GATES ON BUFFETT TRAVELING IN CHINA, MATCHING WITS IN MATH, AMERICA'S TWO RICHEST GUYS ARE BUDDIES. BILL GATES WRITES ABOUT A WARREN BUFFETT BIOGRAPHY AND DESCRIBES THEIR FRIENDSHIP.
(FORTUNE Magazine) – ONE multibillionaire reviewing a book about another? That alone is reason to check out Bill Gates' take on Buffett: The Making of an American Capitalist, by Roger Lowenstein. There's another reason, as anyone versed in billionaire social habits must know: Bill Gates and Warren Buffett are pals.
The friendship between America's most successful investor and its wealthiest entrepreneur did not stem from some kind of magnetic attraction of moguls. They met the way ordinary folks do, through a friend: Meg Greenfield, editorial page editor of the Washington Post, in whose parent company Buffett's Berkshire Hathaway holds a major stake. Greenfield, who grew up near Seattle, was a longtime friend of Gates' mother, Mary. In 1991, she invited parents and son to a Fourth of July bash at her house near Seattle; unable to go, Mary Gates invited Greenfield and her houseguests, among them Buffett, to the Gates country house on July 5.
"We all stuffed ourselves into my ancient Subaru and drove out to spend the day," says Greenfield. Gates and his girlfriend (now wife), Melinda, arrived in somewhat flashier style: by helicopter. Of him and Buffett, Greenfield says, "I was not unaware that this was an interesting pairing. Bill and Warren began a very intense conversation, and it went on from there." They have since traded visits and vacationed together, sharing experiences both mundane (Gates traveling to a University of Nebraska football game) and exotic (Gates taking the Buffetts to China last fall).
Asked whether he planned to respond with a review of Bill's recent book, The Road Ahead, Buffett sidestepped: "Before we tackle that question, let's establish a fact: There is no such thing as a 'mundane' Nebraska football game."
ROGER Lowenstein begins his biography of Warren Buffett with a disclaimer. He reveals that he is a longtime investor in Berkshire Hathaway, the company that under Buffett's guidance has seen its share price rise in 33 years from $7.60 to approximately $30,000.
In reviewing Lowenstein's book, I must begin with a disclaimer too. I can't be neutral or dispassionate about Warren Buffett, because we're close friends. We recently vacationed together in China with our wives. I think his jokes are all funny. I think his dietary practices--lots of burgers and Cokes--are excellent. In short, I'm a fan.
It's easy to be a fan of Warren's, and doubtless many readers of Buffett: The Making of an American Capitalist (Random House, 1995) will join the growing ranks. Lowenstein's book is a straightforward account of Buffett's remarkable life. It doesn't fully convey what a fun, humble, charming guy Warren is, but his uniqueness comes across. No one is likely to come away from it saying, "Oh, I'm like that guy."
The broad outlines of Warren's career are well known, and the book offers enjoyable detail. Lowenstein traces Warren's life from his birth in Omaha in 1930 to his first stock purchase at age 11, and from his study of the securities profession under Columbia University's legendary Benjamin Graham to his founding of the Buffett Partnership at age 25. The author describes Buffett's secretiveness about the stocks he picked for the partnership, and his contrasting openness about his guiding principle, which is to buy stocks at bargain basement prices and hold them patiently. As Warren once explained in a letter to his partners, "This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."
Lowenstein describes how Warren took control of Berkshire Hathaway and cash-cowed its dying textile business in order to purchase stock in other companies. The book traces how Berkshire evolved into a holding company and how its investment philosophy evolved as Warren learned to look beyond financial data and recognize the economic potential of unique franchises like dominant newspapers. Today Berkshire owns companies such as See's Candies, the Buffalo News, and World Book, as well as major positions in companies such as American Express, Capital Cities/ABC (about to be Disney), Coca-Cola, Gannett, Gillette, and the Washington Post Co.
Readers are likely to come away from the book feeling better educated about investing and business, but whether those lessons will translate into great investment results is less than certain. Warren's gift is being able to think ahead of the crowd, and it requires more than taking his aphorisms to heart to accomplish that--although Warren is full of aphorisms well worth taking to heart.
