One thing I did not leave clear from my prior writing: Warren Buffett does not think in terms of market value. He thinks in terms of book value, and how to compound it. That is how I think the markets as well. I think of the markets like a businessman does, and so does Buffett.
Why should being a businessman, and being an investor be so different? Answer: they should not be thought of differently. This is why value investors look at the returns relative to the price they paid.
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Buffett as an Investor
Buffett had a strong grounding in probability. Whether it was with stocks, or at the racetrack, he was smart enough to find an edge.
He was also wise enough to understand the concept of discounting. Discounting is the cousin of accumulation. One looks forward, the other looks backward. Buffett understood when it was smart to receive cash and distribute cash. He knew what a dollar was worth. He knew when the dollar was worth in the future. This grounded his sense of investing.
He invested in many industries: Newspapers, Utilities, Insurance, Furniture, Jewelry, Pipelines, Railroads, Manufactured Housing, Coke, Shoes, Textiles, and Airlines.
He also sought a margin of safety. What would be the maximum bad outcome if he invested in a company? If you can limit the downside, you have the capability of making money on the upside.
Buffett also like to play Bridge. Bridge is a complex game; you do the best if you bid to take the amount of tricks that you will actually take. Bridge favors people who can estimate well, and Buffett is one of those people.
Buffett is a very bright guy. Very, very bright.
Buffett and Business Ethics
Buffett is an ethical businessman. Probably one the most difficult parts of his life was when he was chairman of Salomon Brothers. In that situation, he had to play a delicate game trying to satisfy the regulators in Washington, DC, and satisfy investors who held the stocks and bonds of Salomon Brothers. This was a very difficult task, but Buffett performed extremely well. In some ways, I think this is the highlight of his career. I think this, because the regulators were stacked against him, and he succeeded in a large measure. Without Buffett, Salomon Brothers would have been bankrupt. Buffett triumphed against both economic and political forces.
And at the time he did that, he made Salomon Brothers a far better place. He stressed ethics above economics. Bravo! That is what needs to happen in almost all corporations United States now.
Now, when his son Howie had troubles ADM, Buffett had considerable advice for his son but he did not demand that Howie do it he said. But Howie listened to his dad and left ADM before the crisis erupted. As a result, Howie’s reputation stayed clean.
In general, Buffett was a Boy Scout when you consider business ethics. But when you consider other aspects of ethics, he was not so.
Buffett’s father was one of the most conservative Republicans in the House of Representatives. As a boy, he campaigned for his father. He switched his political views after he married Susie. After he married Susie, the first thing was opposing racism. That was a really good thing, and both he and Susie did many good things in integrating our society.
This is hard to impress on the black children that I have adopted. With no large amount of racism, it is hard to explain to them what others went through 50-150 years ago.
But I disagree with Buffett who bought the concept of the population bomb from Paul Ehrlich. People are born with a mouth and brain. The brain is far more important than the mouth. No matter how much the population grows, we will find ways to make our resources stretch further. The largest scarcity on earth is good ideas.
Munger and Buffett led the way in California on the issue of abortion. To me, this is the worst thing about them. Life begins at conception. Every embryo has unique DNA. Embryos begin most of their adult human actions between two and three months after conception. It is cruel to abort them. Much as people mourn the deaths of six and seven-year-olds in Connecticut, we kill far more children when prior to birth, by a factor of 10,000.
Buffett also favored taxing the wealthy. But most of his tax proposals would not tax him. This is the most hypocritical part of Buffett. He could pay extra tax to the government off of his embedded gains in the stock that he holds of Berkshire Hathaway. Berkshire Hathaway itself could just pay off their deferred tax liabilities. But he doesn’t do that. Instead, he asks others to pay what he will not.
Though I like all kinds of food, I find it amusing that Buffett does not want to eat anything that a three-year-old does not eat. I also find it amazing that he is still alive following such a diet.
That’s one of the cute parts of the book – watching when Buffett turns away food, and the efforts that they make to provide hamburgers and steaks to him in areas where that is harder to achieve.
I’ve tried to give you all the main themes of the book The Snowball. The biggest theme of the book revolves around Buffett’s first wife Susie. For more than 20 years, Susie was the core of Buffett’s life. She gave him a life after the harsh treatment his mother gave. But after many years of marital neglect, she left him, and that is to her discredit. (Of course, Buffett could have solved this by spending less time on business and more time on his marriage.)
Then when Susie died, that was the next largest theme of the book. She did not care for herself well, but Susie was beloved by almost everyone mentioned in the book. I wonder at an alternative history where Susie stayed at Warren’s side, and sang without leaving him. Warren might have done better, far better.
Warren Buffett is an amazing man, and I look up to him, leaving aside his ethical lapses. This book is the best book that describes him of all the books that have been written about him. Alice Schroeder did an excellent job on this book. Warren Buffett should be grateful to Alice Schroeder for this book. It gives a fair but believable representation of his life.
By David Merkel, CFA of Aleph Blog