Review: The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder

The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder. New York: Bantam, 2008. 976 pp. $35 (cloth).

Nine-year-old Warren Buffett is in his yard playing in the snow.

Warren is catching snowflakes. One at a time at first. Then he is scooping them up by handfuls. He starts to pack them into a ball. As the snowball grows bigger, he places it on the ground. Slowly it begins to roll. He gives it a push, and it picks up more snow. Soon he reaches the edge of the yard. After a moment of hesitation, he heads off, rolling the snowball through the neighborhood. And from there, Warren continues onward, casting his eye on a whole world full of snow (prologue).

snowball-buffett

Many decades later, Alice Schroeder, a former insurance analyst at Morgan Stanley and the author of The Snowball, is sitting in front of Warren Buffett, one of the world’s richest men. “Where did it come from,” she asks, “Caring so much about making money?” Buffett leans forward, “more like a teenager bragging about his first romance than a seventy-two-year-old financier,” and begins to tell his story: “Balzac said that behind every great fortune lies a crime. That’s not true at Berkshire [Hathaway]” (p. 4). Thus begins The Snowball, one of the most highly anticipated biographies of the past few years and the first to be written about Buffett with his full cooperation.

As its full title indicates, The Snowball: Warren Buffett and the Business of Life sets out to present Buffett’s thinking, not only about business but about life in general. Among the many topics this hefty volume explores are those individuals who influenced his thinking. A major figure in this respect is Buffett’s father, whom he idolizes and from whom he learned a crucial point when it comes to judging both oneself and others:

The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.

I always pose it this way, I say: “Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?” . . . Now my dad: He was a hundred percent Inner Scorecard guy. He was really a maverick. But he wasn’t a maverick for the sake of being a maverick. He just didn’t care what other people thought” (p. 33).

In addition to the valuable lessons he learned from important figures in his life, Schroeder shows how Buffett’s own interests and thinking during childhood contributed to his development. Schroeder reveals him to have been an efficacious child, intensely interested in collecting and processing facts.

Warren thought about numbers all the time and everywhere, even in church. He liked the sermons, he was bored by the rest of the service; he passed the time by calculating the life span of hymn composers from their birth and death dates in the hymnals.

In his mind, the religious should reap some reward for their faith. He assumed that hymn composers would live longer than average. Living longer than average seemed to him an important goal. But piety, he found, did nothing to improve longevity. Lacking any personal sense of grace, he began to feel skeptical about religion. . . . [T]he information he had collected about the hymn composers had taught him something else, however, something valuable. He was learning to calculate odds. Warren looked around him. There were opportunities to calculate odds everywhere. The key was to collect information, as much information as you could find (p. 52).

The Snowball details Warren Buffett’s progression from a tiny fact collector to a teenage rebel to a brilliant moneymaker. Along the way, it offers two main values to patient readers. It shows how Buffett accumulated a portfolio of great companies and one of the world’s largest fortunes—starting from the money he earned on his paper routes. And it shows how he accumulated a set of truly great friends—starting from his beginnings as a somewhat awkward and antisocial child.

Toward revealing how Buffett accumulated his vast wealth, Schroeder shows how Buffett found a verifiably effective system for identifying potentially lucrative investments. After reading Benjamin Graham’s The Intelligent Investor and being greatly impressed by the author, Buffett went to Columbia University to study under him. Schroeder explains the “three main principles that required nothing more than the stern discipline of mental independence,” which Buffett learned in Graham’s class, as follows:

A stock is the right to own a little piece of business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.

Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.

Mr. Market is your servant, not your master. Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high (p. 147).

The Snowball explains how Buffett came to agree with these basic principles and how he applied them later as an investor.

I went through the Moody’s Manuals page by page,” says Buffett, explaining his early approach to business. “Ten thousand pages in the Moody’s Industrial, Transportation, Banks and Finance Manuals—twice. I actually looked at every business—although I didn’t look very hard at some” (p. 166).

It was hard work, but after poring through volumes of businesses and meeting with the management teams, he would find one or two stocks that were ridiculously cheap, he would invest in them, and he would be rewarded—oftentimes handsomely. And then he would do the same thing all over again, each time making “the snowball” a little bit bigger.

Schroeder shows that Buffett’s modus operandi in investing is to focus on a few areas of the marketplace and get to know them very well. Indeed, this approach is a key aspect of Buffett’s advice to those seeking to become wealthy.

