Sunday, January 9, 2011

The Snowball: Chapters 49, 50, 51 & 52

Warren Buffett chose Alice Schroeder to be his biographer, granting her access to his personal life like no outsider has ever been granted. In The Snowball, she is rather frank and is not always complimentary of the investing legend, which has apparently led to a rift between the two. Here follows a summary of the book.

The Salomon debacle added stress to Buffett's life like no other business situation. He was sleepless at night, as he wondered how the billions of dollars of expiring debt would be paid as customers withdrew their funds and cancelled deals. But Buffett guided Salomon through the mess, and came out of it looking like an honest genius. From the start, he focused on turning the firm into an ethical powerhouse, which likely enabled it to avoid an indictment that would have finished the firm.

In 1991, Buffett meets Bill Gates for the first time. Neither had expected to have much in common with the other (other than the fact that they were #1 and #2 in the world's richest man rankings), but they hit it off immediately. They were so enthralled in private conversation that they left others at the party miffed. Gates, who understood the notion of competitive advantage very well himself, advised Buffett to buy Intel and Microsoft in 1991. Buffett only bought a token amount, 100 shares, of the latter. Gates also told Buffett that Kodak would go bust because of the digital age; at the time, Kodak was prosperous and saw no threat.

The author also describes Buffett's attempt to buy Long-Term Capital Management (LTCM) before it was bailed out. Because Buffett had been touring remote areas with the Gates', he was unable to consummate a deal that he believes would have been very lucrative. LTCM had equity of $500 million for which Buffett offered $250 million. The problem for LTCM was that it needed a capital injection to stave off default (due to leverage); Buffett was willing to make a capital injection of several billion dollars. However, for a couple of potential reasons (one being that LTCM was run by a man Buffett had fired for ethical violations at Salomon), Buffett believed that LTCM downplayed the likelihood of a private transaction and thereby forced the government to bail it out (in order to avoid panic in the capital markets).

As the year 2000 approached, Buffett had fallen to #4 in the world's richest man rankings, as the technology boom took center stage. People called him a has-been and a dinosaur as he would not invest in technology stocks, which were the hot investments of the day.

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