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Behind The Curtains of Buffett's Life with Alice Schroeder
"I will never forget a few people insisting to me that Warren is really not that interested in money."
I only went to Omaha once, in 2009. The economy was in shambles and I was about to graduate college. I was in love with a beautiful New Yorker, my future ex-wife, and equally seduced by the idea of becoming the next Warren Buffett. So I trekked to Nebraska carrying a copy of his brand new biography, Alice Schroeder’s The Snowball.
On the day of the annual meeting, Buffett spent hours signing copies, including mine.
Pretty remarkable given that his relationship with Schroeder didn’t survive the book’s publication.
Buffett unceremoniously canceled their annual dinner and stopped speaking to her. Schroeder later acknowledged that Buffett had “made himself extremely vulnerable” and her book “did not perfectly match the narrative of his own life.”
It was courageous of him. The end result is that the book makes him feel uncomfortable.
Schroeder estimated he’d spent “2,000 hours of concentrated time” with her. That was an unprecedented amount of access to his life, a look behind the curtains unlikely to be matched by any other outsider.
It was an exhausting time for her. Schroeder recounted feeling “unbelievably wrecked” after spending 4-5 days a week in Omaha due to the intensity of Buffett’s intellect. His friends and colleagues likewise told her they “needed time to recuperate after seeing him. Or that they could only take him in doses of two hours at a time.”
It’s so intense to have someone racing ahead of you mentally and you are trying to keep up. This is clearly one reason for his bond with Bill Gates. They don’t have to wait for each other to catch up.
For example, Schroeder noted that Buffett remembered conversations “better than you do” and subtly used this ability to test people:
I don’t know if you’ve ever been in that situation, where you realize the other person has asked you the same question some time ago. When Buffett does that, it’s often a test.
He will ask very probing and penetrating questions and then 2 months later he will ask again and you know he remembers the exact words you said. It can feel a little like getting deposed, and it’s a bit spooky to have a human tape recorder sitting in front of you. And of course, he’s reading you emotionally at the same time, and you know it.
Something to keep in mind the next time you hear Buffett downplay his intelligence.
Schroeder has kept a low profile since then. Some of her post-financial crisis comments on Buffett were rather pessimistic, like in 2012, when she focused on his lagging performance and struggles to steer the Berkshire behemoth through a ZIRP world.
To appreciate how well she understands Buffett, we have to revisit the interviews she gave at the time of publication. They are, unfortunately, evidence that not everything on the internet is forever. Many of these gems are accessible only in the web’s archives.
At times, Schroeder was remarkably frank. For example, consider her comments on Buffett’s ruthlessness. This is where his public image diverges from his actions (the idea behind the book From Predators to Icons) and it’s a tough pill to swallow for people who put him on a pedestal. Schroeder noted as much: people in his circle “belabored his honesty beyond the point that made sense,” she said. “They would belabor it to such a degree that you began to realize they held some specific concerns in this area.”
It became clearer that this had to do with the incidents in his life where he has been ruthless.
She hinted at various deals in which Buffett got the better end. “Surely people realize that he didn’t get where he is by running a philanthropic institution.”
But this is what happens when you elevate a highly effective investor and businessman to the status of an idol. It becomes impossible to reconcile reality with that fantasy. For example:
I’ve seen him “encourage” people to do what he wants by subtly raising the possibility of what he might leave them in his will. But without promising anything. This is torture for some people; they are always working for a commitment that never comes.
Yikes.
Another example is Buffett’s habit to enlist others to be the “bad cop” and protect his image. Schroder also believes that Berkshire’s extreme decentralization, ‘delegation to the point of abdication’, at least in part reflects Buffett’s risk aversion.
He has boundaries made of steel. If he can’t control something completely he doesn’t want to control it at all.
Giving Berkshire’s managers ‘sole responsibility’ is just another moat to protect him from any possible fallout should things go off the rails at any business unit.
I’ve seen Warren claim that he cannot overrule a decision … If there were ever a serious shareholder class action lawsuit, the lawyers would pull out the 10-K and claim that Warren should not be deposed because he is not really responsible for what happens at Berkshire.
