The Snowball: Warren Buffett and the Business of Life

by Alice Schroeder

Scattered about the room are books and newspapers. Photographs of his family and friends cover the credenza and a side table, and sit under the hutch beside his desk in place of a computer.

The sound is muted, but the crawl at the bottom of the screen feeds him news all day long. Over the years, to his pleasure, the news has often been about him.

“Balzac said that behind every great fortune lies a crime.1 That’s not true at Berkshire.”

Then he buried his head in a newspaper as the plane rolled down the runway and ascended to forty thousand feet. For the next two hours, six people hummed around him, watching videos, talking, and making phone calls, while the flight attendant set out linens and bud vases filled with orchids on the bird’s-eye maple dining tables before returning to the galley to prepare lunch. Buffett never moved. He sat reading, hidden behind his newspapers, as if he were alone in his study at home.

His public image was that of a simple man, and he seemed genuine. Yet he lived a complicated life. He owned five homes but occupied only two of them. Somehow he had wound up having, in effect, two wives. He spoke in homely aphorisms with a kindly twinkle in his eye and had a notably loyal group of friends, yet along the way he had earned a reputation as a tough, even icy dealmaker. He seemed to shun publicity yet managed to attract more of it than almost any other businessman on earth.

Buffett’s friend Tom Murphy referred to this kind of event as “elephant-bumping.” “Anytime a bunch of big shots get together,” says Buffett, “you can get people to come, because it reassures them if they’re at an elephant-bumping that they’re an elephant too.”

He had no interest in outdoor activities other than golf. He never went skeet shooting or mountain biking, thought of water as “a prison of sorts,” and would rather go around handcuffed than ride on a raft. Instead, he played a standing golf game with Jack Valenti, president of the Motion Picture Association of America, for a dollar bet, and a bridge game with Meredith Brokaw, and otherwise spent his time socializing with people like Playboy CEO Christie Hefner and computer hardware CEO Michael Dell.

A new group of recently minted technology executives, filled with an unusual swagger, introduced themselves to people who had never heard of them a year before.

After the breakfast buffet, Clarke Keough walked to the podium. Buffett had known the Keough family for many years; they had been neighbors back in Omaha. It was through Clarke’s father, Don, a Sioux City cattleman’s son and former altar boy, that Buffett had made the connections that led him to Sun Valley. Don Keough, former president of Coca-Cola, had met Herbert Allen when he bought Columbia Pictures from Allen & Co. for Coca-Cola in 1982.

“In the short run, the market is a voting machine. In the long run, it’s a weighing machine.

“Weight counts eventually. But votes count in the short term. And it’s a very undemocratic way of voting. Unfortunately, they have no literacy tests in terms of voting qualifications, as you’ve all learned.”

And there are really only two questions. One is how much you’re going to get back, and the other is when.

“Now, Aesop was not much of a finance major, because he said something like, ‘A bird in the hand is worth two in the bush.’ But he doesn’t say when.”

Interest rates—the cost of borrowing—Buffett explained, are the price of “when.” They are to finance as gravity is to physics. As interest rates vary, the value of all financial assets—houses, stocks, bonds—changes, as if the price of birds had fluctuated. “And that’s why sometimes a bird in the hand is better than t...

“There were two thousand auto companies: the most important invention, probably, of the first half of the twentieth century. It had an enormous impact on people’s lives. If you had seen at the time of the first cars how this country would develop in connection with autos, you would have said, ‘This is the place I must be.’ But of the two thousand companies, as of a few years ago, only three car companies survived.21 And, at one time or another, all three were selling for less than book value, which is the amount of money that had been put into the companies and left there. So autos had an enormous impact on America, but in the opposite direction on investors.”

“Well, that’s the way people feel with stocks. It’s very easy to believe that there’s some truth to that rumor after all.”

Ultimately, the value of the stock market could only reflect the output of the economy.

“Praise by name, criticize by category” was Buffett’s rule.

Buffett had stayed on top for forty-four years in a business where five years of good performance was a meaningful accomplishment.

Fortune magazine ranks the largest 500 companies based on sales and refers to them as the “Fortune 500.”

A short-seller borrows a stock and sells it, betting it will go down. If so, the “short-seller” profits from buying the stock back cheaper. He loses if the price rises. Short-selling is normally risky: You are betting against the long-term trend of the market.

Both regarded rationality and honesty as the highest virtues. Quickened pulses and self-delusion, in their view, were the major causes of mistakes. They liked to ponder the reasons for failure as a way of deducing the rules of success.

“I had long looked for insight by inversion, in the intense manner counseled by the great algebraist Carl Jacobi,” Munger said. “ ‘Invert, always invert.’ ” He illustrated this with the story of a wise peasant who said, “Tell me where I’m going to die so I won’t go there.”

“the Shoe Button Complex.” “His father commuted daily with the same group of men,” Munger said. “One of them had managed to corner the market in shoe buttons—a really small market, but he had it all. He pontificated on every subject, all subjects imaginable. Cornering the market on shoe buttons made him an expert on everything. Warren and I have always sensed it would be a big mistake to behave that way.”

