RSSConsidering the Snow
By Tim Price | November 29, 2008 | 5:05 PM | 2 Comments
"Sunshine is delicious, rain is refreshing, wind braces up, and snow is exhilarating. There is no such thing as bad weather, only different kinds of good weather."
- John Ruskin
He was born 10 months after the Wall Street Crash. Two weeks before his first birthday, a run began on the local banks. England in subsequent weeks went off the "gold standard". He became a dollar millionaire at 32, at a time when a million was a big number and a dollar was genuinely worth something. Throughout his long and monumentally successful career - Forbes magazine ranked him as the richest man in the world earlier in 2008 - Warren Buffett has either made financial history, or floated just on its periphery, a player or active observer in some of Wall Street's most celebrated deals as well as some of its more notorious recent scandals. But as Alice Schroeder makes clear in her substantial biography of Warren Edward Buffett (‘The Snowball', Bloomsbury 2008), the so-called Oracle or Sage of Omaha, notwithstanding the accumulation of historic levels of wealth, his reputation for honesty and plain-dealing is richly deserved. And this 838-page study fleshes out the humanity behind the Buffett story, handily complementing - for Buffett completists - the free primer on investment comprising his accumulated letters to the shareholders of Berkshire Hathaway.
‘The Snowball' reinforces some of the essential truths within Malcolm Gladwell's equally current study of success, ‘The Outliers': the supposedly "self-made man" also requires being born in the right place at the right time, with a degree of demographic luck, and with a commitment to focus on one's endeavour (Gladwell suggests a minimum of 10,000 hours' dedication to the cause). Buffett had all three, and has had the good grace frequently to acknowledge the fact:
"I've had it so good in this world, you know. The odds were fifty-to-one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.
"Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one that is born in the United States ?' It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, ‘I did it all myself,' and think of themselves as Horatio Alger - believe me, they'd bid more to be in the United States than in Bangladesh. That's the Ovarian Lottery."
But this is not merely a well-sourced hagiography, as even a cursory scan through the index makes clear. Warren Buffett the human being is captured here with all his vulnerabilities, his "attention-seeking"; "avoidance of confrontation"; "clothes and appearance" (sometimes self-deprecation has a place); his "discomfort with illness"; "emotional fragility and unavailability"; "frugality and tightfistedness"; his "immaturity as youth"; his "fears of mortality".. And perhaps the most intriguing aspect of Buffett's private life, his unorthodox marital triangle with Susan Buffett ("Big Sooz") and Astrid Menks, is covered extensively but sympathetically.
Aspirant financiers and entrepreneurs seeking the Value Way to Riches will be well served by the shareholders' letters alone. ‘The Snowball' fills in both the private and public history of America's greatest investor. What strikes the reader of today is the extent to which the current deep crisis has its roots in the behaviour of bankers ten and twenty years ago - the Credit Crunch and Banking Fiasco of 2008 did not come out of a clear blue sky. The full dress rehearsal for the bankruptcy of Lehman Brothers in 2008 - probably the worst decision made by the US Treasury and Federal Reserve so far, in an environment where the swirl of poor decisions has been as thick as autumn leaves - came in 1991 when Salomon Brothers was hours away from bankruptcy following a hushed-up fraud involving rigged auctions for US Treasury bonds. Buffett was parachuted in as chairman to save the firm, and perhaps even the integrity of the US financial system. So "too big to fail" is hardly a contemporary coinage. And the festival of moral hazard that is the current Anglo-Saxon banking culture has its origins in the 1998 collapse of Long-Term Capital Management and its vilely hubristic executives. Buffett was invited to rescue the fund. But its management, in what might be seen as an eerie presentiment of the downfall of Lehman's CEO Dick Fuld, were determined to retain ownership and control of the business. Alice Schroeder asks the pertinent question of the Fed-orchestrated LTCM bailout:
"It is hard to overstate the significance of a central-bank-led rescue of a private money manager. If a hedge fund, however large, was too big to fail, then what large financial institution would ever be allowed to collapse ? The government risked becoming the margin of safety. No serious consequences had come about in the end from the derivatives near-meltdown. The market afterward seemed to behave as if no serious consequences ever could. This threat, the so-called "moral hazard," was a chronic worry of regulators.."
Buffett himself candidly explained the second- and third-order impact of failing derivative structures, which again carries huge resonance in our dislocated modern financial arena:
"Derivatives are like sex. It's not who we're sleeping with, it's who they're sleeping with that's the problem."
Much of ‘The Snowball' has a grim relevance to current events:
"Terrorists have a huge advantage. They pick the time, the place, and the means. It's very difficult to defend against fanatics.. This [the terrorist attacks of September 11, 2001] is just the start of things. We don't know who our enemy is. Now, it's us versus a shadow. There could be many shadows."
And like the shareholders' letters, ‘The Snowball' is a repository of fine quotations, about business and investment success, and much else. But as we crouch in the aftermath of the Crash of 2008, amidst the rubble of the equity and credit markets, there is specific cause to see optimism and a sense of opportunity in Warren Buffett's words describing a previous panic (in this case, the crisis of confidence in the financial markets post-Enron). As Alice Schroeder puts it,
"Berkshire's best opportunities always came at times of uncertainty, when others lacked the insight, resources, and fortitude to make the right judgments and commit."
But Buffett tells it best, and the advice resonates for our time as well as in relation to his previous market coups:
"Cash combined with courage in a crisis is priceless."
‘The Snowball: Warren Buffett and the business of life' by Alice Schroeder was published in September 2008 by Bloomsbury Publishing. RRP £25.00; available via Amazon from £12.49.
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