Buffett developed his own simple formula for what to do with a cigar butt once he owned it: Take out all the cash and raise prices. That worked well for a while, until it became harder to find undervalued companies. It was then that Munger — a charmingly crotchety lawyer — stepped in to wean Buffett off bargain hunting and teach him to appreciate the value of “great businesses.” Once Buffett added the art of qualitative assessment to his prodigious quantitative skills, the rest was history. Buffett and Munger’s holding company, Berkshire Hathaway, would become a major shareholder or outright owner of companies with such perennially strong brands as Coca-Cola, Fruit of the Loom, Geico, Gillette, and See’s. By 1974, Buffett was on his way to fortune and fame, thanks to being featured in “Adam Smith’s” bestseller, Supermoney, as not only a genius investor, but an honest one too — almost a saint among the demons of Wall Street.
Buffett’s reputation would grow with his wealth. In 1987, the value of a Berkshire share had increased 23 percent per annum for 23 years (an initial investment of $1,000 was worth $1.1 million — there’s that snowball!). In the process, his name became synonymous with careful, prudent, and patient investing and with traits such as openness, integrity, and extreme honesty. It was all about the basics, starting with living by Dale Carnegie’s sensible rules for success (“Ask questions instead of giving direct orders”) and Buffett’s own homespun common sense (“Be long-term greedy, not short-term greedy”). Although his personal expertise was limited to finance, Buffett appreciated the value of strong enterprise management and knew great leaders when he saw them (then he invested in their companies and left them in place to run their businesses without interference). He was ahead of his time in calling for independent boards, the expensing of stock options, and an end to excessive executive compensation and, especially, unconscionable perks. Most famously, he was a constant critic of Wall Street and often cautioned managers not to take expedient actions to satisfy the short-term thinking of stock analysts.
That’s the story we all know — the official line that “media-shy” Buffett turns out to have promulgated and carefully managed for decades. But Schroeder shows us another, more complicated and factual, version of the legend that is Buffett, one in sharp contrast to his “aw-shucks” image.
How to explain the dichotomy between Buffett figuratively sitting on the front porch with a glass of lemonade, telling folksy stories and teaching through homilies, and his long history of sophisticated business feats? What was he doing as interim chairman of an investment bank while talking and writing about Wall Street as a gang of con men, sharpies, and cheats?
As a major investor in and a board member at Salomon Brothers, Buffett was the logical choice to step in to chair that firm in the early 1990s when the head of its government bond business was caught making illegal trades that netted about $4 million in profits. That act would cost Salomon some $800 million in “lost business, fines, penalties and legal fees.” The episode nearly led to Salomon’s demise as its reputation was blown to smithereens. In great detail, Schroeder documents how Buffett’s actions — most notably his willingness to capitalize on his own reputation for integrity — saved the firm. In the process, she also shows that he was no naive outsider in the investment industry but, instead, one of its shrewdest players. And the contradictions continue: More recently, he was a vocal critic of the derivatives game, in 2003 calling them “financial weapons of mass destruction.” Later, it turned out that companies in his own portfolio were major players in derivatives markets. (And, in 2008, he spectacularly became one of the largest investors in Goldman Sachs, arguably the master of the derivatives game. In hindsight this investment appears to be so potentially lucrative that it may offset his recent heavy losses in the Great Recession.)