the New York Stock Exchange had to stop trading the stock to keep the price from skyrocketing out of control." (Schroeder, p. 552)
In the early 1990's Buffett burnished his reputation as a white knight -- which he had established by taking a fifteen percent stake in Cap Cities after its purchase of ABC at the request of CEO Tom Murphy -- when he rode to the rescue of the investment banking firm Salomon Brothers -- three times. First he invested 700 million dollars to prevent its takeover by corporate raider Ron Perelman.
A year later one of its bond traders violated regulations regarding the sale of Treasury notes and cornered the market on an auction series. The company fell under an investigative cloud, and the stock dropped precipitously. Leveraged thirty-five to one, mostly in short-term debt, it was threatened with insolvency if its creditors decided to call their loans. When CEO Gutfreund, who apparently knew about the irregularities but had not reported or acted upon his information, resigned, company officials asked Buffett to step in as the interim Chairman.
Buffett had told his children, "It takes a lifetime to build a reputation and five minutes to ruin it." His reputation as one of the most respected businessmen in the world was being undermined by executives whom he had endorsed, and he had to salvage that reputation. (Schroeder, p.582) With the company on the verge of bankruptcy, in a call which he said was the most important in his life, Buffett convinced Treasury Secretary Nick Brady to allow Salomon to bid in Treasury auctions and thus stay in business.
Buffett implemented a new culture of openness at Salomon. Threatened with a criminal indictment, he waived the attorney-client privilege and pledged complete cooperation with congressional investigators and government regulators. When he testified before Congress, "the Red Sea parted and the Oracle appeared." (Schroeder, p. 603)
"Huge markets attract people who measure themselves by money," Buffett said. "If someone goes through life and measures themselves solely by how much he has . . . sooner or later he's going to end up in trouble . . . Salomon was going to have different priorities from now on." (Schroeder, p. 603)
In words that have been parsed and dissected in classrooms and case studies as a mantra of corporate responsibility, Buffett admonished his new managers: "Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless." (Schroeder, p. 603) Transparency, integrity, honesty, all of the things Buffett stood for, he meant for Salomon to stand for them too. (Schroeder, p. 603)
While Salomon, after paying a $190 million fine and a $100 million restitution, regained its footing, Buffett's testimony in Congress as its reformer and savior transformed him into a heroic figure. His star shone brightly. Berkshire-Hathaway stock burst through $10,000 a share. Buffett was now worth 4.4 billion dollars.
In his spare time Buffett liked to play bridge. He pursued a "petite, sweet-faced brunette" in her mid-fifties, Sharon Osberg, a two-time world champion, until she became his regular partner. He even entered the World Bridge Championship with her, unheard of for a non-ranked amateur.
In 1995 Buffett broke one of his hallowed rules. Desperately coveting the fifty percent of GEICO he didn't already own, he forked over $2.3 billion for it in Berkshire stock, not cash, fifty times more than he had paid for the other forty-eight percent.
His mistakes were few -- he bought Dexter Shoes, thinking that the demand for imported shoes would wane -- and the home runs many. In early 1996 Berkshire stock rocketed to $34,000 a share, valuing the company at $41 billion.
No matter how long he kept making money, sooner or later Buffett knew he would have a bad year or the momentum would slow down. By the end of 1999, with the Dow up 25% and the NASDAQ up 85%, Berkshire-Hathaway had fallen from a 1998 high of $80,900 a share to $56,100.
Buffett's formerly "incredible cash machine," Coca-Cola, of which he owned two million shares, lost half of its value when declining sales growth, burgeoning expenses, and a revolt by its bottlers compelled Buffett and other Board members to engineer the resignation of its President. Buffett's biggest purchase ever, General Re, a huge reinsurer, which cost him $22 billion of Berkshire stock, was bilked out of $375 million in an elaborately designed fraud. Baron's Magazine put him on its cover with the headline: "What's Wrong Warren?" (Schroeder, p. 682)
Technology gurus, flush with stocks trading at extravagant valuations, said Buffett had missed the boat, the dawning of the Internet age. Through it all, he remained faithful to the ideas that had made him famous and wealthy -- preserving the margin of safety, defending the circle of competence, abjuring the treacherous emotionalism of Mr. Market -- and to his Inner Scorecard. He had learned from his father not to care what other people thought.
By March 2000 Berkshire-Hathaway stock had dropped 48% from its high. At his annual meeting that year, when asked about technology stocks, Buffett said, "I don't want to speculate about high-tech. Anytime there have been real bursts of speculation, it eventually gets corrected." (Schroeder, p. 697) He would not consider buying a technology stock at any price.
