Buffett and the business of life

From teenage shoplifter to the world’s richest man, Alice Schroeder’s best selling biography reveals a man who’s both tough but vulnerable and filled with self doubt.

"Life is like a snowball. The really important thing is finding wet snow and a really long hill." - Warren Buffett

If Morgan Stanley insurance analyst, Alice Schroeder, never wrote "The Snowball: Warren Buffett and the Business of Life," it's unlikely that we'd ever discover the inner workings of "Oracle of Omaha". Much has been written about Buffett, but this is his first authorized biography. The end result of some 2,000 hours spent with Buffett, during which time Schroeder amassed 300 hours of recorded interviews Snowball is five years in the making. The book's title comes from the Zen like metaphor Buffett uses to describe the accumulation of more than just money, but also knowledge and understanding in life.

Buffett earned his fortune by being superb at determining a company's long-term value and earnings potential, his primary investment criteria. Always suspicious of stock booms and seldom surprised by stock busts, Buffett never lets the ups and downs of the stock market influence his investments and looks carefully for undervalued companies.

The "everyman" as a multibillionaire, despite his vast wealth, Buffett has always eschewed ostentation. He pays himself about $100,000 annually, which in today's U.S. economy places him in the upper-middle-class. He lives in the same simple Omaha, Nebraska, house that he bought in 1958 for $31,500. He prefers an old gray suit to expensive London tailoring. In Buffett's early days, when he was only a multimillionaire and not a multibillionaire, he walked around with holes in the soles of his shoes. To Buffett, wardrobe doesn't matter; what matters is making money. He is better at this pursuit than anyone else in the world. In 2008, Forbes magazine ranked him as the globe's richest man, with a net worth of $62.3 billion.

Author Alice Schroeder does a masterful job of chronicling Buffett's improbable, inspiring life. As a former superstar research analyst, Schroeder uses her expert knowledge of finance and commerce to detail Buffett's investment philosophy and business activities. Her book is packed with fascinating details and trenchant observations about the "Oracle of Omaha." One of the best business biographies available, this book shows how the world's greatest investor amassed the world's greatest fortune, while staying true to his essential self.

In this book extract from "The Snowball: Warren Buffett and the Business of Life" you can discover who Warren Buffett is; what his personal and business history is; and what his investment philosophy is:

The World's Wealthiest Individual

Warren Buffett earned his vast fortune all by himself. Instead of living amid Wall Street's bustle, Buffett lives and works in Omaha, Nebraska, a bucolic city in the U.S. heartland. Throughout his career, backwater Omaha has been Buffett's base, though the rest of the business world sees it as a déclassé town of no special signifi cance. To build his enormous wealth, Buffett exhaustively studied the stock market and the world of commerce, learning everything he could about individual companies, and their potential for growth and earnings. This hard-earned knowledge has been his guiding light and his path to becoming the richest man in the world.

Buffett's investment philosophy, adapted from his mentor, investment guru Benjamin Graham, is remarkably simple: Look for companies whose stock values are priced less than the organization's "intrinsic" value and invest accordingly. Buffett does not concern himself with the market's temporary ups and downs. He invests for the long term, focusing on companies' sound business fundamentals and capacity to generate superior earnings year after year.

Through this straightforward process, he made his fortune. Of course, the "Oracle of Omaha's" legendary expertise in separating commercial winners from losers is much easier described than accomplished. How did Buffett become the world's best company evaluator and stock-picker?

You can find the answer in his single-minded quest, from childhood, to become a millionaire. One of the earliest photographs of Buffett as a little boy shows him proudly holding his favorite toy, a nickel-plated change-maker, a small gizmo with four tubes that dispensed coins. As he grew up, Buffett zealously studied everything he could find about business and investing, including decades-old magazines and newspapers. That he far surpassed his initial financial goal is a testament to his prescience and steely-eyed focus, as well as to his idiosyncratic formula for financial achievement. His story is the classic American tale of hard work that pays off beyond all expectations. How the kid who wanted to make a million actually did that - and more - is a truly amazing tale.

"Warren Buffett was a man who loved money, a man for whom the game of collecting it ran in his veins as his lifeblood."

The Early Years

The members of the Buffett clan were Nebraska tradespeople, straightforward, honest, no-nonsense types. Warren's father, Howard, worked in his own father's grocery store in Omaha before attending the University of Nebraska. After that, he sold insurance.

In 1930, Howard's second son Warren Edward was born just at the start of the Great Depression. Soon after, Howard opened a stock brokerage, Buffett, Sklenicka & Co. To do so when people were shunning stocks took real courage. However, Howard's business was a winner from the start.

