Search Results for: snowball

Tidbits From Warren Buffett’s Biography, The Snowball: The Early Years

I am currently reading The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. As an authorized biography of Warren Buffett intended for the general public and not a book specifically about investing per se, I think that so far it is excellent. I have only recently started learning more about Buffett, but he is certainly an intriguing person. Schroeder is an excellent writer, and provides both detail and insight into his life as well as does a especially good job of explaining the financial aspects of his activities.

Here are some of the notes that I took while reading the book so far, covering his early years:

  • The Snowball title is a metaphor. “Life is like a snowball. The important thing is finding wet snow and a really long hill” How did Buffett’s portfolio grow so big? He started early, and with relentless focus came the power of compounding returns. (He specifically states that credit card debt is a huge obstacle in starting your own snowball!)
  • As a teenager, why did Warren want money? A quote from Buffet:

    It could make me independent. Then I could do what I wanted to do with my life. And the biggest thing I wanted to do was work for myself. I didn’t want other people directing me. The idea of doing what I wanted to do every day was important to me.

    A amazingly common sentiment among those that end up very rich. Independence, not money, as the primary goal.

  • Since he felt socially awkward growing up, he was inspired by Dale Carnegie’s now-famous book How to Win Friends and Influence People. Here are some of the rules that he took upon himself to follow:

    Everyone wants attention and admiration. Nobody wants to be criticized.
    The sweetest sound in the English language is the sound of a person’s own name.
    The only way to get the best of an argument is to avoid it.
    If you are wrong, admit it quickly and emphatically.
    Ask questions instead of giving direct orders.
    Give the other person a fine reputation to live up to.
    Call attention to people’s mistakes indirectly. Let the other person save face.

  • By the time he was 16 years old, Warren Buffett had saved up $5,000. This was primarily through delivering over 500,000 newspapers, along with other small enterprises. If adjusted for inflation, $5,000 at that time would be the equivalent of $53,000 in 2007. Talk about a head start for that snowball.

Charlie Munger: The First $100,000 Is The Most Difficult

There used to be a series of ING commercials where people would carry around their “Number”, which was usually over a million dollars. I think such large numbers actually discourage most savers, so what if we had an alternative goal that was both more achievable yet realistic?

I’m currently reading a new book called Charlie Munger: The Complete Investor by Tren Griffin because, well, I like to read anything about Charlie Munger. There is a lot of good stuff related to investing inside, but it didn’t mention one of my favorite personal finance quotes from Mr. Munger. I can’t seem to find an exact reference anymore, so here are two paraphrased sources…

First, here is an excerpt from the 2003 book Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe (my review):

Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.

Second, here is another version of the quote credit to Munger, per Conservative Income Investor:

“The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”

$100,000 is certainly a nice, round number. But is it a worthy goal? Consider these points:

Most people will never achieve $100k in portfolio assets. Forget a million bucks. Consider this chart from the Quartz article America is full of high-earning poor people. On average, even a person earning close to six figures will struggle to reach $100k in financial assets by age 55.

The figure below plots financial assets held by the upper middle class (household income from $50,000 to $75,000, and $75,000 to $100,000) aged 40 to 55. Financial assets are any assets a household owns that isn’t a house, car, or business, which means it includes all retirement funds.


If you reach $100k quickly, that means you have high earning power. Let’s say you start a successful small business or are in a well-paid professional field. Well, you have the saving potential to reach the millionaire level, you just have to keep it by not increasing your spending accordingly.

If you reach $100k gradually, that means you have built up a strong habit of spending less than you earn. Let’s say it takes you a decade of steady saving to reach $100k. That’s okay, as you’ve shown that have both consistent earning power and spending restraint. You’ll be able to save another $100k over the next decade for sure, meanwhile your first $100k is going to keep on growing.

At the $100,000 level, compound interest become significant. At 5% return, your $100,000 will grow by $5,000 in just one year. That’s $5,000 for doing nothing but waiting around for a year. The year after that, you won’t just have another $5,000. You’ll have $5,250 due to compound interest. At the end of five years, that $100k is already $127,628.

Add in the additional money from your continuing habit of saving, and things start to improve quickly. Your snowball is growing. I no longer automatically reinvest my dividends from my taxable mutual fund and ETF holdings because I love seeing the money show up in my cash account. A few clicks and I’ll reinvest them, but I like the feeling of “cashing my dividend checks” and knowing that one day I’ll be waiting for them to arrive instead of my paycheck.