That’s not to say that she had become jaded. Quite the contrary. Consider this anecdote about Buffett’s motivations:
One time I went out to dinner with him at Gorat's, and Marge Lauren, who is the widow of one of his earliest partners, came by and said hello. After she left the table, he said to me, "That woman is the reason I run Berkshire Hathaway the way I do, because her entire finances depend on me. Every dime she has is in Berkshire Hathaway stock."
He said, "I am trying to run Berkshire so that for a generation after I am gone, it will still be healthy and fundamentally a sound company. Beyond that, there's really not much I can do.
I can try to set it up so that the businesses that Berkshire buys and the way its capital is structured and the fundamental pieces of Berkshire have enough longevity to carry on. And there are no guarantees, but that is what I am trying to do."
How many leaders feel this degree of responsibility for their investors (who Buffett still considers his partners)? How many think about longevity as structuring the right combination of operating assets, capital structure, and other ‘fundamental pieces’ (like culture?)?
Buffett’s mindset, Schroeder explained, meant he was “always looking at the risk profile of Berkshire Hathaway and trying to take out risk, build in conservatism.”
He likes to say that a cardboard cutout should be able to run the company. That's an unattainable ideal, but he really wants people to look at it after he is gone and say, this man created something sustainable.
Buffett may be ruthless in one context and compassionate and generous in another. And that’s ok.
He’s allowed to be human. He’s a decent, honest, admirable person of integrity who’s accomplished magnificent achievements. That should be enough.
It’s not necessary at all to pretend that someone is infallible in order to be loyal and admire them. I found in the case of Warren Buffett that there were people who genuinely believed that if they admitted any imperfections in him, it would make them disloyal.
Schroeder believes people and the press get a lot wrong about Buffett because they “take snippets” and “turn them into mantras.”
Amen to that.
When dealing with anyone as impressive yet complex as Buffett, nuance and context matter a great deal.
It has always been my goal to write about Buffett in a balanced and nuanced way, taking into account the conditions he faced, and without turning him into an idol to be worshiped.
Hopefully, I occasionally offered a novel take with pieces like: The Reading Obsession, The Next Warren Buffett, Buffett’s alternate history (part 2), The Hustler: Lessons from a Young Warren Buffett, Picking stocks like Buffett, and dissecting The 'Berkshire System' for Life Advice
Schroeder emphasized the point I made in The Reading Obsession. Yes, Buffett structures his day for a lot of focused reading and thinking.
He comes in the morning and his routine is to switch on CNBC with the sound muted and start reading while glancing at the crawl from time to time. The wooden shutters on the windows are always closed. You get no sense that a world exists outside, which is what he wants, no distractions. As far as I can tell, he doesn’t need sunlight.
He reads his way through newspapers, annual reports, trade magazines, reports from Berkshire’s subsidiaries, occasionally talks on the phone (“he doesn’t make a lot of outgoing calls; people call him”) and “that’s his day … most of the time.”
Except when he has lunches, dinners, and travels to meet people and maintain his invaluable network.
Warren relies on those people who do call him as his window on the world. He needs eyes and ears. You know, if you’re Warren Buffett, you can’t walk into a Dairy Queen to check things out. People are always putting on a show for him. He appreciates candid information and seeks it out.
Through this vast network, he’s created a sort of database of information about business and the economy that’s probably irreplaceable.
Another misconception she pointed out was Buffett’s attitude towards macro. While Buffett always emphasizes that Berkshire does not invest based on macro, Schroeder noted he was “keenly aware of the economic cycle and relevant data.”
To him, “the economy is context.”
He uses economic data to put context around what is happening in specific businesses. It lets him visualize macro-risks at the company-specific level. Second, macro data signals to Buffett where Mr. Market is going awry, for example, what parts of the stock market might be fertile digging grounds.
One example was the housing bubble. When in 2004, Schroeder told him she’d bought a house, Buffett was “aghast.”
That's when I knew we were in a serious housing bubble. Finally he said, well, don't worry, you'll be able to sell it in ten years, so just hold on until 2014.
He knew to some degree that we were in a bubble in the years [leading up to 2008] because you could do some statistics that would show corporate profits being at unsustainable levels and housing growth exceeding demographics to a ridiculous degree. He didn’t get into the mortgage business, although you’d better believe, people were showing up on his doorstep urging him to do it with all sorts of apparently lucrative deals.
Looks like he was off by only a couple of years as average home prices recovered to 2004 levels by 2012.
