The following are links and excerpts of a very insightful 6 part interview series of Alice Schroeder, author of Warren Buffett’s biography “The Snowball“, by Miguel Barbosa (Simoleon Sense). It is long, detailed and highly recommended. [HT Alice]
Simoleon Sense Interviews Warren Buffett’s Biographer, Alice Schroeder
- Part 1: The Forging of A Skeptic – From Accountant to Buffett’s Voice on Wall St. Here is an interesting excerpt,
Alice: [...] At the time my former boss and mentor, Denny Beresford, was Chairman of the FASB (Financial Accounting Standards Board, the standard-setter for U.S. Generally Accepted Accounting Principles). He knew I was considering leaving Ernst & Young and suggested that I come work for the FASB. I took that job thinking that it would be intellectually challenging, analytical, and involve plenty of speaking and writing.
At the FASB,I was assigned, essentially by being next in line as the most recent arrival there, to a dreaded project, which was to oversee the issuance of some of the most important new accounting regulations for U.S. insurers in 20 or so years.
Nobody on the staff wanted to work on these. The insurance industry had been fighting ferociously for more than a decade to keep them from getting passed, and with a lot of success. [...]
I got assigned to this project by chance, but I fell in love with the industry within a couple of weeks.
The main topic was SFAS 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts; I also went on to complete EITF 93-6, Accounting for Multiple-Year Retrospectively Rated Contracts; and, EITF 93-14, Accounting for Multiple-Year Retrospectively Rated Insurance Contracts by Insurance Enterprises and Other Enterprises.
Their titles are a mouthful, but essentially they all eliminate deceptive accounting practices in which reinsurance contracts were created specifically not to indemnify risk, but to shuffle or smooth earnings around from one accounting period to another – or artificially inflate an insurance company’s reported capital reserve one way or another.
If these rules passed, some companies and segments of the reinsurance industry would be losing their most profitable products, at least on a risk-adjusted basis. Conceptually, these deals were a very effective form of leveraging capital at very low, and even no, risk. They were very similar to the type of securitizations that got Enron in trouble. Not surprisingly, Wall Street also was starting to dabble in the business.
- Part 2: A Behind The Scenes Look At Wall St & Morgan Stanley. Here is an interesting excerpt,
Alice: [...] So what is it like to be an analyst…When I started at Oppie it was very free form. Analysts used their judgment. Over time, as I moved through the different firms, especially Morgan Stanley, more and more requirements arose. There were things you had to write every time you published on a company. The financial models became standardized. Like any other business, the more you standardize something, the more you stamp out creativity.
This was more than just compliance. Through this process, big firms like Morgan Stanley were also trying to brand themselves. The firm wanted to be the brand, and discouraged its analysts from doing distinctive enough work to result in them becoming a brand themselves.
You may wonder why analysts at banks hedge themselves so much – on the one hand this, on the other hand that. Partly it can be lack of courage. But someone is always trying to lawsuit-proof your opinion. Decisive statements are lawyered into “may, can, could, might, potentially, appears” instead of “is, does, should, will,” much less “look out below.”
The time pressures that work against quality research are also well-known. You write up a lot of inconsequential things, especially what I call “elevator notes” (this quarter “X was up and Y was down”). Instead of writing original or probing views, you are really incentivized to spend as much time as possible marketing.
Miguel: So let’s bring Warren Buffett into the picture. You’re an analyst covering insurance companies. When is the first time you come across Berkshire Hathaway? Do you still remember the day you released the Paine Webber report?
Alice: Oh yes. I came across Buffett when Berkshire bought the second part of GEICO, which was a major event. It never occurred to me to begin following it until several years later, when Buffett announced his bid for General Re. At that point, a number of my clients asked me to follow Berkshire Hathaway. They were going to own the stock and they wanted research coverage.
These clients knew I liked complex difficult things to analyze. That I was interested in doing things that were different even if there was no obvious commensurate reward for the extra effort. The sell-side had limited interested in following Berkshire, to say the least. The stock didn’t trade. At the time, Warren essentially didn’t pay bankers and frequently expressed a negative attitude toward the Street.
So, I went to my research director at PaineWebber and made a case that our retail brokers would appreciate this coverage because their clients were interested in Berkshire and Warren Buffett. Being able to call and talk about Berkshire was a service for retail clients that did not involve asking for a transaction. It was something their financial advisors appreciated being able to offer. To its credit, PaineWebber gave me a thumbs up.
- Part 3: Meeting The Oracle of Omaha. Here is a great excerpt,
Alice: You can tell he’s [Warren Buffett] not ordinary by reading anything he’s ever written. I knew right away he was a legend. It was also apparent at our first meeting how different he was. I took a list of 60-some-odd questions that should have filled several hours of conversation. We sat on his Gulfstream flying to Omaha and he sliced through those questions in about 45 minutes in between mouthfuls of potato chips. I had to improvise, which was terrifying at the time. It was my first encounter with what conversing with him was like.
But, to go back to exactly how I met him: Shortly after I started working on the report, clients who wanted to meet Buffett asked me to get a meeting with him. The ostensible reason was that they were going to be voting on the General Re merger and their fiduciary obligations as fund managers required them to meet with the management of any company whose stock they owned. Truthfully, I’m not sure how eager they would have been to fly to Omaha to meet anyone but Warren Buffett.
So I wrote him a letter saying that shareholders representing 13% of General Re’s stock wanted to meet with him and we were all willing to fly to Omaha if he would give us an hour of his time.
