One of our favorite investing books here at The Acquirer’s Multiple is – The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. Schroeder recounts a time in the late ninety’s when Buffett was being humiliated by some of the leading financial commentators of the time and Berkshire’s stock price was getting hammered. But Buffett remembered what he had been taught by his father, and that was that the only scorecard that counts is your Inner Scorecard. It’s a significant lesson for all investors.
First let’s take a look at what Barron’s were writing about Buffett in December of 1999:
Tollymore Investment Partners 2Q20 Letter: ESG ≠ sustainable investing
Tollymore Investment Partners letter to investors for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more Dear partners, Tollymore generated returns of +19% in the first six months of 2020, net of all fees and expenses. Investment results since inception are shown below: Tollymore's Raison Detre Tollymore is a Read More
Shares in Buffett’s Berkshire Hathaway are set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor’s 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.
At around $54,000 a share, Berkshire’s Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company’s famed investment portfolio, which includes such stocks as Coca-Cola, Gillette and American Express.
But there’s more to Berkshire’s weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.
Indeed, Buffett has even started taking flak on Internet message boards. One contributor called Berkshire a “middlebrow insurance company studded with a bizarre melange of assets, including candy stores, hamburger stands, jewelry shops, a shoemaker and a third-rate encyclopedia company [the World Book].”
Now let’s take a look at Schroeder’s version of events written in The Snowball: Warren Buffett and the Business of Life, and the valuable lessons that we can learn from the world’s greatest investor.
Here’s an excerpt from the book:
Nearly all of Buffett’s $30 billion plus—ninety-nine percent—was invested in the stock of Berkshire Hathaway. He had spoken at Sun Valley about how the market’s weighing machine was more important than its voting machine. But it was the voting machine’s opinion of his stock price that set the altitude from which he preached. People paid attention to him because he was rich. So when he predicted that the market could disappoint investors for seventeen years, he was standing on the edge of a cliff, and he knew it.
If he was wrong, not only would he be the laughingstock of Sun Valley; in the record books of the world’s wealthiest men, his personal rank might drop. And Buffett paid close attention to that rank.
Through the late 1990s, BRK (Berkshire Hathaway’s stock symbol) had boosted his profile by outpacing the market, until it peaked at $80,900 per share in June 1998. That a single share of Berkshire stock cost enough to buy a small condo was unique among American businesses. To Buffett, the stock price represented an uncomplicated measure of his success. It had grown in an ascending line since the day he first bought BRK for $7.50 a share. Even though the market had rocked through the late 1990s, until 1999 an investor who bought BRK and held on to it would have been better off.
But now, Buffett found himself standing on the sinking platform of an unloved stock, watching the “T&T”(tech and telecommunications) stocks ascend. By August 1999, BRK had slumped to $65,000. How much should someone pay for a large, established business that returned $400 million to them in profits every year? How much for a small, new business that was losing money?
- Toys “R” Us was earning $400 million a year and had sales of $11 billion.
- eToys was losing $123 million a year and had sales of $100 million.
The market’s voting machine said that eToys was worth $4.9 billion, and Toys “R” Us was worth about a billion less than that. The presumption was that eToys was going to crush Toys “R” Us through the Internet. The one cloud of doubt that hung over the market concerned the calendar. Experts were predicting that disaster might strike at midnight, December 31, 1999, because the world’s computers were not programmed to handle dates beginning with a “2.” Fearing panic, the Federal Reserve began to increase the supply of money rapidly to prevent cash shortages in case all the country’s ATMs froze at once.
Thus turbocharged, shortly after Sun Valley the market had spiraled upward like a Fourth of July firecracker. If you had invested a dollar in January in the NASDAQ, an index full of technology stocks, your bet was now worth a buck twenty-five. The same bet in BRK was worth only eighty cents. By December, the Dow Jones Industrial Average closed the year up twenty-five percent. The NASDAQ blasted through the 4,000-point level, up an incredible eighty-six percent. BRK fell to $56,100. In just a few months BRK’s lead for the past five years had been tsunamied.
For more than a year, financial pundits had made sport of Buffett, a has-been, an emblem of the past. Now, on the eve of the millennium, Barron’s, a weekly must-read on Wall Street, put Buffett on its cover with the headline “Warren, What’s Wrong?” The accompanying article said Berkshire had “stumbled” badly. He was running a Pamplona of negative press like nothing he had ever experienced. “I know it’s going to change,” he repeated over and over, “I just don’t know when.”
His shrilling nerves were urging him to fight back. Instead, he did nothing. He did not respond.
Near the end of 1999, even many longtime “value investors” who followed Buffett’s style had either shuttered their businesses or given in and bought technology stocks. Buffett did not. What he called his Inner Scorecard—a toughness about financial decisions that had infused him for as long as anyone could remember—kept him from wavering.
“I feel like I’m on my back, and there’s the Sistine Chapel, and I’m painting away. I like it when people say, ‘Gee, that’s a pretty good-looking painting.’ But it’s my painting, and when somebody says, ‘Why don’t you use more red instead of blue?’ Good-bye. It’s my painting. And I don’t care what they sell it for. The painting itself will never be finished. That’s one of the great things about it.”
“The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: ‘Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?”
Now, that’s an interesting question.
“Here’s another one. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?”
“In teaching your kids, I think the lesson they’re learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll wind up with an Outer Scorecard. Now my dad: He was a hundred percent Inner Scorecard guy.”
“He was really a maverick. But he wasn’t a maverick for the sake of being a maverick. He just didn’t care what other people thought. My dad taught me how life should be lived. I’ve never seen anybody quite like him.”