Even though their relationship didn’t survive The Snowball, Schroeder’s observations remain a timeless treasure trove, an invaluable peek behind the curtain, and a must-read for any serious investor and student of Buffett and Berkshire.
My favorite excerpts from three Q&A’s with Schroeder:
The lesson from Buffett’s midlife crisis
Buffett’s weakness and the importance of Charlie Munger
Would Buffett not be as successful today?
The master persuader
Three traits of great investors and Buffett’s ‘money mind’
How is Warren different from other investors?
Buffett’s three step investment process
The most important lesson: the value of time
The master of time management and his five minute filter. "He doesn’t analyze from A to Z; it’s a time-waster."
The value of time and the master of time management
The value of history and analogies. “He has accumulated a filing cabinet of knowledge about companies, and it’s very big. … pattern recognition is his default way of thinking. It creates an impulse always to connect new knowledge to old and to primarily be interested in new knowledge that genuinely builds on the old.”
Please share this post with any friends or colleagues who enjoy learning about Buffett and Berkshire.🙏
You can find the full Q&As here:
2010: Simoleon Sense Interview with Warren Buffett’s Biographer, Alice Schroeder or on SeekingAlpha
2009: three-part interview with the Motley Fool:
The lesson from Buffett’s midlife crisis
(From the Reddit AMA)
Schroeder: “I will tell you a little story. When I was 47, I was having a difficult year for a variety of reasons and Warren sat me down.” He said,
Look, when I was 47 I thought my life was over. Susie had left me, and I had already accomplished everything I thought was worthwhile as an investor. Berkshire, as far as I knew, was at its peak.
And to my surprise, my life kept getting more and more interesting since, and most of the really important things I've done happened after I was 47 and thought my life was over.
The reason, he said, was that he had stored up so many experiences, good and bad, in the first part of his life, and as a form of compounding, their positive consequences unreeled over the next thirty-some-odd years.
Don’t ever fall for the ‘past the peak’ fallacy! Many of the most interesting and important moments of your life are still waiting to happen.
Buffett’s weakness and the importance of Charlie Munger
(From Buffett's Biggest Weakness)
His biggest weakness is the flipside of his strength. He is pretty rigid and he doesn't really listen. He has incredibly firm convictions and is often right, to say the least. But when he is headed down a track that doesn't make sense, he tends to not pay attention to contrary information.
Apparently he told her once: “When I get up in the morning I look in the mirror, and at that point, everybody's had their say.”
And this is where Munger comes into play:
One of the roles that Charlie Munger plays that is really important is he is one of the very few who will tell Warren "no" or "you're wrong."
Interestingly, Warren has enlisted all of these women to be recruited as his protectors, but there are one or two — Carol Loomis and Sharon Osberg, his bridge partner — who will really stand up to him. It is tough to be in the position he is in where you are incredibly rich, incredibly famous, and known for your wisdom because people are in awe of you.
He said to me one time, "When I was 21 years old, I could have been saying the most brilliant things on earth and nobody would have listened to me. Now, I could say that the moon was made of pink tissue paper and everyone would go, 'Wow, look! It really is.' And they would believe me, because I am Warren Buffett."
Do you have enough people in your life that act as reality checks?
Would Buffett not be as successful today?
(From Buffett's Biggest Weakness)
I don't think he would have been as successful because the two things that he did don't work today. One is, there was a lot of shoe leather involved. He would do the work that nobody else bothered to do.
He would go down to some state insurance department basement and dig through records that no one else was looking for. Now everybody has access to everything, and so the diligent are no longer really rewarded the way they used to be.
The second thing is that Warren was uncommonly good at going around and talking to management and getting them to tell him what their business plans were. That used to be perfectly legal. In fact, the insider trading worlds have evolved, and I wrote a long footnote about it in the book, but he used to basically be able to get and trade on inside information, as did everyone in those days. He was great at finding out if there was a tender offer coming or something like that. You can't do that anymore.
The master persuader
(From Interview with Alice Schroeder)
This one was really interesting to me. Buffett has recommended Cialdini’s work many times but I’ve never deeply thought about how he incorporated its lessons to further his edge.
When I read Cialdini I thought, “Gosh. It’s as if Warren wrote this book based on his experience.”
Miguel: He understands the psychology of people.
Alice: Reciprocity and Social Proof. Those are his top two techniques.
