Warren Buffett always had spectacular timing. As Wall Street burns, the
billionaire investor is the hero of the hour after predicting the financial
meltdown and riding to the rescue — $5 billion (£2.7 billion) in hand — of
Goldman Sachs.
Tomorrow marks the release of The Snowball, the first and only, Buffett says,
biography to be written with his co-operation. The book’s author is Alice
Schroeder, a former analyst who spent “literally thousands” of hours with
Buffett and his family.
“Invaluable” hardly describes Schroeder’s access to the world’s richest man
when you consider that lunch with Buffett recently fetched $2.1m in a
charity auction.
Such is Buffett’s reputation that last week, when he snapped up his stake in
Goldman, the bank’s shares rose $8 as investors who had wondered if it would
survive the credit crunch reacted positively.
Schroeder said: “Around the time Bear Stearns was being taken over, he talked
about the domino effect to me. He said to me first Bear, then Lehman, then
Merrill. He saw this coming and he talked about a crisis of a magnitude that
we had not seen before.”
Where others saw chaos, Buffett saw opportunity. It has been a busy two weeks
for him. The week before, one of his firms, Mid American Energy, made a $4.7
billion offer for Constellation, a rival pushed to the brink of bankruptcy
by the credit crisis.
Buffett likes big brand names for his Berkshire Hathaway investment vehicle.
And he likes to pay low prices for them.
The purchase of the Goldman stake was classic Buffett, waiting for a top-rated
firm to fall to rock-bottom prices. It seems to be a fall he had been
predicting for some time.
Schroeder said that since the 1980s Buffett had been warning of the dangers of
derivatives like the mortgage-related investments that have caused the
credit crisis. In 2002 he referred to them as “financial weapons of mass
destruction”.
It’s not the first time he has predicted the end of the latest investment boom
before it has turned into the latest investment bust. Buffett made similarly
dire predictions for the dotcom economy in 1999 just as it was hitting its
peak.
“He has a way of looking at every possibility. He is a handicapper. He grew up
at the racetrack handicapping horses and he looks at every possible outcome
and handicaps the odds.
“But if something could be catastrophic, even if it’s a low probability, his
attitude is don’t bet more than you could lose,” said Schroeder.
“He looked at the amount of debt being taken on. If you borrow 30 times what
you have and something goes drastically wrong, you are done. He doesn’t
expose himself to those types of risk,” she said.
It’s a strategy that has paid off handsomely. Forbes magazine has estimated
his wealth at $62 billion, making him the world’s richest man.
Buffett didn’t get there by himself. Schroeder paints a picture of a man who
still feels the influence of his parents. He revered his father, a
stockbroker who became a four-term congressman, but had a complex
relationship with his mother, who would “verbally lash” the young Buffett
and his older sister until they wept.
When his mother died Buffett told Schroeder he cried not because he was sad
but “because of the waste. She had her good parts, but the bad parts kept me
from having a relationship with her”.
His upbringing appears to have left Buffett in need of a lot of love and
support and he has relied heavily on a close circle of friends and mentors
ever since. Chief among them was his late first wife, Susie.
Buffett’s early years left him with a “shaky inner core”, he told Schroeder.
His first wife was an amateur psychologist — and the daughter of a
professional one — who referred to Buffett as “her first patient”. Susie
“knew that the main thing he needed was to feel loved and never criticised”,
writes Schroeder.
As far as Buffett is concerned the pivotal moment in his career was his
rejection, at the age of 19, by Harvard Business School. The school saw
through his shaky confidence and the rejection led him to Columbia Business
School, where the stock-picking legend Benjamin Graham was teaching.
Today Buffett works with a close-knit team that has changed little over the
years. In business, Buffett is rarely separated from his sidekick Charlie
Munger. Other close advisers include Bill Gates, a man Buffett treats as a
second son. Like money, friends stick to Buffett.
“Life is like a snowball,” he once said. If you want to grow then “the
important thing is finding wet snow and a really long hill”.
Schroeder attracted the attention of Team Buffett when she was working as an
analyst at Morgan Stanley. In 1999 she wrote a report on Berkshire Hathaway
that so impressed Buffett that he called and said “maybe I’d like to do
something else. I didn’t realise at the time that Warren never says anything
lightly”, said Schroeder.
When she eventually suggested writing his biography, Buffett said he would
co-operate. He encouraged friends and family to open up to her and allowed
her to spend hours in his office watching him work.
His one request was that, if she was given two versions of a story, she pick
the one that was “less flattering”. “Humility is one of the ways he disarms
people,” said Schroeder.
All that time with the man nicknamed the Sage of Omaha taught Schroeder many
invaluable lessons, some of which led to profound changes in her personal
life.
“From a personal standpoint, he is not a perfect person but he is very
efficient at running his time and he is very good at managing his
relationships with people,” said Schroeder.
Buffett looks for two key characteristics in those he allows to be close to
him — honesty and a lack of selfishness. Those who pass his test are
accepted “pretty much unconditionally. He will not try and change the people
he likes. He doesn’t spend any mental energy at all thinking I wish they
were more like this or that. He will never say a negative thing to anyone’s
face or behind their back about anyone he likes, and he praises people for
the qualities he does like about them”. Seeing that over and over “has a
really powerful effect on people”.
The effect on Schroeder was certainly profound. A year into her assignment she
split with her husband. “I was in a very unhappy marriage. My husband and I
were still trying to make it work,” she said.
Seeing Buffett in action made her think that she needed to stop thinking about
trying to change their relationship and end it instead.
“We are both much happier now,” she said. “Warren would say that until you are
middle-aged you should be delaying gratification. You should delay that
holiday and concentrate on your career. But once you get to middle age,
start withdrawing from the bank. Go on that round-the-world trip. Of all
things, make sure you are in the relationship you want to be in,” said
Schroeder.
In many ways Buffett seems a contradictory character. A small-town boy from
conservative Nebraska, he is a liberal who supports Barack Obama and has
championed abortion rights. He is a billionaire who insists on carrying his
own luggage. A shy man who craves attention and gets excited when a porn
star says on her website that he is her hero. Buffett, Schroeder writes, is
“at heart nothing more than a starstruck little kid, endearingly clueless in
many ways about his place in the pantheon”.
“He is a rich guy who doesn’t care about money. He is an incredibly successful
man who attributes his success to luck. He is a man of simple tastes who
lives something of a jet-set lifestyle.
“He’s not a sham,” said Schroeder. “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.”
Rumours have circulated that Buffett is close to handing the baton at
Berkshire to a successor. Last year he said a handful of candidates had been
sounded out. He is not immortal (although Schroeder said he would like to
be) and some day he will step down.
Right now Buffett is proving to be a contradiction: a successful snowball in
hell.
