The Leader's Bookshelf, page 20
The plot centers on an ancient ring, called the One Ring, with mysterious powers, forged by Sauron, the Dark Lord, that happens to fall into the hands of a hobbit called Bilbo Baggins. For some, but perhaps rather confusingly not all, the ring confers the power of invisibility, echoing Plato’s ancient description of the Ring of Gyges, and just as Plato warned, the price paid by the wearer is a slow corruption of character. Such a thing would not worry Sauron, of course, who, from his base in the Dark Tower of Mordor, searches far and wide for the ring to complete his dominion, but in vain.
Eventually Bilbo reaches his “eleventy-first birthday” and disappears, but not before bequeathing to his young cousin Frodo the task of undertaking a perilous journey across Middle-earth, traveling deep into the shadow of the Dark Lord to destroy the One Ring by casting it into the Cracks of Doom.
Well, that’s the plot, and whether or not people actually read the thing, The Lord of the Rings is indisputably one of the best-selling novels ever written, with over 150 million copies sold worldwide, not to forget entirely the three very popular film adaptations.
Notes
1. The bridge was demolished in 1929. There is only one bridge in the United States that really embodies Tom Paine’s idea, the Dunlap Creek Bridge in Pennsylvania, which stands as the first cast-iron arch bridge in America, built between 1836 and 1839, long after Paine’s death.
8
Make a Huge Profit—and Then Share It
John Rockefeller and Warren Buffett
Most of the books here so far have been either fiction or broad-brush factual works, particularly philosophical ones. The readers I’ve described seem to have chanced upon ideas in them that either captivated or inspired them and sent them off on a new line of thinking.
But of course there’s another kind of reader who has a pretty precise idea already of what they want, and this kind looks through the library shelves for books on precisely that. They’re not in search of new ideas as such but rather are looking for facts, methods, and details. If fictional works attract the gushing reviews in the Sunday papers, the grand prizes, and the excited media chatter, it is in more workmanlike volumes in reference libraries that many readers first found a crucial guide, a fellow spirit that would channel their intuitions and shape their destiny.
The American stock market guru Warren Buffett is just such a case in point. Here is a man who seems to have always had a pretty precise idea of what he wanted to do and achieve in life (essentially following in his father’s footsteps) and, as a young man, had already taken certain career steps to effect that. Yet of all the people I looked at while researching this book, Buffett is the one to most firmly declare that books shaped his life.
We already saw a little bit of this conviction in the introduction, where I recalled him pointing at a pile of books in his office and offering as advice to entrepreneurs of all kinds that they read “500 pages like this every day.” Five hundred pages! This directive turns books into a kind of raw material that might be dug out of the ground and sold on the stock exchanges that Buffett’s life revolves around. Plus, to me, it’s absurd to imagine that plowing through pages and pages of texts chosen like this will give you anything other than tired eyes and maybe a headache. But of course that’s not what Buffett is really urging. I think that he is more likely saying that time invested (and “investments” is the word that defines this man) in reading is well spent because books are like brain multipliers. It might take you a decade to match an author for background knowledge in their chosen field; how much smarter to just read their books and let them share their insights.
NONFICTION FAVORITES OF CEOS
Warren Buffett’s advice to anyone who wants to become a successful entrepreneur can be summed up in three words: read a lot. And here are the favorite books of three such businesspeople who seem to think the same thing.
First of all, consider Narayana Murthy, the Indian cofounder of Infosys, who has been listed as one of the twelve greatest entrepreneurs of our time by Fortune magazine. (Infosys is a global brand specializing in cutting-edge digital services.) Murthy has never shied away from sharing his love for reading. Like Buffett, his favorite book is a practical guide directly relevant to his work—in his case, Jon M. Huntsman’s story of how he built a $12 billion company from scratch. The book is called Winners Never Cheat Even in Difficult Times, and its core message is that although it can sometimes seem tempting to take shortcuts to get to the top, it is always best to build your company with integrity, and doubly so when times get tough.
Then there’s Bill Gates, cofounder of Microsoft and one of Buffett’s personal friends. Indeed, Gates shares with Buffett many things, the most superficial being that he is fabulously rich, but a second being that he is a dedicated philanthropist who seeks to use his wealth for the benefit of humankind. The third similarity is a real love of books. As discussed in the introduction, Gates recommends many authors from different genres, but it seems that in his own case it is really a business book that is his preferred beach read, Business Adventures: Twelve Classic Tales from the World of Wall Street written by John Brooks. The book, which is also one of Buffett’s favorites, seeks to explain why some businesses, like Xerox and General Electric, are successful and why others, like Ford’s Edsel venture, fail. If these twelve tales are given a new spin by the publisher, some reviewers nonetheless saw them as being rather dated tales of corporate life in America.