I think it was also Cialdini who mentioned that if people do you a favor they like you more. Warren has an ability to get people to invest psychologically in him.
One reason he prefers people visit him in Omaha is that somebody spending the time and money to make that journey is going to leave persuaded. They aren’t going to go away thinking they wasted their money. Because the way you resolve cognitive dissonance is in whatever way makes you feel most comfortable.
Now obviously it’s not a waste to go see Buffett speak. What I’m saying is that this kind of structural persuasion and elicited psychological investment tilts the odds in his favor.
Schroeder also more generally emphasized Buffett’s ability to ‘read people.’
I also believe his understanding of human nature is immensely valuable. He is superb at figuring out what the great businesses are, but great people must run them. And he has been successful at seeking out really terrific management. He has made a few whopper mistakes, but they are definitely outliers in the trend of being great at picking top people.
… his steady pulse is helped by his exceptional skill at reading other people’s emotions. He reads people in a conscious manner that could be the result of self-training to recognize ”emotional tells”; even so, he’s remarkably fluent at it. If this skill could be bottled he could sell it for an awful lot of money.
Three traits of great investors and Buffett’s ‘money mind’
(From 2010 Interview with Alice Schroeder)
It seems to me that there are 3 qualities of great investors that are rarely discussed:
They have a strong memory;
They are extremely numerate;
They have what Warren calls a “money mind,” an instinctive commercial sense.
Warren is all of these.
By numeracy I mean an excellent recall for numbers, fast mental arithmetic skills, and preferably, an intuitive grasp of the time value of money, intuitive enough that you don’t necessarily need a calculator to do basic calculations.
Warren seems to have been born with a near-photographic memory. He exercised it a lot (memorizing the population of all fifty states etc.) I consider it genetic for the most part.
But, Schroeder noted:
The money mind is far more important than the others.
It sounds like an ingrained intuition for all things commerce.
Buffett's skills have been compared with a musician. That’s exactly right. The “money mind” is an instinct, almost a sixth sense, of sniffing where there is an opportunity to make money and knowing how to exploit it.
Schroeder also commented on Buffett’s “bathtub memory”, how he selectively “remembers stories and certain facts” and discards all else “as if for efficiency or comfort.”
If something is unpleasant, it goes down the drain. He retains a sort of DVD of events in his head. If there is new information the old version gets overwritten. It’s gone.
Let’s say he is at a party. There will be 2 things he remembers. He will remember that Carol Loomis wore a yellow dress and that somebody else told him a certain joke. That is all he will remember. It’s as if the rest disappears.
How is Warren different from other investors?
(From 2010 Interview with Alice Schroeder)
Alice: He’s more interested in money, for one thing (laughs).
In terms of how that affects his investing behavior, number one, in his classic investments he expends a lot of energy checking out details and ferreting out nuggets of information, way beyond the balance sheet. He would go back and look at the company’s history in depth for decades.
He used to pay people to attend shareholder meetings and ask questions for him. He checked out the personal lives of people who ran companies he invested in. He wanted to know about their financial status, their personal habits, what motivated them. He behaves like an investigative journalist. All this stuff about flipping through Moody’s Manual’s picking stocks … it was a screen for him, but he didn’t stop there.
Number two, his knowledge of business history, politics, and macroeconomics is both encyclopedic and detailed, which informs everything he does. If candy sales are up in a particular zip code in California, he knows what it means because he knows the demographics of that zip code and what’s going on in the California economy. When cotton prices fluctuate, he knows how that affects all sorts of businesses. And so on.
The third aspect is the way he looks at business models. The best way I can describe this is that it’s as if you and I see an animal, and he sees its DNA. He isn’t interested in whether the animal is furry; all he sees is whether it can run and how well it will reproduce, which are the two key elements that determine whether its species will thrive.
Buffett’s three step investment process
(From the Reddit AMA)
I have to generalize but hopefully this is helpful. Essentially it's a three step process.
1) Is it an addressable investment? He rules out a lot of stuff that has too much tail risk, or he has no edge on the market. For example, thinking you can be smarter at buying Johnson & Johnson than everyone is essentially market timing. Warren rules that out unless he has some insight he is convinced no one else has. He may not always be right but it's the right approach and works over time.
