The Snowball

by Alice Schroeder

  Before 2003, Buffett’s need for attention had been satisfied by a few interviews a year and the shareholder meeting. He had always been careful and strategic in his cooperation with the media (if not always forthcoming about just how cooperative he had been). But starting around the time of Susie’s illness, for whatever reason, he had begun to need the mirror of media attention, television cameras especially, almost like a drug. The intervals he could tolerate without publicity were growing shorter. He cooperated with documentaries, spent hours talking to Charlie Rose, and became such a regular on CNBC that it started to prompt puzzled queries from his friends.

  The Buffett who so craved attention contrasted markedly with the Buffett who focused with unaltered intensity on Berkshire Hathaway. To see him flip from one mode into the other in half a second was head-spinning. In addition to adding Bill Gates to the board, he now set up a “whistleblower line” so that employees could report wrongdoing. And—in a major step toward the day when Berkshire’s board would have to make decisions without him—he initiated separate meetings of the board without his presence. Yet he remained as focused on investing as he had been as a younger man.

  Since the Federal Reserve’s dramatic interest rate cuts in the wake of 9/11, the market had steadily recouped its losses until it was nearing bubble-era levels. Buffett wrote in his 2004 letters to shareholders: “My hope was to make several multibillion dollar acquisitions that would add new and significant streams of earnings to the many we already have. But I struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year with $43 billion of cash equivalents, not a happy position.” The following year, Berkshire used part of this money to make four small acquisitions—Medical Protective Company and Applied Underwriters, two insurance businesses; Forest River, a recreational-vehicle manufacturer; and Business Wire, which distributed public-relations material for corporations—and one larger acquisition, PacifiCorp, a major electric utility, for MidAmerican Energy. While MidAmerican had not yet spawned a series of huge acquisitions as Buffett had hoped, the wisdom of buying it had grown clearer. Oil prices had continued to rise. MidAmerican had a significant toehold in alternative energy. Its relationships with consumers and regulators were excellent. Its CEO, David Sokol, was often mentioned as a potential successor to Buffett, although Buffett himself was keeping his cards very close to the vest.

  Buffett also used this report to reiterate that he was still down on the dollar, and thought it would decline. The dollar had strengthened since his first article, and now his view was being widely criticized in the financial press. He had reduced his currency bets in favor of buying foreign stocks, but nothing changed his view. And once again, he decried excessive executive compensation. On derivatives, a topic he now covered every year, Buffett wrote:

  “Long ago Mark Twain said: ‘A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.’…I dwell on our experiences in derivatives each year for two reasons. One is personal and unpleasant. Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head-on, however, I wasted several years while we attempted to sell the operation. That was a doomed endeavor, because no realistic solution could have extracted us from the maze of liabilities that was going to exist for decades. Our obligations were particularly worrisome because their potential to explode could not be measured. Moreover, if severe trouble occurred, we knew it was likely to correlate with problems elsewhere in financial markets.

  “So I failed in my attempt to exit painlessly, and in the meantime more trades were put on the books.” Buffett was referring to a period during which he had hired a new manager, and briefly allowed him to expand the business. Some of these trades later proved costly to unwind. “Fault me for dithering. (Charlie calls it thumb-sucking.) When a problem exists, whether in personnel or in business operations, the time to act is now.

  “The second reason I regularly describe our problems in this area lies in the hope that our experiences may prove instructive for managers, auditors, and regulators. In a sense, we are a canary in this business coal mine and should sing a song of warning as we expire…General Re was a relatively minor operator in the derivatives field. It has had the good sense to unwind its supposedly liquid positions in a benign market, all the while free of financial or other pressures that might have forced it to conduct the liquidation in a less than efficient manner. Our accounting in the past was conventional and thought to be conservative. Additionally, we know of no bad behavior by anyone involved.

  “It could be a different story for others in the future. Imagine, if you will, one or more firms (troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic markets and under extreme, and well-publicized pressures. The time to have considered—and improved—the reliability of New Orleans’s levees was before [Hurricane] Katrina.”10

  The general belief, however, continued to be that derivatives spread and reduced risk. In a market shoved upward by cheap debt and derivatives nearly day by day, low interest rates and the “securitization” of mortgages into derivatives were pumping a housing boom that would peak in 2006. By one estimate, total global leverage (debt) had quadrupled in less than a decade.11 Buffett fretted occasionally that he might never again see the kind of home-run climate for investing that had blessed him in the 1970s. But he never stopped searching, he never stopped delving for ideas.

  One day in 2004 he obtained from his broker a thick book, the size of several telephone directories stapled together. Its pages contained listings of Korean stocks. He had been scouring the global economy, looking for a country, a market, that was overlooked and undervalued. He had found it in Korea. Night after night, he leafed through the tome, studying column after column of numbers, page by page by page. But the numbers and their nomenclature puzzled him. He realized that he needed to learn a whole new language of business that described a different culture of commerce. So he got another book and figured out everything important there was to know about Korean accounting. That would reduce the odds of getting hornswoggled by the numbers.

