The Snowball Part II: Warren Buffett’s Munger And Graham Years

The Snowball Part II: Warren Buffett's Munger And Graham Years

According to the book, his wife Susie approached Astrid Menks to care for Warren wBuffettith food, and other aspects of personal care.  But for a man to have his wife abandon him, with no prospect of return, a pretty 30-year old woman with few requirements would test most men in terms of their fidelity.  According to the book, Susie was surprised that Astrid moved in with Warren.  I think that was naive on her part.  If you want to be a wife, be a wife.  Make up your own mind on what you want, and fault yourself for bad decisions.  Adultery is a bad thing, but Susie is the most to blame by leaving Warren.

Warren Buffett is/was a simple guy.  If Susie never left, he would have been happy.  Indeed, he was depressed when she left.  But she got tired of the neglect, and abandoned her marriage vows to him.  She should have borne the neglect, and stayed with him — marriage vows are permanent.  Marry in haste, repent at leisure.  We have no idea of how much Susie may have pleaded with Warren to be connected to her and the family, but the eventual result was a virtual divorce from Susie, which led to another relationship, even though the legal fiction was maintained.

Buffett also had many friends and mentors in the value investing community, most of whom learned from Ben Graham.  In the early years, there was a “Graham Group” that would get together to discuss the principles of Ben Graham.  Bit-by-bit, the group slowly because the “Buffett Group,” because Warren was Graham’s most apt disciple.

But there was one peer who got him thinking more broadly, Charlie Munger.  There were a number of people who thought they would benefit from knowing each other.  They were right; at the very first meeting they hit it off, and found it hard to end the conversation.

Warren received a lot of respect from men in his early years.  They looked at the returns and said, “Wow.”  But as the ability suffered a bit in the late sixties, as “cigar butt” investments disappeared, there was some uncertainty, as to whether Warren would continue.  Fortunately for him, Charlie Munger had given him a new paradigm, which I call “growth at a reasonable price.”

Buffett became very good at estimating opportunities, particularly opportunities that will last.  It is only under such conditions that growth investments will work.

But there are two more entities that shaped him — The Sun Valley Conferences and Bill Gates.  Gates is the more important influence, because his knowledge of the tech sector helped to refine Buffett’s view of moats, because an attractive technology that gets a large market share is its own moat.

The Sun Valley conferences had two aspects. Buffett presented at a number of them, and during the tech bubble, he drew quiet derision from attendees.  That said, he was a sponge for information, and he understood tech.  What he did not understand was how you could get reliable free cash flow from tech businesses, where obsolescence was such a threat.

Part 3 will come tomorrow.  Stay tuned.

By David Merkel, CFA of alephblog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.