Warren Buffett is a man who needs no introduction. Since appearing in Forbes’ “World’s Billionaires Ranking” in 1993 as the ninth richest man in the world with a net worth of $6.6 billion, Buffett became a mainstay second only to Bill Gates. In 2023, Buffett is the sixth richest man in the world and worth a whopping $106 billion USD (source). Unlike the likes of Gates, Musk, and Bezos, Buffett did not achieve outrageous wealth by starting companies but by buying them. However, Warren Buffett did not write The Snowball: Warren Buffett and the Business of Life nor is the book focused on Buffett’s investments. So is Alice Schroeder’s biography a useful read for those of us on the journey to Financial Independence? Or is this biography an ultimately uninstructive recount of Warren Buffett’s personal life?
The long and short of it:
Over the course of Warren Buffett’s long and colorful life, he had many experiences that are of great didactic value, not only for the money-makers of the world, but also for anyone looking to live a good life. For the most part, Schroeder organizes the book chronologically, moving through Buffett’s various notable experiences and the notable people who enter and leave his life. Thus the money/general life lessons are scattered throughout the book in a disorganized but realistic fashion. For the purpose of expediency, I opted to gather up the money lessons which I feel are most pertinent to you, the average investor, and leave the equally important, but unfortunately less relevant, life lessons for another discussion.
Compounding
Buffett first came across the concept of compounding in Frances Minaker’s One Thousand Ways to make $1000. Minaker presents the following idea for a business venture: say you saved up $10 and bought a weighing machine. You charge people a dime to use it. It would take 100 people using your weighing machine before you have enough money to buy a second machine. However, with two weighing machines, you can now make money at double the speed. This means only 50 people per machine, and you can purchase a third machine in half the time. With the addition of a third machine, money comes faster and so on and so forth. Buffett did this with a pinball machine he and his friend put in a barber shop. Soon enough there were pinball machines set up in barber shops all around town.
Because of Buffett’s understanding of compounding, he saw money in the present and money in the future as directly linked. His legendary frugal ways have its roots here. Why spend a dollar today when it will grow to be a thousand dollars in five years? Why spend a thousand dollars when it will grow to be a million dollars in twenty years?
Lessons from Graham
In the investing community, it’s well known that Warren Buffett was a student of Benjamin Graham’s. From Graham, he learned a number of valuable lessons:
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- The market prices are cyclical but for the most part, the economy is growing and businesses are becoming more profitable. Therefore, by buying during recessions and selling during bull markets, you stand to earn a reliable profit.
As Buffet said once in a conference: “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.” The long-term upward progression of the market is the weight, the short term fluctuation is the vote.
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- Have a margin of safety to protect your investments from unexpected market forces, and to buy good companies at cheap prices (bargains frequently emerge during recessions and company lawsuits). Minimize the downside.
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- Mr. Market is often unreasonable, so don’t take the market valuation of your share to be the actual value. Only buy from and sell to Mr. Market when it is profitable to you.
For more on Graham’s teachings, check out my review of The Intelligent Investor.
Intangible assets are valuable
There are some differences between Buffett’s investing ideology and Graham’s. The first difference lies in Buffett’s recognition of intangible assets. For Graham, a company’s tangible assets make up the bulk of its value — how many factories they own, the value of the machines therein, and the company’s own investments in bonds and shares. Buffett accounts for these assets, but he also pays attention to things like a company’s reputation (how trustworthy is it? Is there a strong brand recognition?), management, and patented ideas (coca-cola’s syrup recipe, apple’s computer interface).
When American Express ran into a lawsuit and the stock price plummeted, Buffett first ascertained that the public still trusted in the brand (intangible asset) before investing heavily in the company. His decision paid off handsomely when the lawsuit was settled and American Express’s stock price rose to reflect its value. In a similar case with a different company, Buffett and Munger purchased See’s Candy for $25 million. The company only had $2 million in post-tax earnings and $8 million in tangible assets, but See’s Candy had a loyal customer base and an excellent reputation backed up by excellent products. To this day, See’s Candy remains one of Buffett’s favorite investments.
Diversification up to a point (if it’s a good company, then buy more of it)
Another way that Buffett differs from Graham is in his approach to diversification. It is an oft repeated truism that you should diversify your holdings in a variety of industries for a margin of safety. The idea is that if a company or industry falls out of favor with the public, you won’t be forced to sell otherwise strong positions. When you have other dependable options, it’s easier for you to remain resilient in a fluctuating market. Buffett agrees up to a point. For the average investor who isn’t attuned to the market’s ongoings, it would be a fair decision to choose 10-30 strong companies from different industries, or to invest in an index fund and leave it at that. For investors who are confident in their stock analysis and have a history of successful stock picks (Buffett being an exceptional example), it would be more beneficial to concentrate their wealth in the companies best positioned to grow and increase their own earnings.
Go for companies with a wide moat
As something of an addendum to the point on “intangible assets,” Buffett also stresses the value of companies with a wide moat. These are companies with qualities that are very difficult to replicate. This might be economy of scale, such as with AT&T and Walmart, or companies with an excellent reputation such as See’s Candy and Apple. Companies with a wide moat are excellent vehicles to hold long-term capital because of the stability that results from its competitive edge.
