The Directed Life

Notes and quotes from Alice Schroeder’s Snowball biography

Date read: 12/7/2022

The Market

Buffet on the nature of the market (page 16):

In the short run, the market is a voting machine. In the long run, it’s a weighing machine.

Buffet on interest rates (page 17):

What you’re doing when you invest is deferring consumption … Aesop was not much of a finance major, because he said something like, ‘A bird in the hand is worth two in the bush.’ But he doesn’t say when … that’s why sometimes a bird in the hand is better than two birds in the bush and sometimes two in the bush are better than one in the hand.

Interest rates:

• the cost of borrowing
• the price of “when”
• value of financial assets vary with varying interest rates

Influences

The start of the book 1,000 ways to make $1,000 that struck a deep chord in young Buffet (page 64):

Never in the history of the United States has the time been so favorable for a man with small capital to start his own business as it is today … But you cannot possible succeed until you start. The way to begin making money is to begin.

Schroeder on how deeply influential this book was to Buffet (pages 64–65):

The way that numbers exploded as they grew at a constant rate over time was how a small sum could turn into a fortune … Warren began to think about time in a different way. Compounding married the present to the future. If a dollar today was going to be worth ten some years from now, then in his mind the two were the same.

For Buffet it was pennyweight scales: what can you buy that incurs profit, use the profits to buy more of, and incur more profit?

Warren’s dad Howard carried these handwritten words in his pocket for years (page 67):

I am God’s child. I am in His Hands. As for my body — it was never meant to be permanent. As for my soul — it is immortal. Why, then, should I be afraid of anything?

Buffet started a successful pinball business with his buddy; they bought a pinball machine and convinced a local barber to let them put the machine in his barbershop, splitting the profits. They used the profits from the first pinball machine to buy more pinball machines and put them in more barbershops, now with a proof of concept to show other barbershops how profitable this could be for them. Schroeder describes how

Warren had discovered the miracle of capital: money that works for its owner, as if it had a job of its own.

Schroeder on Graham’s success as an investor (page 143):

Graham had achieved this superior performance while taking considerably less risk than someone who simply invested in the stock market as a whole. And Graham did it mainly through his skill at analyzing numbers.

Related question to ask yourself: Through the development of what skill can you become a significantly more successful person while taking considerably less risk?

The 3 main principles Buffet took from Graham (page 147):

• A stock is a the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.
• Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.
• Mr. Market is your servant, not your master. Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of the price. However, from time to time he does offer the chance to buy low and sell high.

Playing Un-losable Games

How do you play an un-losable game?

Schroeder on Buffet’s success in the mid 1960s (page 315):

The margin of safety Buffet always insisted on had skewed the odds sharply in his favor.

1. Arbitrage

Buffet on arbitrage (191):

Give a man fish and you feed him for a day. Teach a man arbitrage and you feed him forever.

Munger following Buffet into the strategy of playing un-losable games (pages 254–255):

With these huge sums [millions of dollars borrowed from banks], Munger did enormous trades like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock — but only because there was almost no chance that this deal would fall apart. When the transaction went through, the deal paid off handsomely.

Buffet and Munger were arbitraging assets. What can you arbitrage? research, ideas, time, skill, labor?

Thoughts from page 216: Buffet’s partnership started the snowball of the earnings generating more earnings and so on. Buffet would earn more as he performed better. Are you paid for your performance or on a promise?

2. Cigar-butt strategy

Schroeder explaining Buffet’s cigar-butt strategy (page 243):

Keep buying a stock as long as it continued to sell below book value. If the price rose for any reason, he could sell out at a profit. If it didn’t, and he ended up buying until he owned so much stock that he controlled the company, he could sell off — that is, liquidate — its assets at a profit.

3. Float

Schroeder on Buffet and Munger’s acquisition of Blue Chip (page 317):

They wanted it because Blue Chip had something called “float.” The stamps were paid for in advance; the prizes got redeemed later. In between, Blue Chip had use of the money, sometimes for years … That meant they could invest this steadily growing stream of “float.”

