Book Review: Buffett - The Biography By Roger Lowenstein

by: The Global Investor

Summary

An interesting book to learn about Warren Buffett's life.

Provides good examples of the principles of value investing.

However I think for alpha generation in the 21st century, George Soros is the guru to study.

Warren Buffett is the world's greatest investor. I had always noticed Buffett - The Biography when browsing the business sections of book shops, but I always thought that I probably didn't need to read it for two reasons. First everyone knows that Buffett is from the Ben Graham school of investing, that's to say a value investor. I had read Graham's Intelligent Investor whilst in university and had studied value investing during my security analysis and equity investment management classes, so I was familiar with Buffett's style. Value investing is a strategy that appears to offer higher returns over the long run. It's worth reading Buffett's "The Superinvestors of Graham-and-Doddsville" if you are not already familiar with the arguments.

However, and my second reason I had not picked up this book earlier was that I had this feeling that while Buffett was surely a talented investor, he was also in the right place at the right time, i.e. America during the 20th century, and he had made common sense long term investment decisions, and let the power of compound interest do its job. I had always thought Buffett's real genius was in using the GEICO float to leverage his portfolio and earn a decent carry. While I always respected Buffett, I had always thought he was an above average investor, with discipline and a good sense in growing his business, but had a good tailwind for the majority of his career. I am not sure we will see another Buffett in the 21st century.

Anyway, I decided to read this book because I had read another book a few years back by Roger Lowenstein - When Genius Failed, which was about the rise and fall of the mega hedge fund Long Term Capital Management. That book was extremely well researched and written. In short, out of my respect for Lowenstein I decided to read this Buffett book. After all, what harm is there to know more about the world's greatest investor?

Buffett - The Biography is incredibly detailed about Buffett's whole life, from his time as a child through school and university to the start of his career, through working for a stockbroker to working for Graham himself to Berkshire Hathaway and the famous investments like Coca-Cola (NYSE:KO).

What I learned that Buffett was not just a smart investor. He was a canny trader too. When working for Graham he spotted an opportunity to arbitrage cocoa beans thanks to an opportunity that arose where one of their holdings, a chocolate company, was offering to redeem its stock in exchange for cocoa beans at a price cheaper than that of cocoa trading on the exchange, so Buffett exchanged the stock collected the beans, and sold them on the exchange at a higher price, locking in a risk free profit.

Later in his career, in 1969 to be precise, Buffett decided to liquidate his partnership. This was the era of the mad "Go-Go" period, and most everything was expensive in Buffett's eyes. While Wall Street was recommending stocks at any price, Buffett reminded his friends that "Price is what you pay, value is what you get".

The chapter named "Berkshire Hathaway" (NYSE:BRK.A) (NYSE:BRK.B) is also most interesting. Buffett didn't just acquire the company in the market; he had to carefully negotiate with the shareholders and the management to get the company at a good price. But also this chapter demonstrates something I think is also key to Buffett's success that I was not aware of before. That's management incentives. To quote from the book:

Buffett opposed options for the same reason that most CEOs were enamoured of them. Options conferred potential - sometimes vast - rewards, but spared the recipients any risk, thus giving executives a free ride on the shareholders' capital.

More subtly, Buffett wanted managers whose personal interests were in line with those of the stockholders. A manager who owned options, as distinct from shares had nothing to lose, and those would be more inclined to gamble with the shareholders' capital.

I thought this was very interesting, so I looked up the reference. Put another way, Buffett said in his 1985 letter to shareholders:

"Ironically, the rhetoric about options frequently describes them as desirable because they put managers and owners in the same financial boat. In reality, the boats are far different. No owner has ever escaped the burden of capital costs, whereas a holder of a fixed-price option bears no capital costs at all. An owner must weigh upside potential against downside risk; an option holder has no downside. In fact, the business project in which you would wish to have an option frequently is a project in which you would reject ownership. (I'll be happy to accept a lottery ticket as a gift - but I'll never buy one.)"

Buffett was all about owning "pieces of businesses" and knowing the intrinsic value of companies. He often admonished friends for trying to predict the short term direction of the market. You could say that as well as the sporadic riskless arbitrage he engaged in, Buffett's main activity has been "time arbitrage" waiting for "Mr Market" to correct his crazy antics. It's clear that Buffett hated speculation. In Soros on Soros, George Soros said, when asked about a comparison with Buffett, that you could not find two more different characters. That is very true. Soros for the most part was a pure speculator and Buffett a pure investor, but also Buffett is known to admire Adam Smith's Wealth of Nations, while Soros is against the principle of the Invisible Hand.

Buffett - The Biography is a very good read, although it must be stressed it is a Biography (stating the obvious). What I mean is that it provides good examples of how the rules of value investing have been demonstrated by the world's most famous value investor. Readers wanting a more technical investment book should opt for Graham's Intelligent Investor.

So did my opinion about Buffett change much after reading this book? I have to say he is more impressive than I had assumed, given the extent of his negotiation and management skills as well as his corporate finance and stock picking abilities. But I still believe Buffett had the wind at his back thanks to the great success of America during the 20th century. To get Buffett-like results with Value Investing in the 21st century, one might have to look outside the United States. In the 21st century with more and more challenging environment, I think George Soros is the guy to study thanks to his unique analysis of the world and top risk management and trading skills. I have reviewed Soros on Soros here and Soros - The Life And Times Of A Messianic Billionaire here, in case you are interested.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.