Warren Buffett is widely considered one of the greatest investors of all time. Known as the "Oracle of Omaha," Buffett has amassed a vast fortune through his savvy investments and business acumen. But how did this unassuming man from Nebraska become one of the wealthiest and most influential figures in the world of finance?
In "The Snowball: Warren Buffett and the Business of Life," author Alice Schroeder provides an in-depth look at Buffett's life, from his childhood in Omaha to his rise as an investing legend. Through extensive interviews with Buffett himself, as well as his family, friends, and colleagues, Schroeder paints a nuanced portrait of a complex man driven by an intense passion for business and investing.
The book's title refers to Buffett's philosophy of compounding returns over time - starting small and steadily building wealth, like a snowball rolling down a hill. This patient, long-term approach came to define Buffett's hugely successful investing strategy. But as Schroeder reveals, Buffett's path to success was not always smooth, and his single-minded focus on business often came at a cost to his personal relationships.
"The Snowball" offers fascinating insights into Buffett's investing methods, business deals, and relationships. It provides a window into the mind of a financial genius while also exploring the human side of a man whose name has become synonymous with wealth and success. Through Buffett's story, readers gain valuable lessons about investing, business, and life.
Early Life and First Business Ventures
Warren Edward Buffett was born on August 30, 1930 in Omaha, Nebraska. He was the second of three children born to Leila and Howard Buffett. Warren's father was a stockbroker and would later serve four terms as a U.S. congressman. From a very young age, Warren displayed an unusual fascination with numbers and an intense interest in making money.
As a child, Buffett found comfort and joy in statistics and mathematics. He memorized baseball statistics and loved working with numbers. This early affinity for figures would serve him well in his future investing career. Buffett also showed entrepreneurial instincts from a young age. At just six years old, he began buying six-packs of Coca-Cola from his grandfather's grocery store for 25 cents and reselling the individual bottles to his neighbors for 5 cents each, pocketing a 5-cent profit on each six-pack.
Buffett's childhood was not always easy. His mother Leila had a volatile temper and would often berate and verbally abuse Warren and his siblings. To escape the tense atmosphere at home, young Warren would immerse himself in books about business and investing. At age seven, he checked out a book from the library called "One Thousand Ways to Make $1000." The book had a profound impact on Buffett, inspiring him to start thinking seriously about how to make money.
As a teenager, Buffett pursued various money-making ventures with remarkable focus and determination. He delivered newspapers, sold golf balls and stamps, detailed cars, and set up pinball machines in local businesses. By age 16, he had saved up $5,000 from his various enterprises - equivalent to about $60,000 in today's dollars.
Buffett's first real stock investment came at age 11, when he bought three shares of Cities Service Preferred for himself and three for his sister Doris. Though the stock initially dropped, causing him some anxiety, it eventually rebounded and he sold at a small profit. This early experience taught Buffett an important lesson about the need for patience in investing.
After high school, Buffett briefly attended the Wharton School at the University of Pennsylvania before transferring to the University of Nebraska. He was eager to start his business career and managed to complete his bachelor's degree in just three years. After being rejected from Harvard Business School, Buffett ended up at Columbia University, where he studied under renowned value investor Benjamin Graham. Graham's teachings on finding undervalued companies would have a profound influence on Buffett's investing philosophy.
Early Career and Investment Partnerships
After graduating from Columbia in 1951, Buffett returned to Omaha and worked as a stockbroker at his father's firm. He also began teaching investing classes at the University of Omaha. In 1952, he married Susan Thompson and they soon had their first child, Susan Alice.
Buffett was eager to put Graham's value investing principles into practice. In 1954, Graham offered Buffett a job at his firm, Graham-Newman Corporation. Buffett jumped at the opportunity to work for his mentor and moved his young family to New York. At Graham-Newman, Buffett honed his skills in finding undervalued companies to invest in. However, he soon began to chafe under the constraints of working for someone else.
In 1956, Graham decided to close his partnership. Buffett, then just 25 years old, returned to Omaha and started his own investment partnership with $105,100 from seven limited partners, most of them family and friends. Buffett's partnership was structured so that he would take 25% of any gains beyond a 6% annual return, while assuming 25% of any losses. This aligned his interests closely with those of his partners.