In a matter of months Buffett was vindicated. When the Internet bubble burst, he was ready with "a huge stockpot of capital" to scoop up private companies, bankrupt companies, under-the-radar companies -- U.S. Liability, Shaw Carpets, Benjamin Moore Paints, Johns-Manville, Mitex. (Schroeder, p. 712)
The 9/11 attacks -- although they cost Berkshire-Hathaway insurers $2.3 billion, much of it due to poor underwriting -- were another opportunity for Buffet. He bought junk bonds, Fruit of the Loom, the Pampered Chef, a children's clothing maker, a farm equipment manufacturer. He moved into the terrorism insurance business, insuring airlines, Rockefeller Center, the Chrysler Building, the Sears Tower, the summer and winter Olympics, the FIFA World Soccer Cup championship.
In 2003 Buffett's prescience surfaced again. While negotiating to buy mobile home manufacturer Clayton Homes, he observed how the company had been able to transfer risk to Wall Street firms who were packaging mobile home loans and selling them to investors. Mobile home dealers lowered down payment requirements -- making it easier for buyers to get loans. Subsequently, as the real estate market boomed, home loans, commercial loans, and business loans were stripped and securitized through collaterized debt obligations and insured and speculated on through credit default swaps.
In his 2002 shareholder letter, Buffett called derivatives "toxic," expanding time bombs that could cause a chain reaction of financial disaster. The next year he termed them "financial weapons of mass destruction." He warned that claims from derivatives could lead to the failure of financial institutions, a credit seizure -- in which lenders became afraid to make even reasonable loans -- and world-wide depression. (Schroeder, p. 735)
In spite of his vast wealth, Warren Buffett did not believe in giving money away, either to his children or to non-profit organizations -- at least during his lifetime. He set up a foundation in 1964 which made small grants to educational causes -- by 1986 it had given away a token $725,000 -- but insisted that allowing his money to compound over time would produce more for charity in the end -- after he was gone. (Schroeder, p. 487)
To requests from the United Way, universities, churches, heart disease, cancer, the homeless, the environment, the local zoo, the symphony, the Boy Scouts, the Red Cross, his answer was always the same: If I did it for you, I would have to do it for everybody. (Schroeder, p. 488) He did set up an innovative program in 1987 which allowed Berkshire shareholders to direct two dollars per share to the charity of their choice.
To his three children he was equally tight-fisted. He wanted them to carve out their own place in the world. He called trust funds harmful, anti-social, "a lifetime of food stamps." (Schroeder, p. 489) He gave them a few thousand dollars for Christmas each year and promised them each half a million when he died. (He did fund foundations for them, and they did inherit substantial sums of money at their mother's death.)
Such sentiments underlay Buffett's vocal and vigorous opposition to repealing the estate tax. He maintained that the wealthy owed some minimum amount to the society that had enabled them to become rich.
"I don't believe in dynasties," he said. "Wealth is just a bunch of claim checks on the activities of others in the future. You can use that wealth in any way you want. You can cash it on or give it away, but the idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society." (Schroeder. p. 723)
On June 26, 2006, Buffett announced that he would give away 85% of his Berkshire-Hathaway stock -- worth $37 billion at the time -- to a group of foundations over a number of years, easily surpassing any previous gift ever made in the history of philanthropy. Five out of every six shares would go to the Bill and Melinda Gates Foundation, already the largest charity in the world. (Schroeder, p. 815) He requested that the money be spent as it was given, so that the foundations could not perpetuate themselves.
No one had ever done such a thing before: donate money without naming something after himself, without controlling personally how it would be spent, to a foundation that he had selected for its competence and efficiency. (Schroeder, p. 816)
Buffett protested that his wealth had snowballed from a fortuitous set of circumstances, which he termed the Ovarian Lottery. "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 living in the United States instead of in some other country where my chances would have been different." (Schroeder, p. 643) "If I had been born long ago or in some other country my particular wiring would not have paid off in the way it has. But in a market system, when capital allocation wiring is important, it pays off like no other place." (Schroeder, p. 817)
His wiring was fired by an insatiable hunger. "He ruled out paying attention to anything but business -- art, literature, science, travel, architecture -- so he could focus on his passion . . . He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. . . In hard or easy times he never stopped thinking about ways to make money." (Schroeder, p. 821)
And yet, in spite of his single-minded acquisitiveness, he continued to live according to the values instilled in him by his father Howard: the how mattered more than the how much. It helped that he was fundamentally honest -- and that he was possessed by the urge to preach. (Schroeder, p. 829)
"He deliberately limited his money," says Charlie Munger. "He would have made a lot more if he hadn't been carrying all those shareholders and had maintained the partnerships longer, taking an override." He could have bought and sold the businesses inside Berkshire-Hathaway with a cold calculation of their financial return without considering how he felt about the people involved. He could have been a buyout king. He could have promoted and lent his name to all sorts of ventures. "In the end," says Munger, "he didn't want to do it. He was competitive, but he was never just rawly competitive with no ethics. He wanted to live life a certain way, and it gave him a public record and a public platform. And I would argue that Warren's life has worked out better this way." (Schroeder, p. 829)
