/ 18 March 2009

Making money by the Buffett

There are already numerous books available on the “Sage of Omaha”, the legendary investing genius and the world’s wealthiest person, Warren Buffett. They are mostly how-to guides that examine Buffett’s long-term value-based investing approach and give his fans hope of emulating him. This new offering, however, from the former accountant and stock analyst turned finance writer, Alice Schroeder, is an exhaustively detailed and officially authorised biography, charting the way through Buffett’s 78 years.


Schroeder begins at an auspicious moment in Buffett’s investor’s life, on an exclusive retreat in 1999 for the elite of the burgeoning internet boom, all organised by Allen & Company, a private bank profiting nicely from the ever-rising stock prices in the sector. The then 69-year-old Buffett, regarded as an old fuddy-duddy who didn’t understand technology and refused to invest in the hot tech stocks of the time, stands up and gently chides the assembled dotcom paper millionaires, cautioning them that the record prices their companies’ stocks are fetching are built on hype and sloppy analysis.

The Snowball charts Buffett’s journey from his earliest days in Omaha, Nebraska, the son of a wily stockbroker turned Congressman father and an emotionally manipulative mother, as well as the first inklings of the moneymaking approach with which Buffett would gather his fortune.

Buffett got an early start in the business world, selling sticks of chewing gum at age six and then later delivering newspapers, with the small profits accumulating towards ever larger ventures, including a successful vending machine business in his teens. Buffett realised early on both his own dislike of physical labour and the power of compounded investing, the ability of money to make more money. Buffett bought his first company stock at 11, but sold too early, missing out on a larger profit.

The title of this biography is therefore an extended metaphor for Buffett’s approach to wealth creation and accumulation. Buffett’s billions were built up buying stocks and companies, which generated steady flows of incoming cash, reinvested into more and more income-producing assets, building like a snowball rolling down a steep hill, gathering more and more mass.

Schroeder manages to balance out the details of Buffet’s personal life with the minutiae of his investments, explaining the somewhat scandalous events that led to Buffett separating from his wife Susie in the Seventies, but remaining close to her up until her death in 2004. At Susie’s instigation, another woman, Astrid Menks, moved in with Buffett to look after him, and has lived with him ever since, the three of them forming an odd three-way relationship, which apparently worked for all concerned.

Investors seeking to follow in Buffett’s footsteps will find plenty of information on his moneymaking philosophy and approach. This is not a how-to book, but fanboys should be able to pick up enough investing principles and ideas.

Schroeder also takes pains to show how Buffett developed his altruistic philosophies and his feeling that his children should not live a charmed and easy life simply because they won the “Ovarian Lottery”, as he calls it. This sentiment is based on the realisation that Buffett himself is the product of luck, born from “terrific parents, a good education and wired in a way that paid off disproportionately in this particular society”. This led Buffett to believe that his own children “should have enough that they can do anything, but not enough that they can do nothing” and to the slow offloading of Buffett’s wealth that has begun in the past few years.

The obvious criticism that can be levelled at The Snowball is the sometimes inane level of detail that Schroeder seemingly felt obliged to put in. Many of those details are interesting to the serious fan, but might leave others bored. For example, a long anecdote about the life of a Russian immigrant woman who ran a successful furniture business that Buffett ended up buying is interesting, but goes nowhere without resolving anything.

Perhaps Schroeder has padded her book with so much detail because she is afraid of analysing or criticising the man who is clearly her hero. There are a few puzzling aspects of Buffett’s story that Schroeder glosses over a little too simply, whether it is his reluctance to pay any form of dividends on his companies’ expensive stock, or his sentimental reluctance to drop unprofitable sectors of the business. Maybe the five-year research and writing process drew Schroeder a little too close to her subject.