The Snowball is the only ‘official’ Warren Buffett biography that was written with Buffett’s cooperation. Reading this book is an extreme form of dumpster-diving. You will find a few diamonds to hold on to for life, but that will need wading through endless piles of sh*t, often frustrating and sometimes gorily depressing. At 900+ pages, this book spends the bulk of time on useless details like the color of furniture Warren’s wife decorated the home with, or who their babysitter married.
The important chapters worth reading for anyone interested in what made Warren the investor he turned out to be are –
- Chapter 16 – ‘Strike One’ – Describes his first months at Columbia as a graduate student learning investing.
- Chapter 17 – ‘Mt.Everest’ – Times spent with his mentor Benjamin Graham, in class and then at this dream job working for Graham-Newmann.
- Chapter 21 – ‘The Side to Play’ – The first major deal that Buffett analyzed, and got to conclusions different from what his boss had assigned him to (and turned out to be right, making himself $116k in 2016 dollars, or $13k in 1955 on a $3-$5k investment).
Possible ways to benefit from this book:
- Skip the book, scan all reviews for the takeaways first.
- Listen to it over long road-trips, don’t give it actual reading time.
- Read chapters 1-32 (1/3rd of the book), they cover the time until Buffett was ~37 and had made the 2016 equivalent of $50-$100 million. Any further chapters would only make instructive sense for someone operating at that level (>$50 million in net worth, managing national businesses and staying in the mainstream political/media eye). Investing insights from that period onwards are better gained by reading his shareholder letters.
- Life is like a snowball – the important thing is finding really wet snow and a really long hill.” (Life is about the power of compounding – the important thing is to find a good base that compounds well and a runway to compound on. Businesses are compounding machines).
- “Humility disarms”.
- “Anytime a bunch of big-shots get together, you can get people to come to, because it reassures them that if they are at an elephant-bumping, they must be an elephant too.”
- Industries that are poised for growth and will impact the world significantly, are not necessarily good for investors. The auto industry has had the most positive impact on America, and the opposite on investors. (Further explanation: 1999 Sun Valley speech).
- Sometimes you don’t know the winners, but it’s much easier to predict the losers. The returns from the American auto industry (poor) couldn’t be predicted, but shorting horses was an obvious thing to do.
- “Praise by name, criticize by category”. Buffett can make remarks that insult an entire audience without actually bringing up any single person.
- You can get in way more trouble with a good idea than a bad idea, because you don’t know what its limits are.
- Shoe-button Complex v/s Circle of Competence: Some who had cornered the market, and had all of it, in the business of making shoe-buttons, would pontificate on every subject, considering himself an expert. By contrast, Buffett strictly stayed within the 3 subjects in which he would be recognized as an absolute expert – money, business and his own life. (Link: Circle of Competence Theory)
- Pondering the reasons for failure as a way to deduce the rules for success. “Invert, always invert” is what Charlie Munger says. “Tell me where I am going to die, so I won’t go there.”
- Inner Scorecard v/s Outer Scorecard: If the world couldn’t see your results, 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 the world’s worst investor when you were actually the best?
- Emotional grounding and unconditional love an essential for success: Warren grew up scarred with an abusive mother who would get into fits of rage and not stop until she had reduced her eldest two kids to tears.
- “It was always something we did or said. All your past sins would be brought up.” The resulting trauma lasted a lifetime, correcting itself only when he unconditional love after marriage in his wife Susan.
- “Susie recognized Warren’s vulnerability, how much he needed to be soothed and comforted and reassured. More and more, she could see the effect his mother had had on her children. In every life of life except business, Warren felt riddled with self-doubt. He had never felt loved, and she saw that he did not feel lovable.”
- Having a mathematically-oriented, detective-like, and compounding-loving brain as early as age 5: Warren’s hobbies as a kid included activities that involving collecting things or information, computing odds for an event like racing marbles and timing them again and again. “There were opportunities to compute odds everywhere. The key was to collect information – as much as you could find.”
- “Keep your relationships separate and compartmentalized.
- Get creative: As a pre-teen and teenage kid, Warren had a number of jobs and then small businesses, that formed the first snowflakes in a snowball of money to come. This included newspaper delivery (had the insight of checking customer’s old magazines, so he could find out when they were due for renewal and sell them renewal subscriptions), scraping race tickets off the racing floor to find winning tickets that people had impatiently/mistakenly discarded, installing cheap pinball machines in barber shops for people to play with, and taking a cut of that revenue.
- Understanding compounding – Warren predicted that he would be a millionaire by age 35, when he was 10 years old. A million then is ~8-9 million in 2016 dollars.