Buffett's partnership proved tremendously successful from the start. He had an uncanny ability to find undervalued companies and his investments consistently outperformed the market. Word of his success began to spread and more investors clamored to join his partnership. By 1962, Buffett was managing over $7 million for a growing number of limited partners.
A key part of Buffett's strategy in these early years was to take controlling stakes in undervalued companies and then work to improve their operations and unlock value. One of his most notable early investments was in Berkshire Hathaway, a struggling textile manufacturer. Buffett began buying shares in 1962 and eventually took control of the company in 1965. Though the textile business continued to struggle, Buffett used Berkshire as a holding company to acquire other businesses and make investments. This laid the foundation for Berkshire Hathaway to eventually become Buffett's primary investment vehicle.
Throughout the 1960s, Buffett continued to rack up impressive returns for his partnership, often beating the market by 30% or more each year. His personal wealth grew rapidly and by 1969 his share of the partnership was worth $25 million. That same year, citing concerns about overvaluation in the stock market, Buffett decided to dissolve his partnership and distribute the assets to his investors. He retained his controlling stake in Berkshire Hathaway and would use it as his primary investment vehicle going forward.
Building Berkshire Hathaway
After dissolving his investment partnership in 1969, Buffett focused his efforts on building Berkshire Hathaway into a diversified holding company. Though the textile business continued to struggle, Buffett used the company's cash flow to acquire other businesses and make investments in publicly traded companies.
One of Buffett's most successful early investments through Berkshire was in insurance companies. In 1967, Berkshire acquired National Indemnity Company and National Fire & Marine Insurance Company for $8.6 million. Buffett recognized that insurance companies could generate large amounts of "float" - money that is collected in premiums but not paid out immediately in claims. This float could be invested for profit while awaiting potential payouts. Insurance would become a key part of Berkshire's business model and a major source of capital for investments.
In the 1970s, Buffett began acquiring significant stakes in media companies, including the Washington Post Company and ABC. He was drawn to newspapers and television stations because of their strong, predictable cash flows and virtual monopolies in local markets. Buffett developed a close friendship with Washington Post publisher Katharine Graham and served on the company's board for over 20 years.
Buffett also made major investments in consumer products companies with strong brand names and loyal customer bases. In 1972, Berkshire acquired See's Candies for $25 million. Though the price seemed high at the time, See's has generated over $1.9 billion in pre-tax earnings for Berkshire since its acquisition. Other notable consumer products investments included Coca-Cola, Gillette, and Dairy Queen.
As Berkshire grew, Buffett developed a reputation as a skilled capital allocator. He had an uncanny ability to identify undervalued companies and allocate Berkshire's growing cash reserves to their highest and best use. Buffett focused on acquiring businesses with strong competitive advantages, or "economic moats," that could generate consistent profits over long periods of time.
Buffett's investing style evolved somewhat from his early "cigar butt" approach of buying very cheap, mediocre businesses. Influenced by his partner Charlie Munger, Buffett began focusing more on acquiring outstanding businesses at fair prices, rather than fair businesses at wonderful prices. This shift allowed Berkshire to scale up its investments as its capital base grew.
By the 1980s, Berkshire Hathaway had grown into a massive conglomerate with interests spanning insurance, media, consumer products, and more. Buffett's annual letters to Berkshire shareholders became eagerly anticipated for their business wisdom and folksy humor. Berkshire's annual meetings in Omaha grew from small gatherings into major events attended by tens of thousands of shareholders.
Throughout this period of growth, Buffett maintained a relentless focus on increasing Berkshire's per-share intrinsic value over time. He shunned stock splits and refused to pay dividends, preferring to reinvest all of Berkshire's earnings. This approach of compounding returns over long periods led to astronomical growth in Berkshire's value. A share of Berkshire Hathaway stock that sold for $19 in 1965 was worth over $32,000 by 1995.
Challenges and Controversies
Despite his tremendous success, Buffett faced his share of challenges and controversies over the years. In the late 1980s and early 1990s, Berkshire's performance lagged the overall market for an extended period, leading some to question whether Buffett had lost his touch. Buffett maintained his disciplined approach and eventually performance rebounded strongly.
