Thursday, December 03, 2009

The NotMakingThisUp Interview with Alice Schroeder


Editor’s Note:
We had the opportunity to interview author Alice Schroeder as the paperbook version of her best-selling, and eye-opening, "The Snowball: Warren Buffett and the Business of Life" was hitting stores. We emailed more than a dozen questions to Alice, including a few that might have been uncomfortable, but, we thought, worthwhile. Alice answered them all.
Our questions are in plain typeface; Ms. Schroeder’s responses are italicized in bold.
For her thoughts on brilliant people, costly aspirations and codependency, as well as working against actuarial tables, sources fearing retaliation and when “he stopped speaking to me,” not to mention the next CEO’s biggest challenge, Charlie’s dictionary entry, “a major case of monkey mind” and other unique insights into Warren Buffett and the future of Berkshire Hathaway, read on!


JM: First of all, Alice, congratulations on having written a book—that isn’t easy. Second, congratulations on the book being successful enough to warrant a paperback—that isn’t as common as it used to be.

AS: Thank you very much. And congratulations on your very successful book.

JM: Thanks. What was the worst part—not the hardest, but the worst—about writing the book in the first place?

AS: Wow, we are really launching right in here. Okay, the worst part was living with fear. Nearly all writers live with a fear of being judged that increases as the book draws closer to its publication date. I did live with that fear, yet it was far outweighed by my fear of the consequences of publishing this book. I wrestled with that daily for years.

Eventually, I could judge the truth of my writing by my feelings. If it made me feel weak, even nauseous to write something, that was good. It meant that I’d succeeded in subduing the fear monster with my blow dart just long enough to pen it on the page.

I never reread The Snowball if I can help it. The fear monster glares at me from its captivity inside the book. Better to just shut the covers and leave it there.


JM: Understood. What was the best part of writing “The Snowball”?

AS: There’s no one best part. You can’t imagine how grateful I feel to have had this opportunity. I have never learned so much about so many topics so fast. Warren is a great teacher. Simply by observing him and his world you absorb a whole new culture, as an anthropologist would. I got to spend time with a whole cast of other interesting, brilliant people. Imagine being able to talk to Bill Gates for hours. He’s a great teacher, too.

I researched all sorts of unusual topics that would never have crossed my desk otherwise. The history of desegregation in Washington, D.C. How a slaughterhouse was organized in 1940s Omaha. The history of Las Vegas.

I learned to write narrative nonfiction. Some days the words well up inside you and you know they are coming from somewhere outside yourself. To experience that sense of grace is why writers write. This experience changed my life in so many ways that I can’t recount them in a paragraph.


JM: So what, if anything, did you regret about the book once it was published?

AS: According to both my agent and editor, every writer sees the flaws in their book, real and imagined, as soon as they open the covers. And it’s true.

JM: You bet. Now, the new, paperback version of “Snowball” is shorter, but I honestly couldn’t identify major chunks that you removed—and that is no easy feat. What did you remove and who decided what to take out?

AS: I did the cutting myself, which was essential, and removed words, phrases, and sentences to condense stories when possible rather than wholesale cutting. I had to make some tough decisions. One story that was hard to cut, for example, was the story of Warren’s silver investment in the chapter “Semicolon.” He had bought almost a third of the world’s silver supply. He wanted to go to London to visit the silver, and pictured himself in the vault, enjoying the feeling of being surrounded by all those silver bars. What an image.

JM: Yes it is. Now, a question about the title. Not about “The Snowball” part, which some Buffettologists thought was odd given that the snowball metaphor is one of his least well known—but about the “Warren Buffett and the Business of Life” part.

As your book points out, his wife left him—physically, at least—after 25 years, and his children, in their formative years, appear to have occupied his mind less than 10-Ks and 10-Qs.

Indeed, subheadings in your book’s index under “Warren Buffett” include, and I am not making this up, ‘attention-seeking,’ ‘emotional frugality,’ and ‘focus, total absorption and obsession.’

Isn’t one subtext of your book that WB failed where it really matters in the “business of life?”