“[You’ll] get very rich,” says Buffett, “if you [think] of yourself as having a card with only twenty punches in a lifetime, and every financial decision [uses] up one punch. [You’ll] resist the temptation to dabble. [You’ll] make more good decisions and [you’ll] make more big decisions” (p. 709).

As readers of The Snowball will see, Buffett has applied his “twenty punches” approach to every aspect of his life, from investing, to hobbies, to friends.

With respect to the latter, Schroeder shows Buffett first recognizing that “his efforts to get along with people had had mixed results” (p. 98) and then acknowledging that “he needed a system to sell himself to people, a system he could learn once and use without having to respond in a new way to each changing situation” (p. 99).

One book, How to Win Friends and Influence People by Dale Carnegie, seemed to provide such a system. But Buffett is not one to accept any system of ideas on faith. He wanted to see for himself whether the system was valid. And for Buffett, notes Schroeder, “It took numbers to prove that it actually worked.”

[H]e decided to do a statistical analysis of what happened if he did follow Dale Carnegie’s rules, and what happened if he didn’t. He tried giving attention and appreciation, and he tried doing nothing or being disagreeable. People around him did not know he was performing experiments on them in the silence of his own head, but he watched how they responded. He kept track of his results. [And] filled with a rising joy, he saw what the numbers proved: The rules worked (p. 99).

Although Carnegie’s approach to winning friends and influencing people is highly dubious, the relevant point here is that Buffett always looks for practical results. Throughout the book, readers will see Buffett learning not just how to gain friends but how to pick friends who contribute to his knowledge and enjoyment of life. In his words, “it pays to hang around people better than you are, because you will float upward a little bit,” and “if you hang around with people that behave worse than you, pretty soon you’ll start sliding down the pole” (p. 158). Readers will see the type of people Buffett has picked as friends—which, as a rule, are people who “can’t wait until it gets daylight so [they] can get back to work” (p. 496), who see the world through their own eyes, and who respect his right to control his own time.

Although it presents much valuable information, The Snowball, unfortunately, does not heed Buffett’s advice to stay focused on essentials. In fact, this biography distinguishes itself from others by its repeated focus on the nonessential, particularly side stories of a tabloid nature. Schroeder spends a disproportionate amount of time on happenings in the lives of those around Buffett—from the sexual life of one of his teachers, to a scandal that occurred at a company on whose board Buffett’s son briefly sat, to the adventures of his wife after the two separated, to the nitty-gritty details of her fight against oral cancer. Some readers may enjoy such offshoots, but this lack of focus snowballs out of control by the end, creating a book of nearly one thousand pages that actually says less about the famous investor than other biographies have in far fewer pages.

But Schroeder’s worst failure is in explaining the wealth Buffett amassed as the result of someone with a driving passion from childhood to be “the richest man on earth” (p. 827). Schroeder’s rank speculation is completely at odds with Buffett’s actions and words as documented elsewhere—including in her own book. We are asked to believe that a focus on one’s position relative to others, typical of the Outer Scorecard types whom Buffett describes, drove him to take the actions that created his billions—from “stuffing the backseat of his car with Moody’s Manuals and ledgers on his honeymoon” (p. 828) to giving him “the dignity to face years of almost intolerable criticism without counterattacking during the Internet bubble” that he was one of the few to identify (p. 829). With regard to the Internet bubble, Schroeder fails to note here the actions Buffett took to safeguard Berkshire’s capital from the risks he saw in outrageously overvalued companies: Contrary to many investors of the time, Buffett was focused on the value of those stocks and their sale prices—not on whether his neighbor was getting richer than he was.

Although The Snowball is significantly flawed, it does offer a largely edifying view into the life and mind of one of the wealthiest and most remarkable men in the world today. But because of its many digressions and Schroeder’s unwarranted assertions as to Buffett’s motivation, I recommend that those eager to learn about Buffett’s business and life read another biography before (or instead of) The Snowball.

Although a bit dated, Roger Lowenstein’s Buffett: Making of an American Capitalist (1995) offers much of the same value as The Snowball but without any of the major detractions. Importantly, Lowenstein accurately identifies the motivation behind Buffett’s accumulation of billions. For instance, he writes about a time when Buffett was in the eighth grade and he was asked why he cared so much about making money: “It’s not that I want money,” Buffett replied. “It’s the fun of making money and watching it grow.”* The joy of doing one’s work, rather than a desire to be richer than others, is what Buffett and much of The Snowball show to be the driving force behind everything Buffett has done.