When the economy goes south, when all seems lost, there’s only one person to whom Wall Street turns: Warren Buffett.
In the past two weeks, almost every financial industry player in trouble came knocking on the door of the richest man in the world. And virtually every government official sought his advice on the $700 billion bailout plan, says Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” (Bantam), a new biography out this week.
The reason is simple: Even when things go bad, Buffett always comes out ahead.
Buffett’s ultimate decision on who to help demonstrates why, Schroeder notes. “He invested in Goldman Sachs because they had already cleaned up their balance sheet. He had passed on Bear Stearns and a lot of the other banks. His one job is to protect his investors and he judged that Goldman is a safe investment.”
But don’t look for Buffett to head to Washington to protect the rest of us. Schroeder says that while the multibillionaire may be “the teacher everybody comes to,” he has no desire for a 9-to-5 desk job and certainly not one in government. “A lot of politicians have come to him for advice but he’s never sought political office at all,” she says.
Buffett, who famously refrained from investing in the late-1990s Internet bubble, has typically made money during financial downturns, like the 1987 stock market crash. His father, Howard Buffett, got rich during the Great Depression by opening a brokerage firm just when everyone else wanted to get out of stocks.
The younger Buffett’s $5 billion life preserver to Goldman Sachs shows his sentimental streak. He was returning a 68-year-old favor to himself and his father.
The billionaire to-be was 10 years old and touring Wall Street with his father when they dropped in unannounced to meet Goldman official Sidney Weinberg. The senior Buffett was a small-time Omaha, Nebraska stockbroker but Weinberg, the most important man on Wall Street in his day, didn’t hesitate to chat with the Buffetts for 30 minutes and ask young Buffett which stocks he liked.
“He has a longstanding habit of investing in things that go back to his childhood, from Goldman to Coca-Cola and Wrigley gum,” Schroeder says.
The quality of the Goldman investment helped. The $5 billion will net him preferred shares that come with a 10% dividend, and allows Berkshire to buy another $5 billion of common Goldman stock within the next five years at $115 a share. He’s already ahead: The stock closed Friday at $137.99 a share.
“He did the Goldman deal because it was incredibly lucrative. I don’t think there was any altruistic motive,” said Schroeder, a former analyst and managing director at Morgan Stanley who was given unprecedented access to Buffett and associates such as Microsoft’s Bill Gates.
Buffett backs the federal bailout, saying we face an “economic Pearl Harbor” if nothing is done. But it was obvious the plainspoken 78-year-old is rolling his eyes at how we got into this mess in the first place. In interviews with Schroeder, he called derivatives “toxic,” and early Internet stocks by even less flattering terms.
Instead, he favors companies with obvious plans and solid growth. When he bought underwear maker Fruit of the Loom, he made a quip that could be the motto of his own investment firm: “We cover the asses of the masses.”
For students of the Oracle of Omaha, or even those looking for a little reassurance during the crisis, Schroeder’s book is a fascinating study of America’s most successful investor. There’s plenty of money, of course, but also power and, surprisingly, a little sex. Washington Post publisher Katherine Graham, for instance, frequently displayed a letter from Buffett’s wife granting her leave to pursue a relationship with him.
A fan of learning lessons the hard way, Buffett advises individuals caught in the credit crunch to work with their lenders to try to negotiate better terms. He himself struggled to balance his desire to make money with his need to be cautious with other people’s money.
In 2006, Buffett announced plans to gradually give his billions away, with the biggest share going to the Bill & Melinda Gates Foundation, but according to the book, Buffett also turned down requests for loans from his own daughter when she was pregnant and wanted to expand her home for Buffett’s coming grandchild. “Why not go to the bank?” he asked her.
Later, when his sister lost her fortune in the 1987 stock market crash, Buffett first turned her down, then quietly advanced her money – from her own trust fund. The sister, Schroeder writes, was “almost prostrate with gratitude – until she realized that this was her own money and she was being paid early.”
Schroeder details Buffett as a man of disarming humility who nonetheless runs on his “inner scorecard”; Buffett explains the scorecard system like this: “Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover, or would you rather be the world’s worst lover but have everyone think you’re the world’s best lover . . . would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were the best?”
His father, he explains, was the ultimate “inner scorecard guy,” who acted purely on his own beliefs and arguably destroyed a political career by supporting the Taft-Hartley act of 1947, controversial legislation that restricted the actions of unions.
