2 Concerns with Michael Lewis's Review of Buffett Book 'The Snowball' 22 comments
Nadav Manham
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Michael Lewis reviews 'The Snowball' in the New Republic. I don't want to write a long review of a very long review of a very, very long review of Buffett's life - that's too much reviewing. I will say two things though:
1) Lewis and Buffett have a weird history.
2) Lewis is a genius at narrative storytelling. This genius works best in fiction because in fiction you get to make up the facts, and you get to make it "life with the dull bits cut out" as Hitchcock said. In business non-fiction, however, you don't have those two luxuries. You have to get your facts straight, and you can't completely discard the dull bits -- the counterarguments, the caveats, the things that are sort of true but not 100% true -- just to burnish the luster of the story, the way a diamond cutter discards much of a rough diamond to create the perfect polished stone.
For instance, in his attempt to draw a distinction between Ben Graham and Buffett, and to make a larger point about the Great Depression, which produced Graham's worldview, and the post-WWII era, which produced Buffett's, Lewis writes the following:
Benjamin Graham was in many ways very different from what Warren Buffett was destined to become. Graham's experience of the Great Depression had instilled him with pessimism. He eschewed judgments about the future prospects of a company or an industry, and instead looked for bargains in the here and now--companies that were trading below the value at which they might be liquidated. Graham was "looking at businesses based on what they were worth dead, not alive," as Schroeder puts it. Cigar butts, he called these.
Cigar butts obviously appealed to Buffett, but Buffett's investment career was destined to coincide with a very different period in American financial history. There never was a better time and place to make money from optimism than in the American stock market since World War II. Had Buffett confined himself to the gloomy business of plucking wet smelly cigar butts off the ground, he would never have become Warren Buffett. And Buffett was built differently than Graham. He had emerged from his childhood both a pleaser and an optimist. Dale Carnegie's How To Win Friends And Influence People apparently made a deep impression on him. When he looked at a company, he saw not just its asset value but also its possibilities.
Buffett's first big bet was on a then obscure insurance company called GEICO. GEICO was not, by Graham standards, a bargain: it traded at a price above the value of its assets. But Buffett dug down into the business, saw how fast the company was growing, and, as Schroeder writes, "felt confident of being able to predict what it would be worth in a few years. ... A less Graham-like analysis could hardly be imagined. Graham's 1920s bubble and Depression experiences had made him suspicious of earnings projections. But Warren was betting three-quarters of his patiently acquired money on the numbers he had calculated."
None of the above excerpt is false, but there is one hole in it: When Buffett bought GEICO, which to Lewis represents the mythical break of the student from the master, its chairman and largest shareholder was... Ben Graham.
One more example: Trying to cast the present financial crisis as a kind of final commeuppance for Buffett in his old age, Lewis writes:
Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the first time in forty years he must feel like a wasting asset. His share price is still off more than 40 percent from its highs, underperforming even the S&P 500. He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation. The difference this time is that he has gotten himself a sweeter deal than not merely ordinary shareholders, but also the U.S. Treasury . . .
Thus she leaves open the possibility that Buffett might have gone a bit soft in old age. "Basically, when you get to my age," she quotes him telling a group of business school students, "you'll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them." Where there was once only the time value of money, there is now also the time value of love. My God, he's even given his fortune away!
In short, there has never been a better time to bet against Warren Buffett.
First of all, the excerpt is misleading and wrong on the facts:
- When you write that Buffett measures his life by the book value of Berkshire's shares, and in the next sentence state that the stock is off 40% from its highs, you create the impression in the jury/reader's mind that the metric by which Buffett measures his life is down a whopping 40%. Not true: Berkshire's book value declined by only 9.6% in 2008 vs. a decline of 37% in the S&P. This 27.4% outperformance, you can read on the first page of Berskhire's annual report, has been bettered only six times in Berkshire's history with Buffett in charge.
- How is Berkshire "sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes"? I don't know where that number comes from. And if it's the notional value, Lewis should know that overstates the liability to Berkshire.