Find a business where there’s a disconnect between when you get paid and when you have to deliver.

Notes Continued

Charlie Munger’s father forced him to read Robinson Crusoe to “absorb the book’s portrayal of the conquest of nature through discipline.” (page 223)

Buffet on Munger selling himself an hour a day (page 226):

Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?” And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be their own client, and then work for other people too, and sell yourself an hour a day.

Reminded me of Jordan Peterson’s $50 / hour lecture: https://www.youtube.com/watch?v=QeSB3FgW5ok

Munger on risk (page 255):

Munger had the attitude that unless you were already wealthy, you could afford to take some risk — if the odds were right — to get rich.

Buffet on excellence (page 293):

Intensity is the price of excellence.

Buffet on ‘Essentiality’ in business (page 441):

It [The Daily Racing Form] sold a hundred thousand copies a day, and it had for about fifty years. It cost more than two bucks, and it was essential. If you were headed to the racetrack and were a serious racing handicapper, you wanted the Racing Form. He [Walter Annenberg] could charge whatever he wanted, and people were going to pay it. It’s like selling needles to addicts, basically.

Schroeder on the method (page 478):

The method was the same: estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work.

Schroeder on Buffet’s decision to invest in Coca-Cola (page 551):

He had to compare what Coca-Cola would ultimately be worth as a business — the bird in the bush — to the bird in the hand, which was Berkshire’s cash. Simply by investing the cash in government bonds that had no risk of losing money, Berkshire could earn a certain amount over the same period. He compared the two. By that yardstick, Coca-Cola was a beauty, and in fact, there wasn’t any other stock he knew of that stacked up better. Buffet started buying it.

How valuable is your bird in the hand? Probably not that valuable yet. Keep trading up until it is.

Schroeder on Buffet’s mental frameworks — the importance of thinking in probabilities (page 599):

He [Buffet] thought in probabilities; he extrapolated right away to whether a catastrophic outcome was possible—then worked out very fast what it would take to get to the lowest probability of catastrophe.

Buffet on meeting Gates (page 623):

Bill Gates Sr. posed the question to the table: What factor did people feel was the most important in getting to where they’d gotten in life? And I said, ‘Focus.’ and Bill said the same thing.

Buffet on discipline (page 678):

When you’re prosperous it’s very hard to instill discipline.

Buffet’s famous genie analogy (page 687):

You only get one mind and one body. And it’s got to last a lifetime … It’s what you do right now, today, that determines how your mind and body will operate, ten, twenty, and thirty years from now.

Trade deficit (page 740):

Americans were buying more from other countries than they were selling, and at a fast-accelerating rate. They were paying the difference through borrowing; foreigners were buying Treasury bonds, an I.O.U. from the U.S. government. In short order, the country’s “net worth,” he said, “is being transferred abroad at an alarming rate.”

Are you in a micro-trade deficit? Where do you transfer your net worth?

When a shareholder asked Buffet what the ideal business is (page 741):

The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine … we can move that money around from those businesses to buy more businesses.

Capital can always be interchanged for time — what earns you high returns on your time?

Schroeder on the principle of inversion from Munger (page 770):

Munger’s favorite construct was to invoke Carl Jacobi: “Invert, always invert.” Turn a situation or a problem upside down. Look at it backward. What’s in it for the other guy? What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead — through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and you will succeed.

Buffett’s advice on perspective — the 98th floor (page 776)

If you go from the first floor to the hundredth floor of a building and then go back to the ninety-eighth, you’ll feel worse than if you’ve just gone from the first to the second, you know. But you’ve got to fight that feeling, because you’re still on the ninety-eighth floor.

If you have your family and your health, count your blessings before your woes.

Buffet’s personal finance advice (page 825):

Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market.