For example, Warren likes to say that there are no called strikes in investing. Strikes occur only when you swing and miss. When you're at bat, you shouldn't concern yourself with every pitch, nor should you regret good pitches that you don't swing at. In other words, you don't have to have an opinion about every stock or other investment opportunity, nor should you feel bad if a stock you didn't pick goes up dramatically. Warren says that in your lifetime you should swing at only a couple dozen pitches, and he advises doing careful homework so that the few swings you do take are hits.
His penchant for long-term investments is reflected in another aphorism: "You should invest in a business that even a fool can run, because someday a fool will." He doesn't believe in businesses that rely for their success on every employee being excellent. Nor does he believe that great people help all that much when the fundamentals of a business are bad. He says that when good management is brought into a fundamentally bad business, it's the reputation of the business that remains intact.
Warren installs strong managers in the companies Berkshire owns, and tends to leave them pretty much alone. His basic proposition to managers is that to the degree that a company spins off cash, which good businesses do, the managers can trust Warren to invest it wisely. He doesn't encourage managers to diversify. Managers are expected to concentrate on the businesses they know well so that Warren is free to concentrate on what he does well: invest.
My reaction upon meeting Warren took me by surprise. Whenever somebody says to me, "You've got to meet my friend so-and-so; he's the smartest guy ever," my defenses go up. Most people are quick to conclude that someone or something they encounter personally is exceptional. This is just human nature. Everybody wants to know someone or something superlative. As a result, people overestimate the merit of that to which they've been exposed. So the fact that people called Warren Buffett unique didn't impress me much.
In fact, I was extremely skeptical when my mother suggested I take a day away from work to meet him on July 5, 1991. What were he and I supposed to talk about, P/E ratios? I mean, spend all day with a guy who just picks stocks? Especially when there's lots of work to do? Are you kidding?
I said to my mom, "I'm working on July 5. We're really busy. I am sorry."
She said, "Kay Graham will be there."
Now, that caught my attention. I had never met Graham, but I was impressed with how well she had run the Washington Post Co. and by her newspaper's role in political history. As it happened, Kay and Warren had been great friends for years, and one of Warren's shrewdest investments was in Post stock. Kay, Warren, and a couple of prominent journalists happened to be in the Seattle area together, and owing to an unusual circumstance they all squeezed into a little car that morning for a long drive to my family's weekend home, which is a couple of hours outside the city. Some of the people in the car were as skeptical as I was. "We're going to spend the whole day at these people's house?" someone in the cramped car asked. "What are we going to do all day?"
My mom was really hard-core that I come. "I'll stay a couple of hours, and then I'm going back," I told her.
When I arrived, Warren and I began talking about how the newspaper business was being changed by the arrival of retailers who did less advertising. Then he started asking me about IBM: "If you were building IBM from scratch, how would it look different? What are the growth businesses for IBM? What has changed for them?"
He asked good questions and told educational stories. There's nothing I like so much as learning, and I had never met anyone who thought about business in such a clear way. On that first day, he introduced me to an intriguing analytic exercise that he does. He'll choose a year--say, 1970--and examine the ten highest market-capitalization companies from around then. Then he'll go forward to 1990 and look at how those companies fared. His enthusiasm for the exercise was contagious. I stayed the whole day, and before he drove off with his friends, I even agreed to fly out to Nebraska to watch a football game with him.
When you are with Warren, you can tell how much he loves his work. It comes across in many ways. When he explains stuff, it's never "Hey, I'm smart about this, and I'm going to impress you." It's more like "This is so interesting, and it's actually very simple. I'll just explain it to you, and you'll realize how dumb it was that it took me a long time to figure it out." And when he shares it with you, using his keen sense of humor to help make the point, it does seem simple.
Warren and I have the most fun when we're taking the same data that everybody else has and coming up with new ways of looking at them that are both novel and, in a sense, obvious. Each of us tries to do this all the time for our respective companies, but it's particularly enjoyable and stimulating to discuss these insights with each other.