- Buffett has not "sunk $10 billion" into Goldman Sachs. He has sunk $5 billion into Goldman Sachs and received warrants to purchase an additional $5 billion.
Secondly, I don't know how anyone can agree with the impression Lewis wants to create, that the financial crisis plus Buffett's age means "there has never been a better time to bet against Warren Buffett." If you're the world's greatest value investor, and asset prices are way down all over the world, and you have bilions in cash and borrowing capacity to deploy, and Berkshire's stock is down, maybe it's actually a pretty good time to bet on Buffett.
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This article has 22 comments:
The "good" three quarter cycle will probably start in the late 2010s, at which time I'll be ready to retire. A new, perhaps Buffett-like generation, will follow me. But I plan to be "Ben Graham" until then.
One should either compare the drop in Berkshire Hathaway's book value (9.6%) with the drop in the S&P book value (??) or the drop in Berkshire Hathaway's (40%) with the drop in the S&P Total Return index (37%).
On May 18 10:32 AM Graham and Dodd Investor wrote:
> Over a full 75-80 cycle, it's better to be Warren Buffett than Ben
> Graham. But we are now in the quarter of the cycle that is most like
> the 1930s, the time when Graham made his reputation. Hence it's better
> to be like Ben Graham than Warren Buffett today.
>
> The "good" three quarter cycle will probably start in the late 2010s,
> at which time I'll be ready to retire. A new, perhaps Buffett-like
> generation, will follow me. But I plan to be "Ben Graham" until then.
Not necessarily. If he is short puts, the notional value is the liability. However improbable it is that the underlying would go to zero, the entire notional may end up on his books.
people praise and believe they know everything he does and trades...
On May 19 11:31 AM Dan Plettner wrote:
> I admired Warren Buffett until recently. To fully understand any
> man I think it is important to be fully familiar with the company
> he keeps. Recently, I learned of Warren Buffett's purported personal
> friendship with Stewart J Horejsi. Despite multiple opportunities
> to comment on this publicly purported personal friendship, Berkshire
> Hathaway and Warren Buffet have failed to comment. Those who wish
> to know more about the company Warren Buffett keeps will not have
> much trouble finding thorough reads on Horejsi.
On May 19 01:13 PM Robert Perrego wrote:
> Uhhh yeah - but news out today says Buffett is running low on cash
> these days. He started buying the bottom on March 2008 (with Bill
> Miller and Eddie Lampert - other value legends that got destroyed
> in the last year) and blew most his wad while stocks were still coming
> down. Now his dry power is mostly used up and he has massive positions
> to average down and don't forget his $34 billion put. We get a new
> low in this market and his average down approach is DOA and the only
> time he will be happy is getting tax refunds when he posts massive
> losses every quarter.
Check the original document. You are better than that.
If you are going to slander Michael Lewis I'm fine with it...just do it on the truth.
Other wise his decision to loan more money and buy less equity looks quite wise.
If you apply his principals and buy a semi promising company, you are just as likely as anyone else to find that the executives golden parachuted or the chief engineer or scientist went to work for a competitor. All in all, I tend to attribute Buffet's success to him and his leadership and network of know how more than his investment strategy. I applaud him for his work, but would not buy into a little Buffet buff ever filling his shoes with a stock picking machine that mirrors his buying methodology.
As for Graham. He is conservative but pretty rock solid. His book should be on your investment shelf.
So in my mind, both are exceptional their own respective rights. It is hard to say Graham is only interested in breakup value or Buffet is investing in the promise of tomorrow. Buffet invests in the belief he can make sure a company remains prosperous long enough to realize its value. Graham invests in a core company that runs properly from the start and who's value isn't fully realized. Both are very good strategies for obvious reasons.
This quote ""felt confident of being able to predict what it would be worth in a few years. ... A less Graham-like analysis could hardly be imagined. Graham's 1920s bubble and Depression experiences had made him suspicious of earnings projections. But Warren was betting three-quarters of his patiently acquired money on the numbers he had calculated." is an excerpt from Ms Schroeder's book(pg 138).
