Alice Schroeder looks behind the carefully managed façade of Warren Buffett and does not disappoint.

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All longstanding members of the Warren Buffett fan club have been keenly looking forward to the arrival of the new blockbuster biography by Alice Schroeder, published last week. Ms Schroeder is an experienced Wall Street analyst whose coverage of Berkshire Hathaway so impressed Mr Buffett that he chose her to write the definitive version of his life and investment career. The book is the only one with which he has co-operated fully, and is based on 20,000 hours of taped interviews and co-operation from colleagues and family.
 
The result, inevitably, is a dauntingly hefty tome of some 960 pages, but it does not disappoint. Its value lies not only in the extra light it throws on some of the pivotal episodes in Buffett’s career, but also in rounding out the character of a man who many regard as the most consummate stock market operator of all time. The detailed exploration of his personal life points up the contrast between the relentlessly simple focus of his professional life and the multi-layered complexity and periodic awkwardness of his relationships with family, friends and working colleagues.
 
Without rehearsing these details here, suffice it to say that anyone who has wondered if there is more to Buffett than the carefully constructed public persona who pens his rightly famous annual letters to shareholders will quickly find the answer: there is. Look behind the carefully managed façade, as Ms Schroeder has done in painstaking detail, and you will find a man who has experienced (and not infrequently caused) the same family ructions, emotional dramas and financial disputes as the rest of us.  (“Warren doesn’t suffer from stress; he creates it for other people” is roughly how his business partner Charlie Munger sums it up).
 
After a month which has seen Buffett emerge as a significant investor in both Goldman Sachs and GE, such is his status that investors have invariably sought to construe the meaning and implications of his latest moves to deploy some of his huge cash pile. Does his decision to take an equity stake in two iconic names in the US business world mean that he has “called the bottom of the bear market”, as some have suggested?
 
The answer is no. For one thing, a central tenet of Buffett’s investment philosophy has always been to invest in specific businesses, not to make bets on the direction of the market. While it is not strictly true that he has never passed a comment on the level of the market, they are a rarity. In 1974 Buffett said that he was “like an oversexed man in a harem” because share prices had fallen so low, but, as the book reveals, because of his reckless move into the ailing textile company Berkshire Hathaway he had little cash to spare to take advantage.
 
Secondly, the deals that Buffett has struck are on characteristically preferential terms that say little about the prospects for other equity investors. A 10% coupon on a preference share, with an option to buy additional shares at a discount to the current share price, is the kind of bespoke sweetheart deal that Buffett has made in the past. The only downside from his perspective is the risk that Goldman Sachs and GE go bust, a Doomsday scenario that is surely unthinkable even if today’s feverishly gloomy climate.
 
Thirdly, as Ms Schroeder points out, the sweetheart deals of this kind that Buffett had made in the past have not been among his most successful. In the 1980s he made a series of preference share investments that similarly offered him better terms than other investors. Of the four big investments of this kind, the only one that turned out to be an unqualified success was in Gillette.
 
The others all turned out in varying ways to be disappointments. The worst of them was Salomon Brothers, which eventually turned a profit but not before putting Buffett’s reputation on the line when the Treasury bond market scandal in 1991 broke. The Salomon saga, which features prominently in Ms Schroeder’s book, is worth revisiting as a timely reminder that there is nothing new about greed, excess and hubris in investment banking. (Or about failures in corporate governance: even as a board member of Salomon Buffett was kept in the dark about the unfolding scandal and over-ruled as a member of its remuneration committee).
 
Finally, in lobbying for the Paulson plan to go through Congress, Buffett has made it clear that he regards the current crisis as America’s “financial Pearl Harbour”, potentially the harbinger of the worst economic downturn since the 1930s. His instinct is that recession will be longer and deeper than most commentators think, and that meltdown in the financial system remains a real risk. While a number of individual shares now look strikingly cheap, in other words, and are likely to yield handsome returns over time, it is far from clear that the market has fully discounted the damage to corporate earnings that is still to come.
 
How effective will the US bailout be? It is worth recalling “the most frightening words in the English language”, as fondly recalled by President Reagan: “I am from the Government and I am here to help”.



Jonathan Davis
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