One of Buffett's most difficult periods came in 1991 when Salomon Brothers, a Wall Street investment bank in which Berkshire held a large stake, became embroiled in a major bond trading scandal. The scandal threatened to bring down the entire firm and posed significant risk to Berkshire's investment. Buffett stepped in as interim chairman to guide Salomon through the crisis, spending much of his time in New York dealing with regulators and restructuring the firm's management. Though the experience was extremely stressful for Buffett, he ultimately managed to save Salomon from collapse.
Buffett also faced criticism at times for his hands-off management style and reluctance to intervene in the operations of Berkshire's subsidiary companies. Some argued that this led to missed opportunities to improve performance at struggling businesses. Buffett maintained that it was better to acquire excellent businesses with strong management and then largely leave them alone to operate.
In the late 1990s, Buffett was criticized for avoiding technology stocks during the dot-com boom. As tech stocks soared, Berkshire's performance lagged and Buffett was labeled as out of touch. However, Buffett's caution was vindicated when the tech bubble burst in 2000-2001 and Berkshire avoided the massive losses suffered by many investors.
Buffett has also faced scrutiny over his personal life and relationships. His unconventional marriage arrangement, in which he and his first wife Susan lived apart for many years while he had a relationship with another woman, Astrid Menks, raised eyebrows. After Susan's death in 2004, Buffett married Menks in 2006. Some have also criticized Buffett for not being more generous with his vast wealth during his lifetime, though he has pledged to give away 99% of his fortune to philanthropic causes.
Investment Philosophy and Approach
Throughout his career, Buffett developed and refined a distinctive investment philosophy and approach. Some key elements include:
Value investing: Buffett is a devoted practitioner of value investing, seeking to buy assets for less than their intrinsic value. He looks for a "margin of safety" between a company's market price and its true value.
Circle of competence: Buffett only invests in businesses he understands well. He avoids trendy or complex businesses outside his "circle of competence."
Long-term perspective: Buffett's favorite holding period is "forever." He looks to buy great businesses and hold them for very long periods, allowing returns to compound.
Focus on quality: Buffett seeks to buy wonderful businesses at fair prices rather than fair businesses at wonderful prices. He looks for companies with strong competitive advantages or "moats."
Margin of safety: Buffett always seeks a margin of safety in his investments to protect against errors in judgment or unforeseen circumstances.
Rational, independent thinking: Buffett tunes out market noise and makes decisions based on his own analysis. He aims to be "fearful when others are greedy and greedy when others are fearful."
Owner mentality: Buffett approaches stock investments as if he were buying the entire business. He thinks like a business owner rather than a stock trader.
Focus on free cash flow: Buffett pays close attention to the free cash flow generated by businesses rather than focusing solely on reported earnings.
Avoid debt: Buffett is very averse to debt and prefers to finance investments with internal cash flow rather than borrowed money.
Align incentives: Buffett seeks to align the interests of managers with shareholders through appropriate incentives and compensation structures.
These core principles have guided Buffett's investing for decades and been key to his remarkable long-term success. While he has adapted his approach over time, the fundamental tenets have remained largely consistent.
Later Career and Legacy
As Buffett entered his later years, he showed little sign of slowing down. Berkshire Hathaway continued to grow and make major acquisitions, including the purchase of railroad operator Burlington Northern Santa Fe for $26 billion in 2010. Buffett also made high-profile investments in companies like Goldman Sachs and Bank of America during the 2008-2009 financial crisis, providing capital and confidence when both were in short supply.
Buffett's personal wealth continued to grow astronomically. By 2008, he had surpassed Bill Gates as the wealthiest person in the world according to Forbes magazine. Though he has since been surpassed by others, Buffett remains one of the richest people on the planet with a net worth of over $100 billion as of 2023.
In 2010, Buffett and Bill Gates launched The Giving Pledge, encouraging billionaires to commit to giving away the majority of their wealth to philanthropic causes. Buffett pledged to give away 99% of his wealth during his lifetime or at death. He has already donated billions of dollars, primarily to the Bill & Melinda Gates Foundation.
As he has aged, Buffett has begun to plan for Berkshire's future without him at the helm. In 2018, he appointed Greg Abel and Ajit Jain as vice chairmen and potential successors. Buffett has expressed confidence that Berkshire's culture and business model will endure long after he is gone.