AS: We read biographies of eminent subjects to learn from their lives, for better or worse. These are people who have succeeded and failed on a grand scale, and the lessons they impart are magnified accordingly. Warren’s life is so instructive – the Inner Scorecard, his way of dealing with people, how he taught himself to think about risk, about time, about responsibility. When I started working on the book it felt like getting a post-graduate degree in life. I wanted to give those lessons to the reader.

As for the business of life in the title, the point is that business is inseparable from life. Most of the investing books focus on financial success as an isolated goal. Yet his business life can’t be understood outside the context of his personal life. Warren’s story is a living illustration that aspirations to be as successful as him have a cost. Until I got to observe him closely I didn’t realize how single-minded he is. People who want to invest like Warren Buffett ought to understand what this would mean to their lives.

Lastly, readers might be interested to know that a professional indexer creates the index. This is a real job – indexer -- I am not making this up. Other terms she chose: complex personality, honesty, sense of rectitude, sentimentality, showmanship, personal growth after Susie’s death.


JM: You interviewed a lot of people for your book. First, what was your relationship with Susan T. Buffett, and how comfortable were you interviewing her?

AS: I met Susie the day I first interviewed Warren as an analyst. The first five years we barely knew each other. It wasn’t until the book got going that we started getting acquainted. Susie’s very comfortable to be around. One time she took me down to Glide Memorial Church to see the gospel choir rehearse, and we had dinner with the Reverend Cecil Williams and his wife, Janice Mirikitani. I’ve had a couple of meals with Susie, and her eating habits were nearly as appalling as Warren’s, incidentally.

As you would expect from reading The Snowball, when I was interviewing Susie, she didn’t want to talk about herself, but was forthcoming about Warren. She was diagnosed with cancer six months after I started working on the project, which limited the interviews we were able to do. That was too bad. She was a wise woman.

JM: Who was most fun to interview?

AS: Warren, of course. He’s nonstop funny as well as always teaching you things. Among the rest, my favorites, hands down, were the older people. The actuarial tables were not working in my favor, with so many people of Warren’s generation and older to interview, so I started with the oldest first – those over age ninety – and worked my way down. We so rarely spend generous amounts of time with our elders. I was able to do it often and at length. It was a privilege to spend so many hours among people who had accumulated such a great store of wisdom.

JM: Who gave you the most insightful view of Buffett?

AS: Warren, by letting me spend so much time observing him and talking to him. My observations of him became the litmus test against which I measured everyone else’s statements. Beyond that, his sisters, Doris and Bertie, who have known him longer than anyone. Charlie Munger. His kids. Sharon Osberg. Don Graham. A few others that I’d prefer not to name.

JM: Speaking of those last, in your acknowledgements you cite “those who asked not to be named”: what, in general, did those who didn’t want to be named have in common?

AS: They wanted the truth to be told, and were afraid of retaliation if they were named.

JM: Wow. Okay. One final question along this line: there’s a quote late in the book (Page 694 in the paperback), about how Buffett held off on endorsing Obama “until it became irrelevant.” You write:

As one observer put it, “Warren only ever wants to back winners. Your real friends are the people who are there for you even though it might cost them something.”

That sounds remarkably catty for a true friend of Buffett to say. Buffett is a guy who won’t sell the Buffalo News even knowing its value is going to zero and who almost never fires a CEO, even if the business is underperforming. I suspect it was said by a political acquaintance. Am I wrong about that, and do you agree “he only ever wants to back winners”?

AS: To help and endorse and support your friends when they are in need is different than making business decisions about underperforming assets and people. The quote you refer to came from a close friend of his who has no involvement in politics, and is simply one of the people who have been hurt. I would describe it as a wounded, not catty statement.
Remember, we’re speaking of the man who wouldn’t help his sister when she nearly went bankrupt, who wouldn’t help his daughter when she was pregnant (and they are not the sources of this quote).

By the way, as you can tell from The Snowball, people who’ve been hurt by Warren almost always rise above it, and still love him in the end.