A precocious toddler, Warren loved numbers and collecting things. His hobbies included counting and measuring. Of course, these interests would stand him in good stead. As a boy, Warren was a bona fi de businessman. His fi rst products were packs of gum, which he sold to his neighbors. Later, he sold golf balls that he retrieved from the lake at Omaha's Elmwood Park golf course. He also sold popcorn and peanuts at local football games. Warren saved every penny he made. Even as a youngster, Warren avidly read all the investment books and periodicals at his father's office. His favorite library book was One Thousand Ways to Make $1,000. He studied it religiously. He vowed to himself that by age 35, he would be a millionaire.

During the 1940s, Howard, a rock-ribbed Republican, was elected to Congress. He and his family moved to Washington, D.C., where Warren entered junior high school and became a newspaper boy. In 1944, Warren submitted his first income tax return. By age 14, he had saved $1,000. Through hard work, he doubled it and purchased a 40-acre tenant farm in Nebraska. As a teenager, Warren also went into the pinball business, buying and installing the machines in local barbershops. Additionally, he became a horse race handicapper, selling a tip sheet he entitled Stable-Boy Selections. After high school, Warren briefly attended the University of Pennsylvania, which he did not like. He was shocked when Harvard turned him down. He got admitted to Columbia University, where he took classes with Benjamin Graham, the famous author of The Intelligent Investor. He quickly became Graham's star pupil. Warren read and memorized Security Analysis, the influential book Graham wrote with Columbia professor David Dodd.

By this time, Buffett was a regular investor on Wall Street. He focused on companies that kept costs low and always made money, such as GEICO, an insurance firm that sold policies over the telephone. Buffett initially bought 350 shares and later bought many more. After graduation, he returned to Omaha, where he sold stocks for his father's firm and taught investing at the University of Omaha. He married a sensitive, empathetic girl named Susan ("Susie") Thompson.

By 1951, Buffett's capital was $19,738, which he invested and reinvested. He and Susie lived inexpensively on his earnings as a stockbroker and part-time teacher. This was not hard because Warren was quite cheap.

He would wash his car only when it rained, so he could save on water. In 1953, Warren and Susie's first child, Susan Alice, was born. She became known as "Little Susie." They later had two sons, Howard and Peter.

"When Buffett walked into a room, the electricity was palpable. In his presence, people felt brushed by greatness. They wanted to touch him. They became dumbstruck before him, or babbled inane remarks."

In 1954, Buffett and his young family moved to New York, where he went to work at Graham's investment firm, the Graham-Newman Corporation. He subscribed fully to Graham's investment philosophy of focusing on companies' net worth and purchasing stock in firms that Wall Street undervalued. Graham called such companies "cigar butts."

Buffett studied Moody's and Standard & Poor's, and "with his prodigious ability to absorb numbers and to analyze them," he quickly became a sensation at Graham's firm, invariably recommending great buys. Buffett learned a valuable lesson about "capital allocation" - "placing money where it would earn the highest return." This became one of his bedrock investment principles. When Graham retired, he offered Buffett a partnership to keep him at the firm. But Buffett had come to New York to be close to Graham. With him gone, Buffett saw no reason to stay. He moved his family back to Omaha.

"Since Warren looked at every dollar as $10 someday, he wasn't going to hand over a dollar more than he needed to spend."

Buffett Associates Ltd.

By 1956, Buffett had $174,000. Although only 26, he planned to retire and live off the investment income that he could make from his nest egg. He invited some friends and relatives to benefi t from his investment expertise. Six initial partners joined the new Buffett Associates Ltd., including his father-in-law, Doc Thompson ($25,000), his Aunt Alice ($35,000), and his sister Doris and her husband ($10,000). Buffett was the seventh partner. As a management fee, he charged his new partners "half the upside above a 4% threshold." He also "took a quarter of the downside." Soon others joined the partnership, which made money rapidly. Buffett set up numerous additional partnerships with other investors, including attorney Charlie Munger, who also operated his own investment firm. He eventually became Buffett's primary partner. By now Buffett was making a large return from each partnership. He constantly reinvested his earnings, so his wealth kept increasing. Indeed, Buffett's "snowball" was starting to grow substantially.

Buffett was managing more than a million dollars a year by 1958. His goal was to outperform the Dow by 10% annually. He was doing so well he no longer recruited new partners. Now someone who wanted his investment advice had to solicit him. In 1962, Buffett merged his partnerships into Buffett Partnership Ltd. (BPL), with assets of $7.2 million. Buffett was now a millionaire. His early $3 million investment in American Express paid handsomely, but his investment in Berkshire Hathaway, a New England textile firm, initially did not. In 1962, he bought 2,000 shares of Berkshire at $7.50 per share. Then he bought more. Eventually, he bought the company, as well as the Blue Chip Stamps Company, Illinois National Bank and Trust Company of Rockford, Sun Newspapers in Omaha, See's candy company and, over time, many more.

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The Snowball: Warren Buffett and the Business of Life
by Alice Schroeder 
Bloomsbury © 2008
976 pages
ISBN-10: 0553805096
ISBN-13: 978-0553805093

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