Facebook founder Mark Zuckerberg has spoken time and again, though to my mind less convincingly than Gates or Buffett, of his love for books. Perhaps that’s because Zuckerberg names Why Nations Fail: The Origins of Power, Prosperity, and Poverty as his favorite book. This joint effort by Armenian American economist Daron Acemoglu and British political scientist James Robinson uses institutional economics, development economics, and economic history to understand why nations develop differently, with some succeeding in the accumulation of power and prosperity and others failing along the way. Zuckerberg, rather sanctimoniously, credits this book with helping him better understand the origins of global poverty.
Warren Edward Buffett (born August 30, 1930; he’s a Virgo, the sign astrologers consider a “natural” fit for investments!) is an American tycoon with a net worth of nearly $90 billion, making him the third-wealthiest person in the world. Buffett is the second of three children and the only son of Congressman Howard Buffett, who was himself an investor with a small private firm. Buffett displayed an interest in business and markets at a young age. How young? When he was just seven, he borrowed a book called One Thousand Ways to Make $1000 from the Omaha Public Library.
Entrepreneurial ventures punctuated much of Buffett’s early childhood years: selling chewing gum, Coca-Cola bottles, golf balls, and magazines door to door. On his first income tax return in 1944, Buffett claimed a thirty-five-dollar deduction for the use of his bicycle and watch on his paper route. In 1945, as a high school sophomore, Buffett and a friend spent twenty-five dollars to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in three different barber shops across Omaha. The business was sold later in the year for $1,200.
In high school, he invested in a business his father owned and purchased a forty-acre farm worked by a tenant farmer. He bought the land when he was fourteen years old with $1,200 of his savings. By the time Buffett had finished college, he had already saved up the equivalent of $100,000 today. He might even have become the richest person in the world if he hadn’t also turned out to be splendidly disinterested in money for himself, favoring instead numerous philanthropic ventures.
And so Buffett’s interest in the world of business and investing was well established even as a teenager. In fact, he would have preferred to skip university in order to focus on his business ventures; he only enrolled at university at his father’s insistence. After a spell at Pennsylvania, he transferred to Nebraska, from where he graduated at only nineteen years of age. It was at this point that he happened across a newly published book called The Intelligent Investor by one Benjamin Graham. Buffett liked the book so much he says he read it about half a dozen times. What is more, seeing that Graham taught at the Business School of Columbia University, he made a beeline there to continue his studies after all. In due course, he would not only complete a master of science in economics at Colombia but also develop an investment philosophy rooted in Graham’s ideas.
THE INTELLIGENT INVESTOR
AUTHOR: BENJAMIN GRAHAM
PUBLISHED: 1949
Buffett learned the art of investing from a number of books by Benjamin Graham, but first and most importantly, he came across The Intelligent Investor. The book came out in 1949 and soon became a standard reference work on value investing—an approach Graham developed while teaching at Columbia Business School in the late 1920s.
At the heart of the book is the allegory of Mr. Market, an obliging fellow who turns up every day at the shareholder’s door, offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him or ignore him completely. Mr. Market doesn’t mind being ignored, though, and will be back the following day to quote another price.
The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. And Buffett freely credits Graham’s book as guiding his own business strategies: first, that smart investors should profit from market folly rather than participate in it, and second, to concentrate on the real-life performance of companies and dividends rather than be too concerned with Mr. Market’s behavior.
Graham’s allegory offers the figure of Mr. Market as someone who is irascible and moody. Indeed, the more manic-depressive he is, the greater the spread between price and value, and therefore the greater the investment opportunities he offers. In his book The Essays of Warren Buffett: Lessons for Corporate America (1997), Buffett reintroduces Mr. Market, emphasizing how valuable he finds the allegory for disciplined investing. Another debt to Graham that Buffett is quick to acknowledge is in the margin-of-safety principle. This practical piece of wisdom holds that one should not invest unless there is a good reason to believe that the price being paid is substantially lower than the value being delivered.
Since the work was published in 1949, Graham has revised it several times, the last time being in the early 1970s for the fourth revised edition, which features a preface and several appendices by Buffett himself. (Any editions produced since 1976 are necessarily without Graham’s input as he died that year.)