JM: You became the first major sell-side analyst (we call them “Wall Street’s Finest” here—no offense, I hope) to cover Berkshire Hathaway after Buffett merged with Gen Re. You gained enough of Buffett’s respect that he regularly appeared at your famous (among Buffettologists) Friday night dinner in Omaha during the annual meetings, and ultimately gave you his blessing to write what was perceived to be his one and only authorized biography.

How did your own personal view of Buffett change from the first time you ever met him to the day “Snowball” was published—and how about as of today?

AS: If I could make one small adjustment to your introduction, Warren cooperated with me for The Snowball, but it was not an authorized biography. The latter means the subject has editorial control over the book.

When I knew Warren as an analyst he was an awe-inspiring, almost infallible-seeming figure. Fortunately he didn’t care about the stock’s rating, and I believe he might even have been perversely pleased had I put a sell rating on it, so that he could show off how little he cared and make a point about Wall Street. (I didn’t, and it would have been a mistake to do that during the time I followed BRK).


Once I got to know him better he became real, fallible, even fragile. His achievements actually seem more impressive to me with hindsight. To start out in life with a family like his and accomplish what he has done is, in my opinion, a greater feat than the public generally gives him credit for. Whereas the hero-worship of Warren Buffett has been overdone, his real accomplishments are underappreciated.

Today, he seems the same person as when I finished the book. The test of whether you’ve done good research is how well you can predict and, more important, explain your subject’s behavior. Warren rarely surprises me, and I nearly always understand his motives.


JM: You wrote extensively—I'd guess too extensively for most Buffettologists, not to mention for Buffett himself, if the rumors are true—of his personal life. In fact, you named his first wife’s lover. Having been a Wall Street analyst and having written a book about Warren Buffett, I know it is not easy to write something unflattering about a person you both like and admire.

How hard was it to physically put those words down in a book that would be read by WB, not to mention his best friends and family?

Also, where did the worst reaction come from, and do you think you could have or should have done anything differently?

AS: It’s strange that this is a controversy. A biography includes the details of the personal relationships that influenced the breakdown of the subject’s marriage. That goes without saying. You can’t really understand Warren Buffett without this information.

And of course I didn’t want to hurt Warren. I care about him as a human being. It was hard to know that he was going to be hurt and that I would be the instrument of his pain. But let us turn this around a bit.

Warren knew my work as an analyst. He knew that I was dogged about research and that I had a history of writing things that were true even if they upset people. He chose me for this project anyway. He may have thought, who knows what. That in exchange for such complete cooperation, I would owe him the loyalty of writing the version he wanted. As many people would. Nonetheless, he knew what he was getting when he chose me. That was not an accident.
He immediately began shoveling biographical material of an intensely personal nature at me. Until that point I had no idea of the situation I was walking into. Once I started to understand, it became my responsibility to do corroborative research. The choice was to tell the truth, which would hurt Warren, anger other people, and expose me to vindictiveness, or to lie, which would violate the reader’s trust and my integrity. I had to work myself up over and over to find the courage to tell the truth.

From time to time, I talked to Warren, and my agent talked to Warren, to let him know that he wasn’t going to like, or even necessarily agree with, some aspects of the book. He continued to cooperate with me throughout. Warren read the book in July 2008, right before it went to the printer.
Afterwards, we continued to have a perfectly friendly relationship, right up until the week The Snowball was published. It was only then that he stopped speaking to me. Under the circumstances, someone might deduce that other people’s reactions influenced him, although there’s no way to know for sure.

I wouldn’t do anything differently with hindsight. This was an important book that needed to be written. I made a considered judgment based on the readers’ needs, and have tried to set my own feelings aside.

JM: The results speak for themselves, I’d say. Now, moving beyond the personal, while researching “Pilgrimage to Warren Buffett’s Omaha,” my thought process on Berkshire changed: I went in thinking Buffett the Investor could be replaced by an equally rational investor, while Buffett the Manager could be replaced by anyone who merely left the Berkshire companies alone.