Buffett's legacy extends far beyond his personal wealth or the success of Berkshire Hathaway. He is revered as one of the greatest investors in history and his wisdom on business and life is sought by people around the world. His annual shareholder letters and meetings have educated generations of investors on sound business principles. Buffett's emphasis on ethical behavior and corporate responsibility has also influenced many business leaders.
Perhaps most importantly, Buffett has served as a voice of reason and stability in the often chaotic world of finance. His steady, long-term approach and ability to remain calm during market panics have provided reassurance to many investors over the decades. Buffett's remarkable success while adhering to simple, common-sense principles serves as an inspiration and model for investors everywhere.
Key Relationships
Throughout his life and career, several key relationships played important roles in shaping Warren Buffett's path:
Benjamin Graham - Buffett's professor at Columbia and early mentor who instilled the principles of value investing that would guide Buffett's approach.
Charlie Munger - Buffett's long-time friend and business partner who has served as vice chairman of Berkshire Hathaway since 1978. Munger helped evolve Buffett's investing approach to focus more on high-quality businesses.
Susan Buffett - Warren's first wife and the mother of his three children. Though they lived apart for many years, Susan remained an important influence in Buffett's life until her death in 2004.
Astrid Menks - Buffett's companion for many years while still married to Susan, and his second wife after Susan's death. Astrid has provided stability and support in Buffett's personal life.
Bill Gates - A close friend of Buffett's since 1991. Their friendship led to Buffett donating much of his fortune to the Gates Foundation and partnering on philanthropic efforts.
Katharine Graham - The publisher of the Washington Post and a close friend and confidante of Buffett's for over 25 years. Graham sought Buffett's business advice and he served on the Post's board of directors.
These relationships reveal the human side of Buffett and how personal connections influenced his business and life decisions over the years.
Lessons and Insights
Warren Buffett's life and career offer numerous valuable lessons for investors and business leaders:
Develop your circle of competence: Focus on areas you truly understand and can analyze effectively. Don't feel pressured to invest in things outside your expertise.
Think long-term: Short-term market movements are often noise. Real wealth is built through buying great businesses and holding them for long periods.
Be rational and independent: Make decisions based on facts and your own analysis, not emotion or the opinions of others. Be willing to go against the crowd.
Focus on intrinsic value: Look beyond stock prices to understand the true value of businesses based on their economic characteristics and future cash flows.
Seek a margin of safety: Always leave room for error in your analysis and valuation. Buy at a big enough discount to intrinsic value to limit downside risk.
Align incentives: Ensure management's interests are aligned with shareholders through ownership stakes and proper compensation structures.
Be ethical and transparent: Maintain the highest ethical standards in your business dealings. Be open and honest with partners and shareholders.
Live below your means: Buffett's frugal lifestyle despite his vast wealth highlights the importance of not overspending, regardless of income level.
Continually learn and improve: Buffett is a voracious reader who has never stopped trying to expand his knowledge and refine his approach.
Give back: Buffett's pledge to give away the majority of his wealth sets an example of using success to benefit society.
These timeless lessons from Buffett's experiences can benefit investors and business leaders at any stage of their careers.
Final Thoughts
"The Snowball" provides a comprehensive look at the life and career of one of the most successful investors in history. Through Warren Buffett's story, readers gain insights into the principles and practices that led to his remarkable achievements in business and investing.
Buffett's patient, long-term approach to building wealth - symbolized by the snowball steadily growing as it rolls downhill - stands in stark contrast to the short-term thinking that often dominates financial markets. His emphasis on understanding business fundamentals, seeking value, and maintaining high ethical standards offers an inspiring model for investors to follow.
At the same time, the book reveals Buffett's human side, including his struggles in personal relationships and periods of self-doubt. This reminds us that even the most successful individuals face challenges and must work to balance different aspects of their lives.
Ultimately, Warren Buffett's legacy extends far beyond his personal fortune. His wisdom and example have educated and influenced generations of investors and business leaders. As the "Oracle of Omaha" enters the twilight of his career, his life story as told in "The Snowball" ensures that the lessons of his remarkable journey will continue to resonate for years to come.
Buffett's tale is one of patience, discipline, continuous learning, and unwavering ethical standards. It demonstrates how adhering to sound principles over long periods can lead to extraordinary results. For anyone interested in business, investing, or how to build lasting success and wealth, "The Snowball" offers a wealth of insights and inspiration drawn from one of the great business minds of our time.