Buffett’s own career began to take off in 1956, as a 26-year-old in Omaha. He gathered $105,000 from four relatives and three close friends to start the Buffett Partnership. Later, the partnership began buying the stock of Berkshire Hathaway, a New England textile firm, for $7 and $8 a share in 1962. After 1969, Berkshire became Buffett’s investment vehicle. Today, the company’s benchmark stock trades at more than $130,000 a share.
Schroeder relates stories about Buffett’s childhood with gritty honesty. His mother had convinced both young Buffett and his sister Doris “that deep down they were worthless,” causing Buffett to spend a lot of time out of the house attempting to win the approval of other adults.
Buffett speaks in dirty jokes and folk-lore lessons: “When will two birds in the bush will be worth more than one in the hand?” he says about risk, and “Nobody goes home after the first horse race” when he decides to keep an investment.
Detailing his own mistakes, Buffett confesses that “I would have been better off if I’d never heard of Berkshire Hathaway,” and the book explains that the original textile business became a “flyspeck” on the original holding company.
A man of simple tastes in material things, living in the same house he bought in the late 1950s and claiming to shun any food that a 3-year-old wouldn’t eat, Buffet’s first marriage, to the former Susie Thomson, was less conventional.
The marriage continued after the wife moved to San Francisco without him. But Susie sent her friend, Astrid Menks, to live in Omaha with Buffett, not caring if they became romantic. Menks and Buffett married after his wife’s 2004 death.
But Buffet still expressed regrets about Susie leaving, calling her departure “the biggest mistake I ever made.”
Why “Snowball” in the title? As Buffett explains, “You’d better be picking up snow as you go along because you’re not going to be getting back up to the top of the hill again. That’s the way life works.” He advises constant reinvestment of profit, to keep building the snowball.
Progeny, like Buffett’s daughter and two sons, aren’t likely to get an uphill start. “The idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flied in the face of a meritocratic society,” Buffett said of what he termed the “ovarian lottery.”
Are we headed for another Great Depression? Schroeder says that Buffett doesn’t like to forecast. He grew up during the original and he is “keenly aware” of the potential psychological effect of making such prophecies.
That’s crucial because this is a man to whom reputation was everything. Buffett would do almost anything to preserve that. As interim chairman of Salomon from 1991-94, Buffett said, “lose money for the firm, I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”
By making Salomon his “church of finance,” Schroeder said, Buffett sealed his reputation as a Wall Street powerhouse without par, turning to “reformer and savior of Salomon had turned him from a rich investor into a hero.”
Remarking on his new celebrity status, Buffett said “I was at my best giving financial advice when I was 21 years old and people weren’t listening to me . . . and now I can say the dumbest things in the world and a fair number of people will thing there’s some great hidden meaning to it or something.”
Buffett would always describe himself as a teacher, citing his “energy, focus and rational temperament” and crediting other people for much of what he learned. Buffett cites Isaac Newton as saying “I’ve seen a little more of the world than others because I stand of the shoulders of giants. There’s nothing wrong with standing on other people’s shoulders.”
Buffett, though, stands alone – and isn’t shy about saying so. “I have this complicated procedure I go through every morning which is to look in the mirror and decide what I’m going to do. And I feel at that point, everybody’s had their say.”
Schroeder says that Buffett made just one request of her in writing the book. “Whenever my version is different from someone else’s, use the less-flattering version.” Schroeder calls the result a portrait of Buffett’s life and a history of his values, strategies and ideas, principals.
“He’s not a sham,” Schroeder says. “He is one of the great American characters. I can’t tell you what his place in history will be, but we have the Mark Twains, the JP Morgans, the Walt Disneys. Part of what made them great was that they were great characters. Warren is a great character.”
But most importantly, Buffett set out to prove that nice guys can finish first, and we’re living through just the sort of crisis that could prove him right. The banks may get their bailout, but the $62 billion man needs no help.
Partner Charlie Munger points out that Buffett could have become a buyout king. He could have promoted his name to all sorts of ventures, but didn’t do it. He saw himself as the teacher and exemplar.
“He was competitive, but he was never just really competitive with no ethics. He wanted to live life a certain way and it gave him a public record and a public platform,” says Munger. “I would argue that Warren’s life has worked out better this way.”