However, I came out thinking Buffett the Investor may not need to be replaced—because the investment portfolio is so minor relative to the businesses Berkshire now owns—while Buffett the Manager can’t be replaced for the simple reason that nearly all those Berkshire companies are run by individuals who sold to Warren Buffett, not to Howard Buffett and the Board of Directors. Furthermore, it seems unlikely that families who might want to sell to Warren Buffett would feel comfortable selling to a David Sokol on anything like the terms Buffett would get.

What's your take?
.
AS: Allocating Berkshire’s capital (as opposed to investing in stocks) is going to be the CEO’s biggest challenge. The Berkshire companies throw off a lot of cash. Even after the company declares a dividend, as it almost certainly will, there is still the capital management question.

Warren has a term, the Institutional Imperative, to describe the empire-building and other foolishness that leads to overpriced acquisitions, underutilized capital, stock repurchased above its intrinsic value, stock issued below its intrinsic value, and all the other failures of capital management that companies are so prone to commit. CEOs are rewarded in all sorts of ways for creating bigger companies, not more profitable companies. That’s putting aside all the risk that goes with running a big insurance business and the other financial exposures that Berkshire’s balance sheet includes. Then there is the Buffett charm you describe, which has brought the company such good acquisition opportunities. How do you replace that? Capital management is the biggest risk shareholders face.

Warren’s not replaceable as a manager, in my opinion, because he’s created a company that’s an expression of his personality. Even so, Berkshire can evolve to become a more conventional yet still successful company without losing its essence if Warren’s successor does a good job.

I am not in the camp that believes it must be broken up. That’s conceivable, but not necessary. The most critical issue is choosing good operating managers. Undoubtedly many of those who are running the businesses now will retire when Warren leaves. They have hand-picked their successors without much, if any, oversight from Warren. The next CEO will need to approach the turnover as an opportunity, not a problem, if he wants to succeed. It is, for example, an opportunity to improve diversity in Berkshire’s leadership.

JM: Good points, all. Now, you are not a Berkshire shareholder: why?
AS: I thought it would be a conflict of interest to own BRK while writing the book, and didn’t want to have to deal with that. Plenty of people who write about him do own the stock, which I’m not criticizing. Whether someone can manage a conflict of interest is purely a personal thing. But you can also see, collectively, how it influences the gestalt. The tone of writing on Buffett as a whole is largely set by the way so many authors are financially invested in him. If all these people have gotten rich or are getting rich or hope to get rich because of Warren Buffett, how objective can they be?

Journalists and analysts disclose whether they own a stock, but interestingly, they aren’t ever asked to disclose whether the investment is material to their net worth. After the book was published and I’d said my piece, I did buy some BRK. It’s not significant to my net worth.

JM: I meet an inordinate number of people who have personally met Buffett and/or Munger in one way or another—finance (Buffett), real estate (Munger), charity (Munger), and education (Munger also)—and I've heard some great stories.

You must hear things all the time: what’s a favorite story, or a favorite interaction of your own with them, that you didn’t include in the book?

AS: Warren is not so good with anything visual. Once we were talking on the phone after I had known him for years and he had seen me on many occasions. As a sort of joke, I asked him what color my hair was. He paused for quite a long time, and then said, “Not black.”

JM: Perfect. Of course, Charlie Munger is as important to the Berkshire model as Buffett himself. My own feeling is that Munger has had a better rounded life than Buffett—and yet he comes across to strangers as impossibly arrogant.

What's your take on Charlie?

AS: It’s hard to sum up Charlie in a couple of sentences or a paragraph. He’s quite humble in his genuine respect for the achievements of others, as long as they equal or exceed his own intelligence, in his opinion. He is so ungodly judgmental that some people find him insufferable, yet his fundamental kindness shines through. Politically … if you look up “politically incorrect” in the dictionary you’ll find a picture of Charlie there instead of a definition. That’s part of why Charlie is refreshing to be around, though. He’s always himself. There is not a phony cell in his body.