2) Downside protection. He looks for multiple ways to avoid losing money. If you look at the preferred stock deals he did after the financial crisis, he fenced in these companies and built in so many ways to avoid losing money it was almost funny. He will pass on huge upside opportunities if he can't get downside protection.
3) Capital generating power. His focus is on how much capital an investment can produce that can be reinvested either within the business or elsewhere. He prefers the easy route (reinvestment) however, ultimately he's agnostic, money is money and for a dollar he puts out he wants x% back. The x% has declined over the years with Berkshire's size and falling interest rates.
The most important lesson: the value of time
(From Buffett's Cold Shoulder)
What has been the most important on me personally was to understand the value of time — and this is something that has come from observing him, learning his story and that time compounds.
What you do when you are young (and as you use time over your life) can have an exponential effect so that if you are thoughtful about it, you can really have powerful results later. … if you are investing in your education and you are learning, you should do that as early as you possibly can, because then it will have time to compound over the longest period.
The master of time management and his five minute filter
(From the Reddit AMA)
Warren is a master of time management. He knows how to ease people off the phone without making them feel dismissed. He is great at saying no and I learned a lot about saying no tactfully. That's an important time management technique.
Also, he manages his energy, reading when it's optimal, talking on the phone when he's got the right energy for that and so forth. It's fairly compartmentalized and he does not multitask through his day. That was a useful lesson.
(From 2010 Interview with Alice Schroeder)
I have seen him make his famous 5-minute decisions on the phone. Five minutes is the outside amount of time it takes him to make a decision. If the person can be succinct and convey the salient points in 60 seconds he’ll say, “Yes” or “No” in 60 seconds.
The time is determined by how long it takes the person to convey the salient points, not how long it takes him to think about it. It’s virtually instant once he has grasped the 2 or 3 variables or points that are important to him.
Typically, and this is not well understood, his way of thinking is that there are disqualifying features to an investment. So he rifles through and as soon as you hit one of those it’s done.
Doesn’t like the CEO, forget it.
Too much tail risk, forget it.
Low-margin business, forget it.
Many people would try to see whether a balance of other factors made up for these things. He doesn’t analyze from A to Z; it’s a time-waster.
The value of history and analogies
(From 2010 Interview with Alice Schroeder)
This ties in with the idea that great investors reason by analogy.
What about his memory in terms of investments?
Alice: Oh that’s freaky. You’re sitting there talking about something like “Isn’t it amazing that after Jack Welch left GE, the company started having all these problems because of buried accounting issues?” and he will say, “Yes, that’s like …” and pull a company from 30 years prior and start spouting numbers. Then he will pick another more recent company, and another.
He has accumulated a filing cabinet of knowledge about companies, and it’s very big. Part of his teaching style is to have certain examples at the ready.
History was one of Warren’s best subjects even when he was very young (in school). He has a liking for it. But at the same time pattern recognition is one of his primary skills and perhaps his greatest skill. So in terms of data points, unlike many people who learn by seeking information on an as-needed basis, Warren is always looking for fuel for pattern recognition before he needs it.
He’s always looking for context. Having an interest in a broad sweep of history provides vast context for making many decisions because it enables analogies. And that I think has been very helpful for him in avoiding fallacies such as “This time it’s different.”
It allows him to make analogies between industries, for example between the internet/dotcom stocks and early auto stocks, as in the speech he gave at Sun Valley that is described in The Snowball.
If you look at the dotcom stocks, the meta-message of that era was world-changing innovation. He went back and looked for more patterns of history when there was a similar meta-message, great bursts of technological innovation in canals, airplanes, steamboats, automobiles, television, and radio. Then he looked for sub-patterns and asked what the outcome was in terms of financial results.
With the dotcoms, people were looking to see what was different and unique about them. Warren is always thinking what’s the same between this specific situation and every other situation.
That is the nature of pattern recognition, asking “What can I infer about this situation based on similarities to what I already know and trust that I understand?” … pattern recognition is his default way of thinking. It creates an impulse always to connect new knowledge to old and to primarily be interested in new knowledge that genuinely builds on the old.
Behind The Curtains of Buffett's Life with Alice Schroeder
This is an excellent post, Frederik. Lots of rich insights here. Thanks. Warm wishes, William Green
Beautiful! Makes me want to re-read the book, thank you sharing, it’s a special post.