Market Analysis

Book Review: The Lesson of the Snowball

Many mimic his investing style (or try), but the average investor only has a snowball's chance of repeating Warren Buffett's discipline.

The Snowball: Warren Buffett and the Business of Life -- Alice Schroeder

Time and basic asset choice are the key drivers of compounding, the most powerful financial force in the universe. The more and earlier you save, allowing the accumulation to compound, and the more you pick the right asset category (most long-term investors hold way too many bonds relative to stocks), the richer you will be. It's that easy, it's a lesson as old as finance, it's the key principle behind Warren Buffett's lifelong success ... and yet few recognize its power.

In Alice Schroeder's magisterial and excellent biography of Buffett, The Snowball, (a metaphor for compounding!), we're given a comprehensive view of his life as a husband and a businessman. More comprehensive-but also a lot longer-than Roger Lowenstein's Making of an American Capitalist, Schroeder's is now the authoritative text on Buffett's life.

Everyone wants to "invest" like Warren. What's his "formula"? What's the "method"? What stock should I buy to make me rich? These are ancillary to Buffett's true gift for accumulation and compounding. It requires the one thing most folks can't develop, which Schroeder's book highlights: the discipline of deferred gratification. At no time in his life-even his teen years!-did Buffett spend more than he made, and he put every cent he could muster toward buying more assets. Investors today spend most of their time thinking about risk factors and when to sell. I'm not sure "sell" is even in his vocabulary.

Schroeder documents Buffett's failure-filled youth-full of con-like money-making schemes, even spending years trying to figure out horse racing. As with so many precocious youths, school bored him and he put his mind where he was interested. It helped that he was socially awkward-focusing him ever-more on investing.

Schroeder describes Buffett as having a "mathematical mind." This isn't quite right. He did think in numbers, but not in abstractions or theories (as mathematicians tend to do). His mind was always practical, tied to data. Mind you, he wasn't overly concerned with, and didn't fetishize, data (as statisticians do today), he just thought in practicalities. Numbers were practical. He got the raw facts on his side. Particularly in the front half of his life and career, he accumulated real, tactile experience with people, how money is made, and how businesses run best. He hunted for great businesses and then waited until the price was advantageous to him.

People call this value investing today, but that isn't really it. Over his career he did deep value, growth and everything in between. He never felt compelled to do anything by rote or rule-he acted only when he was good and ready and the advantage was his. Otherwise, he waited. He could always wait longer than other mortals; he's like the sitting Buddha of investing.

Ben Graham was his guru, pure and simple. The connection between these two is far deeper than an adoption of ideas. Buffett was just entering adulthood when Security Analysis was published, and it became his "Bible." Long before Berkshire, Buffett would become both a student and an employee of Graham. Graham was a different sort: He wasn't so fanatical about stock investing, and in the latter stages of his career, he tired of it. He loved philosophy and classics and, Schroeder suggests, struggled with loyalty in personal relationships.

These experiences and characters may seem like a sideshow, but they help illustrate why nobody can mimic Buffett. The sheer effort Buffett put in to his work, day in and out, is an ethic reminiscent of Michael Jordan or Benjamin Franklin. Buffett probably consumes more sheer information in a few years than most investing professionals do in their whole lives. He claims to read over 500 pages a day!

And much like such folks, his personal life suffered hugely. In a signal of his prominence as the 80s arrived, he became Chairman of Salomon Brothers. As it was collapsing, he said, "This is my life." For all his wealth and the grandeur of his public persona, The Snowball reveals just how small his world is. The book takes several long excursions into such characters as Graham, and the odd social relationships that would percolate in both his and Buffett's private lives. Buffett ruined many personal relationships including his marriage for his work, and his kids are like afterthoughts in the book. This book is about his life, which means it's about investing. Most investors, retail and professional, aren't willing to go to those lengths. This is why all the "Invest Like Warren" books miss the point.

Buffett loves investing. His approach evolves-as all great guru investors do. A decisive career moment is when he broke with Graham and moved towards Phil Fisher's style of growth investing-the famous American Express investment. Buffett evolved because he saw the markets evolved. Many of his old tricks stopped working, so he had to find new ones. For a long time, pre-Charlie Munger, his business was more or less run like a hedge fund: a lot of risk in one or a few assets, very secretive, money tied up for long periods, and so forth. Nothing like he does today.

Long after he's gone, folks will think of Buffett and say things like "value investor." This is beside the point. The tie that binds his career is patience, accumulation and discipline. That's how his snowball became an avalanche.

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