That page starts with this sentence..."This was especially true because, at its current price, GEICO was an investment that Ben Graham would not have approved of, even thought Graham-Newman had only recently become its largest shareholder."
However, I am reading the book - and don't care for it by the way...(fortunately, like Warren, I'm cheap and I didn't pay for it - I've got it for 21 days from the public library...), and this IS NOT when Warren broke with his mentor...IF this was the time, (the incident in question concerned Warren dumping 3/4's of his then meager portfolio and buying 350 shares of GEICO - in 1951!!), he would not have continued to buy "cigar butts" for 20+ more years.
No, as the author points out his metamorphosis into the Warren we know came after he began his relationship with Charlie Munger.
Although Alice doesn't point this out in her book, I believe it was Charlie that got Warren interested in Phillip Fisher's book, "Common Stocks and Uncommon Profits", which I think was where Warren may have borrowed his notion that every serious investor ought to get a ticket with only 20 "chances" on it - representing the limit of his/her lifetime investments. If that was so, each choice would be thoroughly investigated...of course, that's not how Warren did it - or how Charlie did it.
BTW, I don't mean to imply that Charlie "taught" Warren how to invest, or that he changed Warren's mind about what he had learned at the "foot of Ben Graham". Clearly Warren was his own man - he has simply "boosted himself up onto the shoulders" of those investors he admired.
I can't count the number of book I've read about Warren - though I find them interesting - they haven't been influential...unfortun... - but this is the first one I've come across that makes Warren seem a bit closer to Gordon Gecko and a character played by Danny DeVito in a movie whose name I've forgotten...including the tendency towards lecherous behavior - especially involving Katherine Graham...
It isn't a book you can sit down and read for long stretches...or at least I can't...BTW what's amusing to me, as skim through the pages describing Warren's support of liberals such as Eugene McCarthy!! and his strange relationship with his wife - I keep recalling the advice Jack Palance, as Curly, in "City Slickers" gives to Billy Crystal's character...when he holds up his index finger and says that's the secret to life..."Your index finger?" says Billy, "No", says Jack, "ONE". "Do one thing well, and everything else falls into place". That's advice Warren understood before he saw the movie. His success at making money has opened up vistas he never conceived of...
Now I make a great Gumbo Soup...but...
On May 20 03:28 AM andydee wrote:
> Here's my guess...the author of this piece on Michael Lewis' review
> of Alice Schroeder's book read the review by Lewis BUT did not read
> the book by Schroeder!!
>
> This quote ""felt confident of being able to predict what it would
> be worth in a few years. ... A less Graham-like analysis could hardly
> be imagined. Graham's 1920s bubble and Depression experiences had
> made him suspicious of earnings projections. But Warren was betting
> three-quarters of his patiently acquired money on the numbers he
> had calculated." is an excerpt from Ms Schroeder's book(pg 138).
>
>
> That page starts with this sentence..."This was especially true because,
> at its current price, GEICO was an investment that Ben Graham would
> not have approved of, even thought Graham-Newman had only recently
> become its largest shareholder."
>
> However, I am reading the book - and don't care for it by the way...(fortunately,
> like Warren, I'm cheap and I didn't pay for it - I've got it for
> 21 days from the public library...), and this IS NOT when Warren
> broke with his mentor...IF this was the time, (the incident in question
> concerned Warren dumping 3/4's of his then meager portfolio and buying
> 350 shares of GEICO - in 1951!!), he would not have continued to
> buy "cigar butts" for 20+ more years.
>
> No, as the author points out his metamorphosis into the Warren we
> know came after he began his relationship with Charlie Munger.<br/>
>
> Although Alice doesn't point this out in her book, I believe it was
> Charlie that got Warren interested in Phillip Fisher's book, "Common
> Stocks and Uncommon Profits", which I think was where Warren may
> have borrowed his notion that every serious investor ought to get
> a ticket with only 20 "chances" on it - representing the limit of
> his/her lifetime investments. If that was so, each choice would
> be thoroughly investigated...of course, that's not how Warren did
> it - or how Charlie did it.