Your time will not be wasted talking to Charlie. Usually he’s got something very interesting and insightful to say. It’s better to listen when you’re around Charlie than to try to talk. The phenomenon I wrote about in the book, about him turning his head off when other people are talking, is very much in evidence at times. He’s really a treasure. I enjoyed interviewing Charlie immensely.


JM: I bet. Now, back to Warren.
There’s a single sentence in your book (page 650) that blew my mind. It puts Buffett in focus like nothing else I’ve read, but I’m not sure if you meant it the way it’s written. The setting is this: Susan T. Buffett, his first wife, has had a brain hemorrhage in Sun Valley; Buffett is distraught and at her side in the hospital; their two younger children have traveled a long distance to get there; and when they arrive at the hospital, you quote Buffett telling them nothing about their mother, her condition, or what exactly happened. You have him saying, "I've been here 5 hours."

Is it really all about him?

AS: Well, I guess the best way to answer that is to say that a trained psychologist or psychotherapist would have a field day reading The Snowball. I’m not qualified to diagnose psychological conditions. But my observation was that Warren knows himself pretty well. He’s intentionally arranged his life so that things center around him. He’s got his own means of reciprocating and being loyal to people, yet at the same time is not the least ashamed to say that he feels needier than others.

He’s so open about his self-orientation that it’s quite disarming, even part of his charm. He seeks out people who are comfortable with one-sided relationships, and once said that he felt he served Susie and Astrid by being a “taker,” because they loved to “give.” I thought that was pretty astute of him. He’s got a knack of making codependency work for the people involved, which is why people love him even after they get hurt.

JM: Buffett is known as a guy who “tap-dances to work,” and is so comfortable in his rational approach to the market that he could turn things off and nap whenever he needed to. When did he start taking sleeping pills?

AS: Warren is not a big self-medicator, unless you count work, sugar and caffeine. He loves going to work. It really is the highlight of his day. Work is his stress-reliever. He told me he’s never been a great sleeper, and I’m sure that’s true. He goes through withdrawal from work, and he can’t play bridge in his sleep. He’s got a major case of monkey mind, as the Buddhists would say.

My recollection is that he first started using Ambien for jet lag. If he uses it for insomnia, who cares? He’s certainly no Michael Jackson. Probably at least half the people reading this take Ambien or something similar from time to time.

JM: True. Of course, Buffett is, we know, astonishingly intelligent—and not just about investments. For example, he saved Salomon from extinction; turned around the Buffalo News during a very difficult time; and gave excellent advice to Kay Graham—as you write in your book—that helped her save the Washington Post during a crisis early in her tenure running that company.

So how does he sit on the board of Coke while its CEO starts promising growth targets—which Buffett hates—that leads to channel-stuffing and an SEC investigation?

Does he really hate confrontation that much? Or can he simply rationalize his way out of anything?

AS: Warren is pretty good at rationalizing what he needs to if there is money to be made, and he really does hate confrontation. This is mostly about something else, though. You will notice a seeming passivity when he sits on a board that is similar to his reluctance to direct his own managers. (This trait is almost always taken at face value as being one of his strengths, by the way, rather than being studied for the lessons it yields as both a strength and a weakness. But I digress.)

Warren divides the world into matters for which he has assumed personal responsibility and everything else that is not about him. Where he’s taken responsibility and will be judged for it, he’s uncompromising with himself, and even a micromanager. Otherwise, he “abdicates,” to use Tom Murphy’s term.


With both the operating managers and the CEOs of the companies who’s boards he’s sat on, the point at which he takes action is when the damage done by others could reflect on his reputation. The best example is Coca-Cola. He was passive until the crisis, then took on a role so active it shocked people.


JM: Understood. In the paperback “Snowball,” which is updated to cover the financial crisis, you make the excellent point that Buffett's derivatives position handcuffed him during the market collapse last year. But instead of taking sides on whether Buffett should or shouldn’t have sold puts with $37 billion in notional value on the market near the peak, let's invert the question in a manner of speaking, as Charlie Munger likes to do, and look at the sale of puts this way: What does it mean that he did it?