Buffett unambiguously credits the book as his big inspiration. In an interview, he said of it, “It not only changed my investment philosophy, it really changed my whole life . . . I’d have been a different person in a different place if I hadn’t seen that book,” adding, “It was Ben’s ideas that sent me down the right path.”
Soon after (with a segue to study economics at the New York Institute of Finance), Buffett set up several business investment companies, including one with Graham himself. He created Buffett Partnership Ltd. in 1956 (the key “partners” being a company that made maps for the fire insurance industry and another that made windmills), and this firm in turn became Berkshire Hathaway in 1970 after it absorbed a textile manufacturing firm and became a diversified holding company.
Ever since Buffett became the chairperson of Berkshire Hathaway, he has been noted for holding firmly to two principles. The first is pretty much one that anyone might hold to: he says his company only invests in firms that he believes have long-term value and prospects. But the second principle goes much wider and relates to the responsibilities of wealth. The flamboyant lifestyle and baubles of luxury are not for Warren Buffett. Even today, he still lives in a five-bedroom stucco house in Omaha that he bought in 1957 for $31,500. Not for him the gilded palaces or architectural extravagances of other members of the superrich club.
Instead, despite his immense wealth, he concentrates on ways to put his money to good use. This strategy means that Buffett has pledged to give away not a measly 10 percent, as per traditional religious injunctions, but 99 percent of his fortune to philanthropic causes! How do you give away vast sums of money, though, without wasting it? Buffett’s off-the-peg (“ready to wear”) solution is to do so primarily through the Bill & Melinda Gates Foundation. Cynics might note that this is a very unusual charity in that it regularly returns a substantial profit!
Addressing Colombia University’s centennial celebrations (in 2015), Buffett put it like this: “Leaders who use their talents not only to do something for themselves, but for others. Leadership that is creating ideas, creating products, creating whatever it may be that will benefit millions of people.”
In his philanthropy, as in his investing, Buffett follows Graham’s overarching principle that true investing is based on an assessment of the relationship between price and value. Buffett says, “You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Education’s cost is its ‘book value’ and what is clear is that book value is meaningless as an indicator of intrinsic value.”
This is a big idea with political and social ramifications. Buffett warns that strategies that do not employ this comparison of price and value do not amount to investing at all but rather to speculation. A key principle of Buffett’s called the circle of competence principle follows naturally from this and is the third leg of the Graham/Buffett school of intelligent investing. This commonsense rule advises investors to consider investments only in businesses that they are capable of understanding.
Commenting once on why his investment company had bought a large shareholding in the Washington Post newspaper company at a time when such things were being generally shunned by the market, he said, “Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see. Our advantage was our attitude, that we had learned from Ben Graham, that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values” (emphasis added).
Likewise, in the annual letter for his company’s investors written in 1987 (starting with a reference to his vice president, Charlie Munger), Buffett follows Graham’s lead, saying,
Whenever Charlie and I buy common stocks for Berkshire’s insurance companies (leaving aside arbitrage purchases, discussed) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts, not as market analysts, not as macroeconomic analysts, and not even as security analysts.
This, of course, is the cue for Mr. Market to come in.
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
But sometimes Mr. Market gets depressed and can see nothing but trouble ahead for both the business and the world. Investors should seek to insulate themselves from “the super-contagious emotions that swirl about the marketplace,” and, Buffett says, remember Graham’s dictum that in the short run, the market is a voting machine, but in the long run it is a weighing machine. Or we might paraphrase to say that in the short run it is guided by opinions, in the long run by facts.
Such was certainly the case with the global subprime crisis of 2008 that ripped through the United States like a whirlwind, forcing tens of thousands of homeowners and firms to the wall and leaving whole national economies worldwide in tatters. For Buffett, it illustrated what happens when people invest hopefully in things they don’t actually understand. “Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: we view them as time bombs, both for the parties that deal in them and the economic system.”
The problem, Buffett says, is that essentially such instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. However, events such as the subprime crisis of 2007–2009 showed that many CEOs (or former CEOs) at major financial institutions were “simply incapable” of managing huge, complex books of derivatives. “Include Charlie and me in this hapless group,” Buffett acknowledges ruefully, adding that it took five years and more than $400 million in losses to “close up shop” on the complex web of 23,218 derivatives contracts with 884 counterparties that they ended up with after purchasing General Re (General Reinsurance Corporation) in 1998.1