We are quite candid and not at all adversarial. Our business interests don't overlap much, although his printed World Book Encyclopedia competes with my electronic Microsoft Encarta. Warren stays away from technology companies because he likes investments in which he can predict winners a decade in advance--an almost impossible feat when it comes to technology. Unfortunately for Warren, the world of technology knows no boundaries. Over time, most business assets will be affected by technology's broad reach--although Gillette, Coca-Cola, and See's should be safe.
ONE AREA in which we do joust now and then is mathematics. Once Warren presented me with four unusual dice, each with a unique combination of numbers (from 0 to 12) on its sides. He proposed that we each choose one of the dice, discard the third and fourth, and wager on who would roll the highest number most often. He graciously offered to let me choose first. Then he said, "Okay, because you get to pick first, what kind of odds will you give me?"
I knew something was up. "Let me look at those dice," I said.
After studying the numbers on their faces for a moment, I said, "This is a losing proposition. You choose first."
Once he chose a die, it took me a couple of minutes to figure out which of the three remaining dice to choose in response. Because of the careful selection of the numbers on each die, they were nontransitive. Each of the four dice could be beaten by one of the others: die A would tend to beat die B, die B would tend to beat die C, die C would tend to beat die D, and die D would tend to beat die A. This meant that there was no winning first choice of a die, only a winning second choice. It was counterintuitive, like a lot of things in the business world.
Warren is great with numbers, and I love math too. But being good with numbers doesn't necessarily correlate with being a good investor. Warren doesn't outperform other investors because he computes odds better. That's not it at all. Warren never makes an investment where the difference between doing it and not doing it relies on the second digit of computation. He doesn't invest--take a swing of the bat--unless the opportunity appears unbelievably good.
One habit of Warren's that I admire is that he keeps his schedule free of meetings. He's good at saying no to things. He knows what he likes to do--and what he does, he does unbelievably well. He likes to sit in his office and read and think. There are a few things he'll do beyond that, but not many. One point that Lowenstein makes that is absolutely true is that Warren is a creature of habit. He grew up in Omaha, and he wants to stay in Omaha. He has gotten to know a certain set of people, and he'd like to spend time with those people. He's not a person who seeks out exotic new things. Warren, who just turned 65, still lives in the Omaha house he bought for himself at age 27.
His affinity for routine extends to his investment practices too. Warren sticks to companies that he is comfortable with. He doesn't do much investing outside the U.S.
There are a few companies that he has decided are great long-term investments. And despite the self-evident mathematics that there must be a price that fully anticipates all the good work that those companies will do in the future, he just won't sell their stock no matter what the price is. I think his reluctance to sell is more philosophical than optimization-driven, but who am I to second-guess the world's most successful investor? Warren's reluctance to sell fits in with his other tendencies.
Warren and I share certain values. We both feel lucky that we were born into an era in which our skills have turned out to be so remunerative. Had we been born at a different time, our skills might not have had much value. Since we don't plan on spending much of what we have accumulated, we can make sure our wealth benefits society. In a sense, we're both working for charity. In any case, our heirs will get only a small portion of what we accumulate, because we both believe that passing on huge wealth to children isn't in their or society's interest. Warren likes to say that he wants to give his children enough money for them to do anything but not enough for them to do nothing. I thought about this before I met Warren, and hearing him articulate it crystallized my feelings.
Lowenstein is a good collector of facts, and Buffett: The Making of an American Capitalist is competently written. Warren has told me that the book is in most respects accurate. He says he is going to write his own book someday, but given how much he loves to work and how hard it is to write a book (based on my own personal experience), I think it will be a number of years before he does it. When it comes out, I'm sure it will be one of the most valuable business books ever.
Already, Warren's letters to shareholders in the Berkshire Hathaway annual reports are among the best of business literature. Much of Lowenstein's analysis comes from those letters, as it should. If, after reading Buffett, you're intrigued by the man and his methods, I strongly commend to you the annual reports--even ones from ten or 15 years ago. They are available in many libraries.
Other books have been written about Warren Buffett and his investment strategy, but until Warren writes his own book, this is the one to read.
Reporter Associate Joe McGowan