The Snowball

by Alice Schroeder

  Who would think that tax-exempt money-market funds could become cigar butts?

  “But the most immediate and doable opportunity is weird things in the credit market. And the biggest opportunity is in mortgages. But I don’t understand them well enough, although I’m learning them so that I can understand them. And if I think I’ve got enough margin of safety, I’ll do it.” But the average person should not do it.

  “No. Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market.

  “If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors.”

  If there is any lesson the life of Warren Buffett has shown, it is the truth of that.

  Trees don’t grow to the sky, but Buffett felt he could help new saplings take root. He never lost his focus on business, but as he contemplated the ideal way to spend the rest of his life, once again he was roused by the urge to preach. For some time he had been giving talks to college students around the United States, traveling to their schools, welcoming them to Omaha. He liked talking to students because they were not hardened in their habits, still young enough to take full advantage of what he said.

  “I packed my little snowball very early, and if I had packed it ten years later, it would have been way different than where it stands on the hill right now. So I recommend to students that if you start out a little ahead of the game—it doesn’t have to be a lot, but it’s so much better than starting out behind the game. And credit cards really get you behind the game.”

  As early as 2002, feeling a sense of urgency, he had begun to pick up speed with his talks to the students. They came from MIT. Northwestern. The University of Iowa. The University of Nebraska. Wesleyan. The University of Chicago. Wayne State. Dartmouth. The University of Indiana. The University of Michigan. Notre Dame. Columbia. Yale. The University of Houston. Harvard/ Radcliffe. The University of Missouri. The University of Tennessee. UC Berkeley. Rice. Stanford. Iowa State. The University of Utah. Texas A&M University. Much of his message was that getting rich quick wasn’t the worthiest goal in life. Ironically, it was his own competitiveness and the urge of humankind to worship the rich and famous that made his audience seek him out to hear these words. Like everything else in his life, the visits from students started to snowball.

  In 2008, he was crowned the richest man on earth for the first time. By then, the students were coming from Asia, from Latin America, arriving in Omaha in groups of two or three schools at a time, in packs sometimes of more than two hundred, sometimes on several days a month.

  The students who made the pilgrimage to visit the Sage of Omaha got the full treatment (excepting only that Buffett did not go to their hotels in person and leave bound volumes of his annual reports for them at the front desk at four-thirty a.m. The Internet now did that job for him). They toured Rose Blumkin’s Nebraska Furniture Mart and roamed the aisles of Borsheim’s. Buffett met them in the office. Some days now, he abandoned his gray suits and tight collars, and looked relaxed in casual dress. Their questions often ventured far afield from business. What is the purpose of life? some of them wanted to know. He answered this question the same way he answered the business ones—in mathematical terms.

  As he had told the students at Georgia Tech when Susie was in the hospital, recovering from her surgery: “The purpose of life is to be loved by as many people as possible among those you want to have love you.”

  How should society be ordered? He told them about the Ovarian Lottery. How do I find the right spouse? Marry up, he said. (He wasn’t talking about money.) How do I know what is right? Follow your Inner Scorecard. What should I do about a career? Find something you are passionate about. I only work with people I like. If you go to work every morning with your stomach churning, you’re in the wrong business.

  He told them about the genie. Treat your body like the only car you’ll ever own: Baby that car, garage it every night, buff every dent, and change its oil every week. Then he took them out to lunch or dinner at Gorat’s and everyone scarfed down salty T-bones and double hash browns at the scuffed linoleum tables as if the genie had exempted them temporarily from his rules. As they ate, they would leap up, one after another, and jockey to have a picture taken with Warren Buffett. Someday, maybe in forty years, their grandchildren would believe them when they claimed to have talked and sat and dined with the Oracle of Omaha.

  What he was teaching were the lessons that had emerged from the unfolding of his own life.

  In that unfolding, he admits to ambition, but he denies that there was ever a plan. He finds it hard to acknowledge his own powerful hand as the creator of the sweeping canvas that is his masterpiece. As he tells the story, a series of happy accidents built Berkshire Hathaway; a moneymaking machine sprang up without design. Its elegant structure of true partnership with like-minded shareholders built on what Munger called a “seamless web of deserved trust,” with an investment portfolio buried inside an interlocked set of businesses whose capital could be moved at will, all of them turbocharged with “float”—all this had come about, he claims, simply as a reflection of his personality. The final product was a model that could be analyzed and understood, yet few did and, for the most part, nobody coattailed it. What people paid attention to was simply how rich he was. Indeed, as much as he wanted them to study his model, Buffett sometimes inadvertently discouraged it; he also wanted people to believe that he just tap-danced into work every day and had fun.

  But that would be the less flattering version.

  The truth is this.