  Once he’d mastered the listings, he began sifting and sorting. It felt something like the old days back at Graham-Newman, when he sat next to the ticker machine clad in his cherished gray cotton jacket. Staring at hundreds of pages of numbers, he could pick out which were important and how they fell into a coherent pattern. Working from a list of several thousand Korean stocks, he quickly pared it down to a workable number; after making some notes on a yellow legal pad he kept going, just as he had when he’d paged through the Moody’s Manual, looking for the gems amid the dreck—until finally he arrived at a much shorter list.

  This winnowed-down list was so short that it could be contained on a single piece of legal-size paper. Sitting down with a visitor, he held out the list, which consisted of at most a couple of dozen companies. A few were large—among the largest in the world—but most were very small.

  “Lookit,” he said, “this is how I do it. They are quoted in won. If you go to the Internet and look them up on the Korean stock exchange, they have numbers instead of ticker symbols, and they all end in zero unless it’s a preferred stock, in which case you click in five. If they have a second class of preferred, you don’t click in six, you click in seven. Every night you can go on the Internet at a certain time and look up some issues and it’ll show you the five brokerage firms that would have been the largest buyers and the five that would have been the largest sellers that day. You have to set up a special account with a bank in Korea. That’s not easy to do. I’m learning it as I go along.

  “It’s like finding a new girl to me.

  “These are good companies, and yet they’re cheap. The stocks have gotten cheaper than five years ago, and yet the businesses are more valuable. H
alf of the companies have names that sound like a porno movie. They make basic products, like steel and cement and flour and electricity, which people will still be buying in ten years. They have a big market share in Korea, which isn’t going to change, and some of these companies are exporting to China and Japan too. Yet for some reason, they haven’t been noticed. Look, this flour company has more than its market value in cash, and it sells at three times earnings. I couldn’t buy very much, but I got a few shares. Here’s another one, a dairy. I could end up with nothing but a bunch of Korean securities in my personal portfolio.

  “Now, I’m no expert on foreign currencies. But I’m comfortable owning these securities denominated in the won right now.

  “The main risk, and part of why the stocks are cheap, is North Korea. And North Korea is a real threat. If North Korea invaded South Korea, the whole world could go to hell. China, Japan, all of Asia would be drawn into a war. The consequences are almost unimaginable. North Korea is very close to having nuclear weapons. I regard it as one of the world’s most dangerous countries. But I would make the bet that the rest of the world, including China and Japan, are simply not going to let the situation get to the point that North Korea makes a nuclear attack on South Korea anytime soon.

  “When you invest, you have to take some risk. The future is always uncertain. I think a group of these stocks will do very well for several years. Some of them may not do well, but as a group, they should do very well. I could end up owning them for several years.”

  He had found a new game, a new puzzle to figure out. He wanted more of them and kept looking for opportunities with the same eagerness he’d once shown stooping for winning tickets at the racetrack.

  In December 2005, in a talk at the Harvard Business School, he was asked about his hopes for the Buffett Foundation’s impact on society, since it would someday become the best-funded philanthropy in the world. Buffett responded that his guess was that he was not doing society as great a favor by compounding any more. So he was thinking more these days about giving the money away.

  Nobody said anything. Nobody seemed to realize that Buffett had just signaled a total shift in direction.

  Later, in the same speech, he talked about the Gates Foundation. He admired Bill and Melinda Gates more than any other philanthropists, he said. Theirs was the most rational and best executed of any foundation policy he had ever seen. And he liked that they didn’t want publicity for their philanthropy, did not want their name on any buildings.

  By early 2006, his thoughts had begun to crystallize. While he was pleased with the job his kids were doing with their own foundations, the sense of safety and security that Big Susie had given him was not duplicable. This emotional force operated beyond a conscious level. His decision to leave her in charge of the money had never been based on a rational or calculated assessment of her qualifications as a philanthropist. With the accretion of a decades-long relationship, he had simply built up layers of personal trust and comfort in his wife’s judgment and wisdom. Now that she was gone, everything was different. He mentioned his change of heart to Tom Murphy at Murphy’s daughter’s wedding. Out of the blue, he told Sharon Osberg. He was going to give the money away early. But he had only an idea, not a plan.

