The richest man's recipe

Robert Macdonald reviews Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life, which was published by Bloomsbury in 2008.

Yes, it is true. Even when the richest man in the world, Warren Buffett, is at grand functions with champagne and caviar on offer, he is still on the lookout for a hamburger and Cherry Coke. He still lives in the same house he bought 35 years ago. I don’t recall a mention of what car he drives, and certainly I would be surprised if he has more than one for himself. His attitude towards material possessions is best summed up in the name he gave to his private jet, “The Indefensible”.

Buffett’s conscience obviously got to him, as a few years ago he bought a business called NetJets, which leases out private jets. So rather than own a jet, he decided to own the company and could lease a jet when he needed it. Given the secondary title, The Business of Life, the book is a rich resource on not only how to make money, but more importantly, how to live life. The lessons are many. From how to overcome an awkward shyness as a youth, to understanding the key to success in a career. Dale Carnegie proved to be the saviour for a boy whose date with one girl is described as a “shyness contest: They walked around Philadelphia in awkward silence. We were probably the two shyest people in the whole United States. Warren had no idea how to make small talk; when stressed, he emitted small grunts instead.” The evidence suggests that once in adulthood, Warren was able to turn his Carnegie training to good effect and that he became a little more articulate when relating to women. Buffett annually holds a gathering of friends which mixes pleasure with intellectual engagement. At one such gathering, Bill Gates’ father asked the question: ” What did people think was the most important in getting them to where they’d gotten in life?” Buffett said, “Focus.” Bill said the same thing. Focus, Buffett certainly did. When he started delivering newspapers at an early age, he knew he wanted to be rich. He was a serial entrepreneur in his teens, having amongst others a car-buffing, a golf ball refurbishment and a pinball machine business. The extent of his focus in his youth is perhaps best demonstrated by his habit of “stooping” at horse races. This involved picking up tickets off the ground, which had been discarded by people unfamiliar with horse racing, after not backing a winner. They didn’t realise that you could win money with a second or third place, which Buffett and his friends duly cashed in – with the help of adults, as they were too young to do so. Buffett was primarily at the races to fulfil his fascination with handicapping, which played to his strengths of collecting information and maths. This provided a hint of where his future lay. Focus alone is seldom enough for success. Resilience is needed in strong doses, and the book is littered with examples of this. Buffett was rejected from Harvard University and found his way to study under his mentor Benjamin Graham at Columbia University. He was also persistent and eventually managed to persuade Graham to employ him. But what is interesting is that Buffett didn’t adopt Graham’s approach to investing in its pure form, preferring a more focused stock selection approach rather than Graham’s belief in a diversified portfolio with many stocks. Perhaps “being your own person” is another requirement for success, and there is no doubt that Buffett has been that. The Inner Scorecard, a concept introduced to him by his father, is at the heart of how he has lived. This is evident in both the personal and professional anecdotes that pervade this incredibly rich book. As there will only be poorer mortals who read the book, there is some reassurance that even the wealthiest man in the world has personal insecurities and challenges. Despite his humility and un-materialistic lifestyle, he does seem to show a desire for mixing with the (less) rich and famous, even if he wants to eat hamburgers when others are eating caviar. His relationship with his first wife Susie can best be described as unusual, but also highlights the risks that arise from a total focus on one pursuit. This is not the only unusual relationship he has had. Charlie Munger, his closest confidant, is one and his friendship with Bill Gates another. The fact that he missed Munger’s 70th birthday party to attend Gates’ wedding shows the strength of his friendship with Gates. In fact, his biographer writes: “when it came to being in love with Gates, Buffett ran a close second to Melinda [Bill’s wife].” At almost 850 pages, the detail on what makes Buffett tick is not lacking. For those with no knowledge of Buffett or real interest in investing, there is real value in some key lessons on the ‘Business of Life’. Perhaps the most profound of these is Buffett’s belief in what he describes as the Ovarian Lottery. “I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different. “Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh’. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one that is born in the United States? It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, ‘I did it all myself’ and think of themselves as Horatio Alger – believe me, they’d bid more to be in the United States than in Bangladesh. That’s the Ovarian Lottery”. It is this belief that has led him to pledge away most of his wealth, and why he does not believe that his children should inherit his wealth. There are a number of anecdotes of how he resisted giving his children money, but they won’t be left penniless when he dies. Buffett believes that winners should be free to strive, but that they should narrow the gap by helping the losers. But winning at all costs is not an option for the man who has won more wealth than any other human being. In fact, it is ‘The Snowball’ approach to accumulating wealth that is perhaps the strongest message for the world as it is today. Accumulation happens if you keep going in the same direction, deliberately and consistently. It is not necessarily quick, but as in his case, it can ultimately become an avalanche. In a world where failed bank executives pay themselves bonuses out of funds received as part of a bailout package, there is much to learn from Buffett about wealth, how to accumulate it and how to use it. This book is a must read, even if you aren’t a US banker. About the author Alice Schroeder was a Wall Street analyst and managing director at Morgan Stanley when she decided, at Warren Buffett’s suggestion, to write full-time. Texas-born, Schroeder earned her undergraduate degree and an MBA at the University of Texas at Austin before moving east to work in the financial sector. A former CPA, she lives in Connecticut with her husband.