2 Concerns with Michael Lewis's Review of Buffett Book 'The Snowball'

 |  Includes: BRK.A, BRK.B
by: Nadav Manham

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:

  1. 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.
  2. 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.
  3. 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.