  The plan, which was complicated, took months to work out in detail. The following spring, he started telling the people who were directly affected. “Brace yourself,” he said when he sat down with Carol Loomis, one of the Buffett Foundation trustees. “The news was indeed stunning,” she wrote.12

  “I got lots of questions,” he said about the conversations in which he made this startling announcement, “and some people had qualms about the plan initially because it was such an abrupt change from what they had been anticipating.”13 His sisters, on the other hand, were instantly enthusiastic when they found out. “This is the best idea you’ve had,” wrote Bertie afterward, “since you pretended to have asthma to get sent home from Fredericksburg.”14 Doris—who knew from her Sunshine Lady Foundation how much work it was to give away even a few million dollars intelligently—thought it was a brilliant decision.15

  On June 26, 2006, Buffett announced that he would give away eighty-five percent of his Berkshire Hathaway stock—worth $37 billion at the time—to a group of foundations over a number of years. No gift of this size had ever been 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, in a historic marriage of two fortunes for the betterment of the world.16 He was requiring that the money be spent as it was given, so that the foundations could not perpetuate themselves. To cushion the shock of losing the money that would someday have made their family foundation the largest in the world, Buffett divided the remaining shares, worth about $6 billion, among his children’s individual foundations, each of which would receive shares worth $1 billion, and the Susan Thompson Buffett Foundation, which would receive shares worth $3 billion. None of the children had ever expected their personal foundations to reach such an enormous size, especially not while he was alive. At the date of the gift, the shares handed over in the first year’s installment were worth $1.5 billion to the Gates Foundation, $50 million to each of his children’s foundations, and $150 million to the Susan Thompson Buffett Foundation. Depending on Berkshire’s stock price, those values could vary. As it turned out, they would increase. They would increase a lot.17

  The man who was, at the time, the second richest person on earth was giving away his money without leaving a trace of himself behind. He had spent all his life rolling up the snowball as if it were an extension of himself; yet he would establish no Warren Buffett Foundation, no Buffett hospital wing, no college or university endowment or building with his name on it. To donate the money without naming something after himself, without controlling personally how it would be spent—to put the money in the coffers of another foundation that he had selected for its competence and efficiency, rather than creating a whole new empire—upended every convention of giving. No major donor had ever done such a thing before. “It was a historic moment in the field of philanthropy globally,” said Doug Bauer of Rockefeller Philanthropy Advisors. “It’s set a bar, a touchstone, for others.”18

  That Warren Buffett had done this was both surprising and predictable. An unconventional thinker and problem-solver, he was making a gesture against philanthropic waste and grandiosity. The Gates Foundation got its money, but had to spend each installment—and fast. The decision was unusual, highly personal, a form of teaching by example, and—naturally—enormously attention-getting. Meanwhile, in another sense, this was a classic Buffett no-lose deal. He had stunned the world by giving away almost all of his money by earmarking it, yet got to keep most of it until he actually transferred the shares. Nonetheless, in one stroke he had transformed a lifetime of grasping at money by committing to letting go—and had started to disburse it by the billions. The boy who would not let his family touch the chifforobe where he kept his hoarded coins had finally become a man who could entrust his tens of billions to someone else’s hands.

  In the announcement speech, Buffett said, “Just over fifty years ago last month, I sat down with seven people who gave me one hundred and five thousand dollars to manage in a little partnership. And those people made the judgment that I could do a better job in amassing wealth for them than they could do themselves.

  “Fifty years after that, I sat down and thought about who could do a better job dispensing the wealth than myself. It’s really quite logical. People don’t often have that second sit-down. They are always saying, Who should handle my money? and they quite willingly turn their money over to people with a certain expertise. But they don’t seem to think about doing that very often in the philanthropic world. They pick their old business cronies or whomever to administer wealth after they’re gone, at a time when they won’t even be able to observe what’s happening.

  “So I got very lucky, because philanthropy is
harder than business. You are tackling important problems that people with intellect and money have tackled in the past and had a tough time solving. So the search for talent in philanthropy should be even more important than the search for talent in investments, where the game is not as tough.”

  Buffett then spoke of the Ovarian Lottery. “I have been very lucky. I was born in the United States in 1930 and won the lottery the day I was born. I had terrific parents, a good education, and I was wired in a way that paid off disproportionately in this particular society. If I had been born long ago or in some other country, my particular wiring would not have paid off the way it has. But in a market system, where capital-allocation wiring is important, it pays off like no other place.

  “All along, I’ve felt the money was just claim checks that should go back to society. I am not an enthusiast for dynastic wealth, particularly when the alternative is six billion people who’ve got much poorer hands in life than we have, getting a chance to benefit from the money. And my wife agreed with me.

  “It was clear that Bill Gates had an outstanding mind with the right goals, focusing intensely with passion and heart on improving the lot of mankind around the world without any regard to gender, religion, color, or geography. He was just doing the most good for the most people. So when the time came to make a decision on where the money would go, it was a simple decision.”

  The Gates Foundation followed a basic creed that Buffett shared: “Guided by the belief that every life has equal value,” it worked to “reduce inequities and improve lives around the world” in the areas of global health and education. The Gateses saw themselves as “convenors,” who brought together the best minds as advisers to work on permanent solutions to enormous problems.19