Invest in what you know (circle of competence)
As Schroeder writes, “[Warren Buffett] believed in what he called the Circle of Competence, he drew a line around himself, and stayed within the three subjects on which he would be recognized as absolutely expert: money, business, and his own life.” On this point, Buffett and Graham are in perfect agreement: stay in your circle of competence and invest in what you know.
On one hand, this makes perfect sense, it wouldn’t be right for someone who cornered the market on Shoe Buttons to assume themselves qualified to speak about zookeeping. But on the other hand, the average person is not born a competent investor. Buffett is not saying that you should stay firmly in your comfort zone, but you should recognize when you have exited your circle of competence. With the understanding that you are out of your depth, you must decide. Do you have the energy and capacity to properly research and understand a new subject and expand your circle of competence? Or would it be better for you to leave it alone and focus on something you’re already familiar with?
When Warren Buffett wrote in one of his letters to shareholders, “We will not go into businesses where technology is way over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do about the mating habits of the chrzaszcz,” he is recognizing the limitations of his knowledge, assessing his own interest and energy, and making a tactical retreat. For those of us who have the energy and resources to learn about semiconductors, integrated circuits, and the mating habits of the chrzaszcz, we can certainly invest in such companies, but only after obtaining the necessary knowledge.
Pass up riches if you couldn’t limit the risk
This is related to the idea of the Circle of Competence. Not having a solid grasp of a company’s operations drastically increases the risk of the investment. Other factors that play into risk would be the length of time a bull run goes on for (with stocks trading at ever higher P/E ratios), offerings in a complicated or poorly regulated industry (biotech as an example of the former, crypto for the latter), and potential worker strikes resulting from poor management.
Such was the case in the dot-com bubble from 1995 — 2001 during which the mesmerizing potential of the internet drove the share price of untested internet start-ups to eye-watering heights. During this time, Buffett sat by, unmoved and unwilling to invest. Buffett was unfamiliar with the world of computing, superconductors, and software, he knew the new technology lied beyond his circle of competence. Even as people around him became rich and berated him for “losing his touch” and “past his prime,” Buffett remained steadfast. Of course, with the benefit of hindsight, the ill-begotten wealth of internet speculators soon vanished and Buffett’s judgment proved superior. If the risk can’t be managed, it’s not worth it, no matter how high the potential return.
There’s no such thing as a new paradigm
Returning to the rise of the dot com bubble, there was a belief that a new paradigm was upon the world of business and investing. New tech start ups and young entrepreneurs entered the scene with swagger befitting of new money and snake oil salesmen. The stock market soared to new heights with stocks trading at prices 50, 60, 70 times their earnings. There was enormous optimism that the internet will not only revolutionize communication, but the very fundamentals of investment and business. Of course, hindsight is 20/20 and no one can deny now that Buffett’s stoicism in the face of such investment fervor was a wise decision. There is no such thing as a new paradigm, investors buy shares of a company, the company’s value goes up when the company’s earnings go up. So goes the popular German proverb: leaves will fall sooner or later, trees won’t grow to the sky. The foundational core of investing has remained the same from the Dutch tulip craze through to today’s tech giants.
What makes The Snowball: Warren Buffett and the Business of Life unique?
Although I haven’t addressed this in favor of brevity, Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life stands out among the many books on Warren Buffett as one that puts the most emphasis on the many friends and influences in his life. It takes the perspective of Warren Buffett as a person, rather than Warren Buffet as a legendary investor. Schroeder demonstrates how Buffett’s investment philosophy reverberates through every aspect of his life, from his opinion on politics to the way he interacts with his family. Aside from delving into Warren Buffett’s personal history, this book also unearths the personal histories of his associates, and the people he did business with. Schroeder also took the liberty of contextualizing the social events occurring throughout Buffett’s lifetime, from the Civil Rights movement to Nixon’s impeachment to the Housing Market crisis. It’s an unprecedented and personal look at the entirety of Warren Buffett’s lived experience told mainly from his perspective.
In devoting such attention to detailing Warren Buffett’s life, Schroeder shows readers that Buffett is not a coldly rational investing superhuman. He too has made mistakes and had moments of doubt and uncertainty. He too is driven by subjective beliefs and experiences. Where Buffett differs is his willingness to sacrifice family time, all non-investment-related hobbies, and short-term profits all in the name of making consistently good long-term investments. In reading The Snowball, readers implicitly understand that Warren Buffett is not just a highly unusual investor, but indeed a highly unusual person.
Final thoughts:
Having lived as long and colorful a life as Warren Buffet, it’s perhaps unsurprising that his biography is nearly a thousand pages long (or 640 pages, depending on which edition you happen to have). It’s also very much a biography, not a finance book. Can nuggets of financial wisdom be gleaned from this behemoth of a book? Yes. Should you read it just to find them? Probably not. It’s for this reason that I took the trouble to pick out the most valuable of these nuggets. For a more in-depth exploration of Buffett’s investment principles and not his life story, The Warren Buffett Way by Robert G. Hagstrom would better serve your purposes than The Snowball.
However, if I were to judge the book as a book rather than a resource for potential investing tips, The Snowball: Warren Buffett and the Business of Life is an interesting read and about as close as most of us could get to knowing Buffett on a personal level. It’s well written, first and foremost, detailed without being overly so, and additionally possesses some historical value. All in all, The Snowball is an enjoyable way to spend your spare time, provided you have a good amount of spare time.