Munger often left for the day in time to play a little golf with his cronies at the Los Angeles Country Club. Then he joined his wife, Nancy, for dinner, sometimes at the Pasadena house he’d designed himself or, more likely, with a longtime group of close-knit friends, once again either at the California Club or the L.A. Country Club. He concluded his day by burying his nose in a book.

Now, my dad: He was a hundred percent Inner Score-card guy. “He was really a maverick. But he wasn’t a maverick for the sake of being a maverick. He just didn’t care what other people thought. My dad taught me how life should be lived. I’ve never seen anybody quite like him.”

“Try to be punctual in all your dealings. You will find it difficult to get along with some men, deal as little as possible with such....Save your credit, for that is better than money....If you go on in business, be content with moderate gains. Don’t be too hasty to get too rich....I want you to live so as to be fit to live and fit to die.”

“When I was a kid,” Warren would later say, “I got all kinds of good things. I had the advantage of a home where people talked about interesting things, and I had intelligent parents and I went to decent schools. I don’t think I could have been raised with a better pair of parents. That was enormously important. I didn’t get money from my parents, and I really didn’t want it. But I was born at the right time and place. I won the ‘Ovarian Lottery.’

October 29, 1929, the market dropped $14 billion in a single day.

Now Ernest told Howard that he had no money to pay another son.5 In one sense, Howard felt relief. He’d “escaped” from working at the store and never wanted to go back.6 But he worried that his family would starve. “Don’t worry about food, Howard,” Ernest told him. “I’ll just let your bill run.”

“On August 15, 1931, he went down to the bank. It was two days after his birthday, and the bank was closed. He had no job, and his money was in the bank. He had two little kids to feed.11 He didn’t know what to do. There was not another job to find.”

Warren had something to do almost every day after school until his father returned from work. He had always gotten along with other children; now they kept him safe.

He loved to read and spent many hours with books he checked out of the Benson Library.

He became obsessed with collecting bottle caps. All this free information was lying around untouched—and no one wanted it! He found it amazing. After dinner, he spread his collection of bottle caps on newspapers all over the living-room floor, sorting and counting, sorting and counting.8 The numbers told him which soft drinks were most popular.

By fifth grade he had immersed himself in the 1939 World Almanac, which quickly became his favorite book.

He memorized the population of every city. He got a contest going with Stu over who could name the most world cities with populations over a million.

He had learned a lesson: It might seem easier to go through life as the echo—but only until the other guy plays a wrong note.

One day, down at the Benson Library, a book beckoned from the shelves. Its shiny silver cover gleamed like a heap of coins, hinting at the value of its contents. Captivated by the title, he opened it and was immediately hooked. One Thousand Ways to Make $1,000, it was called. A million dollars, in other words!

“The weighing machine was easy to understand. I’d buy a weighing machine and use the profits to buy more weighing machines. Pretty soon I’d have twenty weighing machines, and everybody would weigh themselves fifty times a day. I thought—that’s where the money is.9 The compounding of it—what could be better than that?”

One lesson was not to overly fixate on what he had paid for a stock. The second was not to rush unthinkingly to grab a small profit. He learned these two lessons by brooding over the $492 he would have made had he been more patient. It had taken five years of work, since he was six years old, to save the $120 to buy this stock. Based on how much he currently made from selling golf balls or peddling popcorn and peanuts at the ballpark, he realized that it could take years to earn back the profit he had “lost.” He would never, never, never forget this mistake.

And there was a third lesson, which was about investing other people’s money. If he made a mistake, it might get somebody upset at him. So he didn’t want to have responsibility for anyone else’s money unless he was sure he could succeed.

He said, ‘Well, how much should I pay you boys? A dime’s too little and a dollar’s too much!’ “I’ll never forget—John and I looked at each other....” That worked out to—at most—twenty cents an hour for shoveling snow. “Oh no! This was the amount we were supposed to split. That was my grand-father....” Well, a Buffett was a Buffett, but Warren had learned a valuable lesson: Know what the deal is in advance.

A good-looking girl does not have trouble, because the world will adjust to her. So they both fit in better than I did, far better, which was a little irritating too.”

I’d learned Ping-Pong from taking out books from the library and practicing at the Y.

The Buffetts were aghast. Warren was their gifted child, but by the end of 1944, he had become the school delinquent.

And to Warren, the death of a President meant another way to make money.

“You know, you kept measuring that biceps to see if it’d gone from thirteen to thirteen and a quarter inches. And you were always worried whether you were loosening up the tape or anything. But I never improved from looking like the Charles Atlas ‘before’ picture. I think my biceps went from thirteen inches to thirteen and a quarter inches after thousands of curls. “The Big Arms book didn’t do me much good.”

Warren had found this system at his grandfather’s house, where he read everything he could get his hands on at a blazing pace, just as he did at home.

Some of these books he read and reread. One of them was special—not a biography but a paperback written by former salesman Dale Carnegie,8 enticingly titled How to Win Friends and Influence People. He had discovered it at age eight or nine.

“If you want to gather honey,” it began, “don’t kick over the beehive.”