- First insights on stocks: Don’t overly fixate on what you paid for a stock, once you buy it. Don’t rush unthinkingly to grab a small profit.
- Know the deal in advance. There should no surprises, once you’ve gotten into something.
- Personality and behavior learnings from Dale Carnegie’s course:
- Everyone wants attention and admiration. No one wants to be criticized.
- The sweetest sound in the English language is the sound of a person’s own name.
- The only way to get the best of an argument is to avoid it.
- If you are wrong, admit it quickly and empathetically.
- Ask questions instead of giving direct orders.
- Give the other person a fine reputation to live upto.
- Call attention to other people’s mistakes indirectly. Let the other person save face.
- Intensity is the price of excellence, patience in learning and good backtesting are helpful: Warren learnt horse handicapping as a high-schooler, not very different from the stock-market. He asked his father to get all the books on horse-handicapping he could get (hundreds) and devoured them all. Then he collected old, obscure race-track sheets and studied them to backtest his own predictions and analysis.
- A prodigious memory is an unfair gift. Strive to cultivate it.
- Figure out your own path, that includes an unconventional way to budget your time: After transferring from Wharton to Nebraska, Buffett spent his spare time (as a <20 year old) calling on local newspaper editors to talk business, politics and journalism. “I was the only person who showed up at Moody’s and S&P’s, asking them for old manuals or specific companies. If I needed docs from the SEC, I would go there.”
- Graham’s notable concepts – Class 1 truths and Class 2 truths, Company A and Company B: Class 1 truths are absolute truths. Class 2 truths become truth by conviction. Graham taught people things by asking questions in pairs. One of his favorites was “Company A / Company B” narratives where he would describe very different scenarios with individual questions, but they would be turn out to be the same company at different points in time.
- The art of security analysis is in playing detective. Probe for what the assets are really worth, excavate hidden assets and liabilities, strip apart the fine print.
- 3 main principles that Warren took away from Graham’s class:
- A stock is the right to own a little piece of a business. Evaluate as if you were buying the whole business.
- Use a margin of safety. A wide margin of safety ensures that good decisions are not wiped out by errors.
- Mr. Market is your servant, not your master. His moods should not influence your view of price.
- 3 principles that Buffett developed from observing his father’s career as senator:
- Allies are essential. (no burned bridges)
- Commitments are so sacred by nature that they should be rare. (no broken promises)
- Grandstanding rarely gets anything done.
- Graham’s investing style (hard to apply today, and not sure why this is a cited as a positive for Buffett, while it would be a negative in the PE world) – Go for cigar-butts. These are cheap and unloved stocks, like a used cigarette you might find on a sidewalk. You coax them alight and suck out one last free puff.
- Soft skills: Over the years, the conflict weary Buffett honed to a fine edge, the skill of getting his way without asking for it out loud. (The book does not elaborate on how, but it does provide context as to where he was starting from).
- Bathtub memory: A bathtub memory (flush out the bad, traumatizing parts to focus on what is truly important) helps you look forward. Buffett used this extensively, especially with his wife, quickly forgetting everything unacceptable to him she had done (in their mid-life and later) and upholding his image of her as the ideal wife who put him together.
- Some businesses are intrinsically bad: As Charlie Munger put it, getting into their first clothing retail was like the story of a man buying a yacht. “The two happy days are the day he buys it and the day he sells it.”
- Making capital homeostatic: Buffett’s key invention was grafting regular business to those generating lots of float. Float is when you have capital available before you need to spend it – insurance premiums are paid first, the claims only come infrequently much later. He bought National Indemnity, an insurance and grafted it to Berkshire Hathaway, then a struggling textile firm. Later, he bought Blue Chip stamps (with Munger). GEICO, his first big pick, also generated a lot of float. In this case, the insurance businesses had extra capital lying around that could be deployed gainfully in other businesses. If the insurance businesses needed to process claims, those could be withdrawn from the cash-flows of the regular businesses.
- Windows of opportunity are small, plan ahead and seize them when they are briefly open: National Indemnity, which Buffett bought and converted to the now successful Berkshire, was a successful insurance business that shouldn’t have been sold by the owner in the first place. Someone tipped off Buffett that Jack Ringwalt, the owner of National Indemnity, grew upset enough for ~15 minutes each year to want to sell it. Buffett asked to be alerted when this happened next and made the deal work out in that window.
Trivia: At age 26, Warren’s net-worth the 2016 equivalent of $1.53 million. He was managing nearly 4 million in partnerships.