Does it mean that he had become as complacent as everyone else, despite years of warning about “ticking time bombs” and “financial weapons of mass destruction”?

AS: I don’t think he was complacent. Warren views derivatives as being fraught with credit risk. He structured these, and other deals, to protect the company from the capital calls that such risk entails. The decisions he made were excellent in that sense. They are the reason why Berkshire is still standing, financially healthy and why it did not require a bailout.

It’s dicey to second-guess an investor as successful as Warren Buffett. Chances are he will be proved right on those puts and they’ll be profitable. I do think Warren, in his focus on the long-term, missed how much the short-term volatility of the market would affect others’ perceptions of Berkshire’s day-to-day financial strength. Berkshire had an awful lot of market exposure going into the crisis, and unfortunately, during the bloodbath, it didn’t look like the Ft. Knox of capital to the rating agencies.


JM: Okay. And last but not least—you. You describe yourself as “a full-time writer.” What’s next?

AS: I’m working on another book, subject undisclosed except that it’s not a biography. I have been approached to write a biography by several other well-known people, but said no. Right now my interests lie elsewhere.

I’m also writing a column on general topics for Bloomberg, roughly once a month, which has been incredibly enjoyable. Occasionally I’m also writing other short pieces, for example, like this, or for The Motley Fool or Huffington Post. You can find these at my website,
www.aliceschroeder.com.


JM: Excellent, Alice. On behalf of our loyal and thoughtful readers, I thank you very much and wish you good luck.

.
Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

9 comments:

kylemowery said...

Thanks Jeff! I only wished you asked Alice more about Kay Graham - those parts of Snowball left me wanting more.

Anonymous said...

fantastic interview. Thanks for doing what you do.

PhillipCharles said...

Mr Matthews,

I have never perceived Buffett to be the messiah that so many who don't truly understand investing make him out to be. He is only a man who happened to find that almost elusive connection between one's innate abilities, personal temperament and vocational interests. In doing so, he has been wildly successful, as would anyone who realized those circumstances. However, there are opportunity costs, etc. that every human must endure and the author seems to address their relevance to the 'business of life'. I am impressed by her forthrightness, objectivity and honesty and am inspired to read the book. For you part, I found this to be a very insightful and enriching interview.

I would hasten to make one correction and suggest that 'subduing the fear monster with my blow dart' may not be the worst, but the most rewarding part of writing the book, or any endeavor for that matter.


Cheers,
PCM

Boris said...

Thanks Jeff,
overall interesting and helpful. In my opinion very worthwile to extend. Both of you deserve high praise for shining a light on this phenomenon. With AS's obvious and proven expertise how could she make such a factual error on axp and why did you not ask?

Aaron said...

Jeff:

Thanks for sharing your interview with Ms. Schroeder. This was a great "two-fer" as one gets the sense of how difficult the process of writing a narrative non-fiction book is, as well as the author understanding her subject matter. As a loyal reader, could you please post more interviews such as these? This would be greatly appreciated; Charlie Rose should be looking over his shoulder.

But What do I Know? said...

This is a great interview, Jeff. As someone who has been critical of Warren Buffett, I guess I expected this book to be a whitewash and it doesn't sound that way--it might be worth reading after all.

What is it about these old guys that they like to explain themselves to younger women? Henry Rogers got himself in trouble talking to Ida Tarbell this way. . .


Anyway, thanks for this.

cheyfaith said...

Thanks Jeff. This is an excellent interview, and I've bookmarked Alice's web site to see what other topics she'll cover. It's a pleasure to read your blog. Happy holidays to you and yours.

Oldnative said...

Jeff - The interview is quite timely - at least for me.

I just finished the book, which was loaned to me by a friend. I was reluctant at first since I thought it would just be another book about Buffett but I found it extremely interesting and insightful. I highly recommend it.

Having read it, I came away strongly doubting the future of the company after Buffet and Munger check out.

Dan said...

Well done, the time invested in this by both of you, is much appreciated. Not least with the juxtaposition to your subsequent post.