the-five-minute-read

The Five Minute Read: Buffett, The Making of an American Capitalist

In Rubicoin’s latest Five Minute Read, we review Roger Lowenstein’s ‘Buffet: The Making of an American Capitalist’.

Roger Lowenstein is an American financial journalist and author. He has written extensively for the Wall Street Journal, The New York Times, Fortune and The Atlantic Monthly.

He is the author of six books, three of which have gone on to be New York Times best-sellers.

His first book was Buffett: The Making of an American Capitalist, a biography of investor Warren Buffett.

Roger is currently the Chairman of the Sequoia Fund, one of the most successful mutual funds in history.

Buffett: The Making of an American Capitalist

Unlike our previous reviews, Buffett: The Making of an American Capitalist is not a straight up investing book. It’s not filled with great tips and tricks to discovering the next Netflix or Amazon. It doesn’t even go in-depth into Buffett’s method – which there have been plenty of books about. Instead, Lowenstein’s biography will give you a deep insight into the mind and character of possibly the greatest investor who has ever lived.

The book traces Buffett’s life from his childhood in the 1930s to his takeover of Berkshire Hathaway – and then all the way up to 1995 when it was first published. From the very start, you are invited to explore the world of a man who has time and time again defied all reason regarding his command of finance and capital allocation – a skill that is demonstrated in the below graphic (which appears on the very first page of the book).

Of course, that image fails to tell the whole story. An up-to-date version would show Berkshire Hathaway’s stock price now up at $246,000 per share, and the Dow Jones barely raised off the line in comparison.

Rather than try to summarize the 400 plus page book, I thought I’d attempt to break down some of the broader themes emerge regarding Buffett’s life and the image of him that you are left with at the end.

Born for Business

One of the early signs that Buffett was destined for the business world came in his senior year of high-school, when he and his friend, Donald Danly, purchased an old pinball machine for $25. Noting that Danly was able to fix the machines, Buffett came up with a business plan. He would go to the local barber and offer to install the machine and take a 50/50 split of the money.

Soon the pair had expanded to seven machines across the city, generating them about $50 a week – a fortune for the 1940s. Buffett even came up with a name for the company – the Wilson Coin Operated Machine Company. As that business was generally controlled by the mob, Buffett and Danly never alerted the barber shops to the fact that they were the ones running the show, and played the part of legmen.

Buffett recalled:

“The barbershop operators were always pushing us to put in new machines, and we’d always tell them we’d take it up with the boss.”

You can see here Buffett’s business savvy – not only was he learning about the power of compounded returns, but he was clever enough not to let his ego interfere with his business. The less the barbershops knew that he was in charge, the less he’d be on the hook when things went wrong.

Buffett The Student

More pertinent than anything else in this book is the idea of Buffett as a lifelong student. He is a sponge for information, constantly seeking out to better himself in any way possible. He was obsessed with the teachings of his mentor Benjamin Graham and strived to learn everything he could from the man.

At the age of 21, Buffett began investing in the same companies as Graham. His research into the companies led him to discover that Graham was chairman of the Government Employees Insurance Company, better known as GEICO. One Saturday, Buffett took a train to the GEICO offices in downtown Washington and banged on the door until a janitor let him in. Buffett asked to speak to someone who worked there and the janitor introduced him to Lorimer Davidson, who was financial vice president at the time and just happened to be in on a Saturday.

Buffett asked Davidson to explain the insurance business to him, asking everything he could about the industry and its potential going forward. Davidson was so impressed with the young Buffett, that he spent 4 hours talking to him.

This was an incredibly important event in Buffett’s life. Of course, he went onto to make many billions investing in insurance companies,  and in 1996 he bought GEICO outright.

His need to continue adding to this bank of knowledge persisted throughout his entire life, often to the detriment of his personal relationships. To this day, when asked about his daily routine, Buffett and his business partner Charlie Munger both admit they spend almost all their time reading.

“In my whole life, I have known no wise people [over a broad subject matter area] who didn’t read all the time – none. You’d be amazed how much Warren reads – how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” – Charlie Munger

Mr. Integrity

One of the markings of a Buffett-backed business is that they tend to have very talented, very honest people running them. It appears to be a trait that Buffett values highly in his managers and his business partners.

That probably stems somewhat from what we’ll call the “Salomon Incident”. With its balance sheet in tatters due to some poor investments in junk bonds, Buffett started buying up stock in the investment bank Salomon Brothers. Shortly after, the company was caught up in a bond trading scandal and was nearly forced to file for bankruptcy. In a last ditch effort to save the firm, management asked Buffett to become the chairman and lead them through the storm.

Buffett came on board and immediately brought a sense of calm to the organization. Though the company was right on the brink, Buffett’s temperament eased the panic and got the company back on track. One demand Buffett made was that every employee works to build back the company’s reputation.

“I want employees to ask themselves whether they are willing to have any contemplated act appear on the front page of their local paper the next day, to be read by their spouses, children, and friends…If they follow this test, they may not fear my other message to them: Lose money for the firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

Before taking control, Buffett had lost one-third of his original $700 million investment in Salomon Brothers. By the time the company was sold to Travelers in 1997, it was worth $1.7 billion. The incident is a good indicator not only of how good a businessman Buffett is (as well as an investor) but also how much faith he has in the idea that you can make money honestly – a theme that is reflected throughout the book.

Should I Buy This Book?

Absolutely. This may not be an outright investing book but there is a huge amount of learnings inside. The examples I’ve given are a tiny representation of the both entertaining and thought-provoking anecdotes from Buffett’s life.

Inside you’ll also learn about his relationship with Mrs. B – an 89-year-old Russian furniture saleswoman who remains the only business partner to ever split with Buffett. You also get a glimpse into how meeting Charlie Munger completely changed the way that Buffett invested and helped shape the Berkshire Hathaway we know today.

Strangely absent from the book is the now infamous story of how Buffett almost sold his stake in Berkshire Hathaway but decided against it when Seabury Stanton offered him 1/8th of a dollar less per share. It’s merely glanced over – which is odd considering it is perhaps the only time that Buffett let emotions get in the way of his business mind. It also happened just five days after the death of his father, whom Buffett was very close to.

Still, this book contains more than enough to enlighten you on the character and temperament of maybe the greatest mind of a generation. It’s thoroughly enjoyable and hard to put down from start to finish.

 

 

Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions in Berkshire Hathaway.

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