>
> BTW, I don't mean to imply that Charlie "taught" Warren how to invest,
> or that he changed Warren's mind about what he had learned at the
> "foot of Ben Graham". Clearly Warren was his own man - he has simply
> "boosted himself up onto the shoulders" of those investors he admired.
>
>
> I can't count the number of book I've read about Warren - though
> I find them interesting - they haven't been influential...unfortun...
> - but this is the first one I've come across that makes Warren seem
> a bit closer to Gordon Gecko and a character played by Danny DeVito
> in a movie whose name I've forgotten...including the tendency towards
> lecherous behavior - especially involving Katherine Graham...
>
> It isn't a book you can sit down and read for long stretches...or
> at least I can't...BTW what's amusing to me, as skim through the
> pages describing Warren's support of liberals such as Eugene McCarthy!!
> and his strange relationship with his wife - I keep recalling the
> advice Jack Palance, as Curly, in "City Slickers" gives to Billy
> Crystal's character...when he holds up his index finger and says
> that's the secret to life..."Your index finger?" says Billy, "No",
> says Jack, "ONE". "Do one thing well, and everything else falls
> into place". That's advice Warren understood before he saw the movie.
> His success at making money has opened up vistas he never conceived
> of...
>
> Now I make a great Gumbo Soup...but...
All that does is arouse our suspicion...not just of this one part, but of the whole.
On May 19 08:48 AM Soldalma wrote:
> When you say the S&P dropped 37% are you talking about the index
> or the book value of the stock index components?
>
> One should either compare the drop in Berkshire Hathaway's book value
> (9.6%) with the drop in the S&P book value (??) or the drop in
> Berkshire Hathaway's (40%) with the drop in the S&P Total Return
> index (37%).
>
Thanks for the info on the Danny Devito movie. Goggled it and recalled that one of the best things about the movie was his co-star, Penelope Andrea Miller. She's sexy in OPM but her characterization of Brando's daughter in The Freshman, opposite Matthew Broderick was beyond delicious.
The guy that wrote this article is an obvious loser. The only reason people are reading it is because of the subject matter.
His two "concerns", imo, have been exposed as bogus - because he failed to read the Michael Lewis article in full, so he completely misunderstood Lewis' reference to "Betting against Buffett", and secondly, is obviously unaware of the context of Lewis' comment on "Buffett-the-student-w... purchase of 30 shares of GEICO in 1951. Of course Lewis should not have selected THAT purchase of GEICO as THE example of Buffett's break with Graham...there are other better examples, but even using GEICO, Buffett's 1976 purchase would have been a superior example.
There were other more obvious early "breaks", (I put that in quotations because I don't believe that Buffett actually "followed" Graham - he just learned from him and adapted Graham's philosophy into his own), Graham bought lots of cigar butts because he didn't know anything about the company except that the share price was less than working capital...so many of the cigar butts would eventually fail. Buffett, working in Graham's office, dutiful filled out the Graham-Newman "briefs" on these cigar butts but wanted to know more about the underlying business and the management. Graham didn't give a damn about the business or the management. I'd say Graham was closer to DeVito's character of "Larry the Liquidator", except that Larry the Liquidator knew more about his investments than Graham knew about his.
On May 20 07:28 AM wobatus wrote:
> Other People's Money was the DeVito movie. The buggywhip line is
> the best. Even the best damn buggywhipmaker went out of business
> and was better off selling off his stock then continuing as a going
> concern.
dividendgrowthinvestor brings up Buffet's integrity and example as a CEO. I ten towards the idea of Graham and Dodd Investor that this is a better era to lean towards Graham. But with the ridiculous political presence of our enormous government and the information the super rich are privy to, Buffet may be onto information that validates his timing here.