The perfect timing of this book rivals the brilliance of Warren Buffett’s many invest- ment coups. For years, this true ‘master of the universe’ has highlighted the dangers posed by derivatives — or ‘financial weapons of mass destruction’ in Buffett-speak. Losses from these highly complex instruments, based on sub-prime US mortgage debt, precipitated the credit crunch and now threaten the entire global financial system.
Presciently, Buffett warned in 2003 that derivatives could push companies into a ‘spiral that can lead to a corporate meltdown’. But Wall Street’s investment bankers ignored his advice, and while they now head for the pawnshops, the world’s greatest investor continues to accumulate wealth faster than anyone else in history.
Would-be billionaires worldwide, seeking the formula of Buffett’s financial alchemy, will doubtless pore over this biography, published with the co-operation and encouragement of the ‘Oracle of Omaha’. Yet this is not just the tale of how a small boy from Nebraska, unloved by his mother, came to be named by Forbes magazine as the richest man in the world. For, as Alice Schroeder, a former Wall Street analyst, told me in an interview before publication, ‘I uncovered layer upon layer of complexity’.
Buffett is certainly a man of contradictions. His personal wealth almost equals the entire GDP of Bangladesh. His holding company, Berkshire Hathaway, was valued at over US$200 billion at the end of 2007. Yet he lives in the same house that he bought in 1958 and, according to Schroeder, takes no pleasure in ‘visiting five-star resorts, collecting wine or art, or acquiring a trophy wife’. (‘I’ve never seen a trophy wife yet that looks like a trophy,’ he says. ‘To me, they always look like a booby prize.’). He prefers Cherry Coke, popcorn and peanuts to champagne and caviar.
Clearly a cultured man, he likes to quote Balzac’s ‘Behind every fortune lies a great crime’, followed by ‘but that’s not true at Berkshire’, and claims that Bertrand Russell’s anti-nuclear treatise, Has Man a Future?, affected him powerfully. Yet his sole comment on visiting the Great Wall of China was, ‘Boy, I sure would have liked to have been the company that got the brick contract for this thing’. An anonymous columnist for Forbes summed him up: ‘Buffett is not a simple person but he has simple tastes.’
He certainly emerges as more than just a money-making machine, and can spout wisecracks of which Groucho Marx would have been proud. (‘We cover the asses of the masses,’ he quipped on buying the underwear maker ‘Fruit of the Loom’.) He gave money to the civil rights movement in the 1960s, opposed the Vietnam war at an early stage and has backed Barrack Obama to become president. He plans to give his fortune to charity and favours inheritance tax, arguing that the well-off owe some minimum amount to the society that enabled them to become so rich. If they thought they did it all themselves, reincarnate them as one of five children of a scared, starving mother in Mali, and see how rich and successful they would be.
These are hardly obvious positions for a man who has played the capitalist system to such dazzling effect. Friends describe him as a person of considerable warmth who sets great store by loyalty. ‘Everybody who meets him likes him,’ Schroeder told me. Yet his first wife labelled him an ‘iceberg’.
So how did he manage to build this vast fortune? Through intense focus, the snowball effect of the book’s title, and luck. He displayed a precocious interest in business, starting, aged six, by selling packs of chewing gum. At 11, he realised the value of compounding. He told friends that he would be a millionaire by the age of 35. Due to the exponential growth of the money he saved from paper rounds and later business schemes, he was in fact in a position to retire at 26. For just like a snowball rolling down a hill, Buffett’s investments over 15 years had grown on a staggering scale.
Chance now began to play a part. Crucially, Buffett was focused on stocks when most people were not, the Wall Street Crash having soured Americans’ appetite for equities. As a result, ‘in his early, glory days, stocks were cheap, and Buffett had scooped them up in handfuls, almost alone in noticing the golden apples lying untouched on the path’. He was thus able to buy shares for US$30 that produced a dividend of US$29. In other words, the investment virtually paid for itself within the first year, and from then on it was pure profit.
Such bargains no longer exist. Armies of analysts scour balance-sheets, and the internet brings Wall Street into everyone’s home. Yet over the past 40 years, Berkshire Hathaway has continued to grow at a breathtaking pace. How is this possible, given that Buffett is not a risk-taker and likes to build in a ‘margin of safety’ before investing in a stock? The answer lies partly in his uncanny timing. He simply doesn’t invest when shares are what he considers to be overvalued. This approach may seem foolish when stock markets are flying, but as Schroeder observes topically, ‘When enough time passes and nothing bad happens, people who are making a lot of money tend to think it is because they are smart, not because they are taking a lot of risk’.
Buffett was thus mocked for not investing in the dot-com boom. In 2000, the Sunday Times crowed that ‘ignoring technology stocks seems to have made a chimp out of Buffett’. Yet the burst of that bubble allowed him to hoover up shares on the cheap and reap the profits.
Schroeder does not make any astounding revelations but she has delivered a well- written, forensically researched and sensitive insight into the Midas of our times. In the opening chapter, she quotes Buffett as telling her, ‘Whenever my version is different from somebody else’s, use the less flattering one’.This says much about his famed integrity. That he emerges so favourably from the book, despite his behest, says even more.
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