I thought it was a long-shot. But Warren called me within a couple of days on the phone. That was my first encounter, and, as are many people who don’t know him at first, I was shocked that he answered his own phone and dialed his own outbound calls. I thought it was a prank until after the first sentence or two when I was sure from the voice that it was him. Then my knees were shaking.
He said, “Come on out.” So we went. In the end, he gave us about two hours. The conversation would seem surreal to a lot of people because we literally spent almost two hours talking about insurance. It really is the insurance gene thing. And, I was with exceptional investors like Jody Jonsson from Capital Group and Chris Davis. Warren enjoyed it because he loves to talk about insurance.
Three weeks later, I was in my office, never expecting to hear from Warren or talk to him again. My phone rang. It was him. Hearing his voice, with no secretary placing the call, was again shocking. He got straight to the point.
He said (and I’m paraphrasing), “I never have had any contact with the Street, but Berkshire is now very complicated. Someone needs to teach investors how it works. This means I have to choose between the lesser of 2 evils. Either I give one person an advantage over their peers. Or, I have to be bothered all the time by analysts. I don’t want a gaggle of analysts calling me all the time, so I am choosing to give one person an advantage. Would you do me a favor and be that person?”
With hindsight, this elegant way of reasoning and drawing me in was so classically Warren. It made a strong impression on me at the time. When you ask how I knew he was different, it was from episodes like this. And, perhaps as he wanted, I felt that he chose me. I had shown the initiative to cover the stock and had brought people to Omaha, and he really likes it when people come to Omaha. It matters to him more than people realize. So I said, “Of course, I would be thrilled to,” and that was the beginning.
By the way, there has sometimes been a misunderstanding that he asked me to cover the stock. There is no way he has ever asked anyone to cover the stock. It’s unthinkable. He rarely asks anyone outright for anything. He wanted to talk to me because I was already going to do it.
So, after that, I would fly to Omaha and interview him once or twice a year, and talk with him by phone periodically. My first interview was that conversation on a NetJets plane in 1998, flying to Omaha with him and Susie.
Susie sat in the back of the plane and read magazines the whole time. She was obviously irritated at him. This side of Susie came out very, very rarely, but if she saw Warren showing off in front of a woman, that could trigger it. And Susie dealt with it fabulously, very gracefully, letting him know in multiple nonverbal ways that he was irritating her. Susie was an unusual person whose emotional intelligence was off the charts.
Alice: [...] But, most frighteningly, it was a huge responsibility, and it was an irrevocable one. I was being entrusted to produce the book that would define Buffett and would always bear the responsibility for interpreting the knowledge I was given.
Miguel: At that point, what was the message of the book? How were you going to tell Warren’s story?
Alice: Initially, it was still this notion of the biography of ideas. Warren kept referencing Iacocca’s biography and Kay Graham’s. He loved Iacocca’s book and, in fact, started shoveling biographical material at me immediately. There were a lot of stories he had been saving for “the” book.
- Part 4: Will The Real Warren Buffett Please Stand Up. Here is an excerpt,
Miguel: What makes him such a wonderful teacher?
Alice: Well, first, it is that he enjoys teaching and, second, that he has worked hard at learning communication skills and specifically learning to communicate as a teacher. So he knows how to order material, how to tell stories, he knows how people process information. It’s also, I think, a valuable insight that teaching is one of his preferred modes of talking to people much of the time. You could almost call it his default mode. And that the value, influence, and trust he built by being such a memorable teacher of investing, business, and life in his public communications was, from a relatively early period, a very important ingredient for his tangible business success. This began as early as high school, but was crucial to running the Buffett partnerships and later Berkshire Hathaway. I think this point is actually still quite underappreciated among even his most obsessive followers.
Miguel: Give us advice to becoming better communicators.
Alice: Well…this is not anything profound. But you see that he uses very short parables, stories, and analogies. He chooses key words that resonate with people —that will stick in their heads, like Aesop’s fables, and fairytale imagery. He’s good at conjuring up pictures in people’s minds that trigger archetypal thinking. It enables him to very quickly make a point … without having to expend a lot of verbiage.
He’s also conscientious about weaving humor into his material. He’s naturally witty, but he’s aware that humor is enjoyable and disarming if you’re trying to teach something.
- Part 5: Buffett The Investor & Businessman. Here is an excerpt,
Miguel: 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.
- Part 6: Curve Ball – Surprising Facts About Warren Buffett. Here is an excerpt,
Alice: [...] If you think about it carefully you realize how costly the equity index puts were in the financial crisis. Berkshire got the float from them to invest, but its negotiations with the rating agencies meant that, at a time when markets were in turmoil, during the very crisis that Warren had been waiting for all those years to put the tens of billions of dollars to cash to work, he couldn’t do it. He was able to participate in the market crash only in a tepid way. That opportunity cost has to be offset against the expected profit from those equity index puts. They weren’t worth it.
Alice: [...] One of Warren’s great strengths is that, despite his pragmatism, he is quite rigid when it comes to anything that could lead to emotional decision-making. This is the circle of competence. He never bought Intel, and if there is anyone who could have understood Intel it was him. I mean, he knows Andy Grove quite well and was around at the founding of the company and even knew Bob Noyce. There were times when it must have been obvious to him that Intel was a rocket.
This is another way of saying that he has managed to avoid style drift for the most part. There’s nothing wrong with learning new things or adapting to changing circumstances. What’s wrong with style drift is that emotions are forming the current that’s drifts you along. Style drift is just endemic whenever the market is briskly valued and it’s hard to find ways to put money to work. You could argue it’s the most common reason highly regarded investors get blown up.
- You can download the full interview here.