  When Warren was a little boy fingerprinting nuns and collecting bottle caps, he had no knowledge of what he would someday become. Yet as he rode his bike through Spring Valley, flinging papers day after day, and raced through the halls of The Westchester, pulse pounding, trying to make his deliveries on time, if you had asked him if he wanted to be the richest man on earth—with his whole heart, he would have said, Yes.

  That passion had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else’s eyes. He read every word of several newspapers each morning and sucked down the Wall Street Journal like his morning Pepsi, then Coke. He dropped in on companies, spending hours talking about barrels with the woman who ran an outpost of Greif Bros. Cooperage or auto insurance with Lorimer Davidson. He read magazines like the Progressive Grocer to learn how to stock a meat department. He stuffed the backseat of his car with Moody’s Manuals and ledgers on his honeymoon. He spent months reading old newspapers dating back a century to learn the cycles of business, the history of Wall Street, the history of capitalism, the history of the modern corporation. He followed the world of politics intensely and recognized how it affected business. He analyzed economic statistics until he had a deep understanding of what they signified. Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion. He defined a circle of competence to avoid making mistakes. To limit risk he never used any significant amount of debt. He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head
, which gave him insights nobody else had. He developed a network of people who—for the sake of his friendship as well as his sagacity—not only helped him but also stayed out of his way when he wanted them to. In hard times or easy, he never stopped thinking about ways to make money. And all of this energy and intensity became the motor that powered his innate intelligence, temperament, and skills.

  Warren Buffett was a man who loved money, a man for whom the game of collecting it ran in his veins as his lifeblood. That love kept him going: buying little stocks like National American, selling GEICO to have the money to buy something cheaper, pushing at the boards of companies like Sanborn Map to do the right thing for shareholders. It had made him independent and competitive enough to want his own partnership and say no to the chance to be a junior partner running Ben Graham’s old firm. It made him tough enough to shut down Dempster’s distribution center and fire Lee Dimon; it gave him the determination to break Seabury Stanton. It had tamed his impatience and made him listen when Charlie Munger insisted that they buy great businesses, even though listening to other people went against his very grain. It stiffened his will to survive the SEC investigation of Blue Chip and to break the strike at the Buffalo News. It made him an implacable acquirer. It also led him to lower his standards from time to time when his turf dried up. Yet it saved him from serious losses by keeping him from abandoning his margin of safety.

  Warren Buffett was a timid man who shied from confrontation and needed people to cushion him from life’s rougher edges. His fears were personal, not financial; he was never timid when it came to money. His passionate yearning to be rich gave him the courage to ride his bicycle past the house with the awful dog and throw those last few newspapers in Spring Valley. It sent him to Columbia, seeking Ben Graham, after Harvard turned him down. It made him put one foot in front of the other, calling on people as a prescriptionist, while they rejected him over and over. It gave him the strength to return to Dale Carnegie after losing his courage the first time. It forced him through the decisions in the Salomon crisis to make his great withdrawal from the Bank of Reputation. It lent him the dignity to face years of almost intolerable criticism without counterattacking during the Internet bubble. He had spent his life contemplating, limiting, and avoiding risk, but in the end he was braver than he realized himself.

  Warren Buffett would never call himself courageous; he would cite his energy, focus, and rational temperament. Above all, he would describe himself as a teacher. All his adult life he had sought to live up to the values instilled in him by his father: He said that Howard taught him that the “how” mattered more than the “how much.” To hold his ruthlessness in check wasn’t an easy lesson for him. It helped that he was fundamentally honest—and that he was possessed by the urge to preach. “He deliberately limited his money,” says Munger. “Warren would have made a lot more money if he hadn’t been carrying all those shareholders and had maintained the partnership longer, taking an override.” Compounded over thirty-three years, the extra money would have been worth many billions—tens of billions—to him.27 He could have bought and sold the businesses inside Berkshire Hathaway with a cold calculation of their financial return without considering how he felt about the people involved. He could have become a buyout king. He could have promoted and lent his name to all sorts of ventures. “In the end,” says Munger, “he didn’t want to do it. He was competitive, but he was never just rawly competitive with no ethics. He wanted to live life a certain way, and it gave him a public record and a public platform. And I would argue that Warren’s life has worked out better this way.”28

  It was the will to share what he knew in an act of sheer generosity that made him spend months writing his annual letter to the shareholders; his joy in showmanship that made him want a mobile home at his shareholder meeting; his pixieish sense of fun that led him to endorse a mattress. It was his Inner Scorecard that made him cling to his margin of safety. It was pure love that turned him into what Munger called “a learning machine.” It was his handicapping skill that let him use that knowledge to figure out what the future might bring. It was his urge to preach that made him want to warn the world of dangers to come.

