Wednesday, December 10, 2008

Success Book Reviews: Warren Buffett and "The Snowball", Part 2

This is part 2 of a “review” of Alice Schroeder’s remarkable biography of Warren Buffett, "The Snowball”. Part 1 is here. I put the term “review” in quotes because what I have bee trying to do on this blog is abstract the qualities that generate personal success and achievement, whether from biographies, websites, etc. As such, I tend to look at the material I am reviewing with a view towards gaining a glimpse at the successful practices of our highest achievers, and, if possible, cross-referencing these characteristics with those of other achievers I have discussed on this blog.

Here are a few of the success secrets that Buffett seems to have practiced, some of which appear in the biographies of other successful people

Buffett Secret # 1: Go to New York

What? What kind of Success Secret is that??? Actually, Woody Allen got it half right. He said “The Secret of Success is Just Showing Up”. What he might have added is “ Just Showing Up In New York City”. Several of the outstanding successes chronicled in this blog have passed through and “caught fire” in New York City: Andy Grove, Sandy Weill, and Allen Greenspan are three of them. All four (Buffett included) had transformative experiences in Post W.W. II New York City. And they are only four of millions who “got their shot” in New York (others included me, and my father). The broader rule is phrased as: “Go where there is a ‘critical mass’ of knowledge or activity in your field”. Ben Stein also mentions this Success Secret in his beautifully written “How Successful People Win”. You grow corn in Iowa and make chips in Silicon Valley NOT THE OTHER WAY AROUND. We view Warren Buffett as basically a Nebraskan. Thanks to Schroeder, we see…not so. Besides his formative experiences studying and working for Value Investing dean Benjamin Graham, Buffett traveled to New York countless times on business for decades. Often times he did it “on the cheap”, rooming with relatives or friends, or in inexpensive hotels. But Go he did.

Buffett Secret #2: Go Wherever You need to go to do business or gain knowledge

Knowledge is often not nearby nor easily obtained. Buffett went far into the countryside to many a rural business to assess its value prospects. In his early years he also managed to track down other businessmen who were already assembling collections of businesses, as he wished to do, and sit down with them for talks. Always, always he would ask questions, and, because he schooled himself in interpersonal skills, he got the answers he needed to make buy/sell decisions. I was struck by what, at least to me, seemed to be a key difference between Buffet and another Titan, Alan Greenspan, who seemed to spend more time in the New York/Washington corridor. One difference between he men, it seemed to me, was that Buffett had “ownership money” on the line. He was actually buying things, as opposed to Greenspan’s early career, as a consultant. Buffett needed to examine each prospective business purchase as with a jeweler’s loupe. The tiniest asterisk in a corporate report might mean an hours long interrogating of target management. As such, Buffet had to be “present” in intellect and in physically Being There. Greenspan, on the other hand, was gifted with a broad, big-idea view, and thus tasked himself with assembling masses of smaller details into a larger tapestry, initially for his consulting clients, later for the Federal Reserve.

The key point is, “getting from, here to there” requires an enormous expenditure of energy. A bias for activity, and enough assertiveness to get the data, confront (or cajole) when (absolutely) necessary. You can’t do it from behind a desk, and, usually, not (solely) in your own backyard.

More Success Secrets of Buffett’s “Snowball” in upcoming posts.

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Saturday, December 06, 2008

Success Book Reviews: Warren Buffett and "The Snowball" Part 1

Alice Schroeder has written a monumental, authorized biography of Warren Buffett. The amazing Buffett is often classed as the world’s richest man. His public image, as a smiling, relaxed, avuncular presence would lead one to ask “Is that all it takes to become the world’s richest man?” Thankfully, the answer is “no”. It appears that what it took for Warren Buffett to succeed was very much what it takes for all of us to succeed, and, for vast success, none of the skills needed for success can be omitted from one’s personal “portfolio” of skills.

What surprised me most about the book was the “disconnect” between the Warren Buffet I thought I understood and the Warren Buffet of Schroeder’s book. I had an image of Buffett as a brainy, savvy stock investor, basically picking businesses by their balance sheets, buying stock when it was cheap, and leaving management alone, as he sat in his Omaha office contemplating his next share purchase. What I learned was that Buffett was no “shrinking violet”, but was hugely proactive, a determined networker, and that he learned to become an absolute master at recruiting others to achieve what he desired to achieve. He has actively sought opportunities to teach, speak, and associate with other prominent and successful people. This side of him goes far beyond the pure “investor” side. As a matter of fact, many investors with similar approaches (the members of Buffett’s “Graham and Doddsville”) succeeded admirably without the need for the limelight.

What is the Snowball?

Perhaps the most prominent feature of Buffett’s career is the Snowball itself. The Snowball is the difference between success and massive success. It is a skill, a goal, a process, and an achievement, all “rolled up” in one, and it is the Snowball itself I want to discuss here.

The Snowball is a compounding effect created by applying a successful, self-reinforcing process at larger and larger scales. Because it is a compounding effect, the process needs to be maintained with as little disruption as possible, for as long a time span as possible.

Bufett's “Snowball” could be defined as the purchase of underpriced cash-flow streams, combined with the re-deployment of those cash flows toward the purchase of future cash flow streams.

This blog has previously examined other Snowball effects, such as the career of Citigroup chairman Sandy Weill and golfer Greg Norman.

In Weill’s case, the competencies used to create the Snowball included brokerage management skills, especially back-office management and balance sheet survivability. In Norman’s case, it was exploitation of a personal brand into wider and wider arenas.

All three, Weill, Buffet, and Norman needed to be skilled at projecting personal presence in order to move to higher and higher levels of leverage (i.e. bigger and bigger businesses). In at least one case, Buffett’s, he consciously took Dale Carnegie classes to improve his abilities in this area.

What does it take to build the Snowball?

First and foremost, a core skill set and a passion derived from success utilizing the skill set. Buffet had a passion for “the business of business” since his first paper route. He came to learn that his love for the details of business could produce increasing success.

Because larger and larger scale is needed, delegation skills become important

Because increasing the span of the business is important, the ability to appreciate the differences, as well as the similarities, of the next acquisition is important.

The ability to scale attention span is important: sometimes a wide-ranging view of a business, sometimes weekly sales figures of a branch network, even product-by product scrutiny. Sometimes you're studying yearly sales in the billions, sometimes one-cent price-increases.

Because the span of the pursuit continues to increase, delegation skills are important. The ability to “size up” a manager becomes a required skill. Since all-too-human people are involved, there is always a chance for error and errors often occur.

Because Buffet’s core competence is, basically, purchasing underpriced cash-flow streams, it is important to have the interpersonal skills to persuade owners of those streams to sell to him at a price he considers valuable. These skills can be “good cop” skills, or “bad cop” skills.

Because the compounding effect takes decades to mature, personal passion and willingness to stick to routine, and maintain consistent analytical rigor is crucial.

I’ll continue my discussion of The Snowball in a future post.

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