  When Warren reached his seventy-seventh birthday, he mused that he had lived one-third of the lifespan of the United States. His age weighed on him; it was getting harder for him to read all day long the way he used to, since one of his eyes was getting a little weak. So he read more efficiently. He had finally given in and agreed to wear hearing aids. His voice turned gravelly faster than it once did. He tired more easily. But his business judgment was still quick and sharp.

  He wished he could have the next ten years’ worth of newspapers delivered to his doorstep right now. The years ahead weren’t endless, but with luck they could be long. Trees don’t grow to the sky, but he wasn’t scraping the horizon yet. Another new person, another investment, another idea always waited for him. The things left to learn far exceeded what he already knew.

  “The snowball just happens if you’re in the right kind of snow, and that’s what happened with me. I don’t just mean compounding money either. It’s in terms of understanding the world and what kind of friends you accumulate. You get to select over time, and you’ve got to be the kind of person that the snow wants to attach itself to. You’ve got to be your own wet snow, in effect. You’d better be picking up snow as you go along, because you’re not going to be getting back up to the top of the hill again. That’s the way life works.”

  The snowball he had created so carefully was enormous by now. Yet his attitude toward it remained the same. However many birthdays lay ahead, he would always be astonished each time the calendar turned, and as long as he lived, he would never stop feeling like a sprout. For he wasn’t looking backward to the top of the hill. It was a big world, and he was just starting out.

  Afterword

  On October 23, 2006, Berkshire Hathaway became the first American stock to trade above $100,000 per share. By the end of 2007, BRK traded above $140,000 per share, which valued Berkshire as a company at more than $200 billion. Berkshire was the world’s most respected company, according to a Barron’s survey.1 Buffett’s personal fortune exceeded $60 billion.

  For a decade, BRK stock had compounded at slightly over twelve percent—a rate that some might compare unfavorably to Buffett’s early years, when he achieved an average twenty-seven percent return. Trees don’t grow to the sky, he always said; as Berkshire’s capital grew, the climb would get steeper. But investors in Berkshire had only gratitude for the “lower” returns. Those who bought an index of the market had just suffered through what the Wall Street Journal called a “lost decade” in which the S&P 500 index had gone exactly nowhere, falling below its level of April 1999.2 Buffett’s talk at Sun Valley was unfolding along the lines he had discussed; the period after the 1999 stock market bubble had burst was now the third-longest stretch in the past hundred years when the market made no progress. Buffett still said that stocks are the best long-time investment—as long as they were bought at the right price, and for a low fee. As of early 2008, he was buying stocks, but not with great enthusiasm. Sooner or later the market’s weighing machine would catch up with its voting machine. In the meantime, he continued to mostly buy businesses.

  Buffett had added several new directors to the Berkshire board since Bill Gates and Charlotte Guyman. In the 2002 chairman’s letter he had invited shareholders to nominate themselves for the director position. The letters had come pouring in, and Buffett—of course—collected them; he was amused, entertained, and in a few instances impressed by the people who’d nominated themselves. Still, in the end, he had added Don Keough and Tom Murphy that year instead of a self-nominated candidate. The process had revealed, however, the highly personal—to say the least—corporate governance at Berkshire. Berkshire had agreed, in response to an SEC request, to adopt a formalized process for shareholders to nominate directors. In 2007, Berkshire added another woman, Yahoo! chief financial
officer Susan Decker, to his board, again tilting the board demographic to a younger age.

  Along the way, Buffett had found that he liked the idea of advertising for people to nominate themselves for jobs. He had always preferred that people ask him for things, rather than the other way around. In his 2006 letter to shareholders, prodded by Bill Gates, he had pointed out that Lou Simpson’s “top-notch” record was at risk if anything happened to both Simpson and himself, and advertised for a successor to Simpson. Send in your résumé, Buffett said. The number one thing he and Munger were looking for was somebody who understood risk. Seven hundred proposals arrived from all over the world. One person explained, “I am said to be selfish and also ruthless” various people went on at length—great length—about why they felt they were cut from the same cloth as Buffett—without giving any real qualifications for the job; and many, many people wrote saying they had no requisite experience, but wanted to be Buffett’s apprentice, understudy, or protégé. He collected all these letters in huge boxes in the boardroom before eventually filing them away. In the end he chose four candidates who were already successful and managing money; they now waited in the wings.

  After the awkward 2004 shareholder meeting, Buffett moved the business section of the meeting to late in the afternoon in 2005. That year, and in 2006, no activists had shown up. But just before the 2007 meeting, a billboard appeared hovering over a major freeway in Omaha that said “Will your conscience let you off on a technicality?” The question referred to a proposed resolution to force Berkshire to sell its PetroChina investment; PetroChina’s parent company, Chinese National Petroleum Company (CNPC), was implicated in funding Chinese sponsorship of genocide in Darfur. While not required to put the resolution on the ballot, Buffett did so, and allowed a vigorous airing of the Darfur issue at the shareholder meeting.