Now, I still think savings rate is a better measuring stick than portfolio size, because someone who can earn $60k and spend $30k every year is going to be able to retire much sooner than someone who earns $180k and is stuck in a lifestyle spending $150k. But if you are in the phase of your life where you love watching your account balances grow every day, even by a few dollars (been there, done that), $100k is the biggest goal you need.

Related: Munger: Work For Yourself An Hour Each Day and Munger on Parenting and Childhood.

The Power of Compound Interest Shown in a Single Chart

It’s not just how much you save, it’s when you save that matters. The best time to start is now. This is the power of compounding returns, which this single chart will help you visualize:


  • Susan (grey) invests $5,000 per year from age 25 to 35 ($50,000 over 10 years) and stops.
  • Bill (green) invests $5,000 per year from ages 35 to 65 ($150,000 over 30 years).
  • Chris (blue) invests $5,000 per year from ages 25 to 65 ($200,000 over 40 years).

You’ll note that Susan still ends up with more money than Bill, even though he invests three times as much money over 30 years, all because Bill starts late. Susan and Chris start out the same, except that Susan stops after 10 years while Chris keeps going. Chris only invests $100,000 more than Susan, but ends up with $500,000 more money in the end. A 7% annual return is assumed.

The chart is from a JP Morgan slide deck for their asset managers, via Business Insider.

I’m also reminded of Warren Buffett and his Snowball biography – “Life is like a snowball. The important thing is finding wet snow and a really long hill.”

Charlie Munger on Parenting and Childhood

I just started reading a biography of Charles Munger, Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe, originally published in 2000.

Charles Munger is best known as Warren Buffett’s long-time friend, business partner, and vice-Chairman of Berkshire Hathaway. I find him fascinating on many levels – as a thinker, investor, philanthropist, and even philosopher. One of my favorite tips from him is to Work For Yourself An Hour Each Day, something I found in Warren Buffett’s biography The Snowball.

Here’s a memorable quote from the book dealing with his childhood:

Like Warren Buffett, Munger inherited no wealth. […]

“While no real money came down, my family gave me a good education and a marvelous example of how people should behave, and in the end that was more valuable than money,” explained Munger. “Being surrounded by the right values from the beginning is an immense treasure. Warren had that. It even has a financial advantage.”

Right now, there is a lot of focus on teaching “financial literacy” – which is good – but if you’re a parent of young children I feel that you have to think differently. It’s not critical to give your kid some fancy allowance iPhone app or online savings account to teach them how to manage money. What you should really be conscious of is how you act around them. Positive character traits like self-discipline, being dependable (keeping your promises), and frugality (not being wasteful) are often best taught by example. Watching you and learning such traits will help them to avoid credit card debt more than showing them how APR works. If only I could just buy them a book or something. 😉

Would Meeting Your Future Self Make You Save More?

Behavioral economists are constantly trying to find ways to convince us do the “right” things like save for retirement. Why is it so hard to give up short-term perks for larger, long-term rewards? For example, take my True Cost of Holiday Shopping calculator and this Warren Buffett anecdote from a 2011 WSJ article:

Warren Buffett is one rare—and extreme—example. When he was a young man, according to Alice Schroeder’s biography “The Snowball,” Mr. Buffett often asked, “Do I really want to spend $300,000 for this haircut?” He was thinking about the vast amount of money he wouldn’t have decades in the future because of the small outlay he might make in the present.

I think it’s fair to say that most people don’t think like that. (It appears he did get haircuts at least once in a while.) According to Stanford researchers, one big reason is because we struggle to identify with our future selves. The researchers are quoted in this Wired article:

To people estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now.

In their study, they used advanced virtual reality goggles make some people see older versions of themselves. Afterwards, the test subjects who saw their elderly avatars stated they would save twice as much as those who didn’t. Merrill Edge, the brokerage arm of Bank of America, has created an online version of this aging process called Face Retirement. It takes your picture via webcam and ages your face to help you better visualize “old” you. I got to see myself at age 47 to 107, in 10-year increments.

Will it work? I’m not sure. My wife says I just look like a zombie, especially at 107. Maybe there would be more shock value if it showed me eating dog food or something.

Warren Buffett Was Nearly Content With Early Retirement At 25

Here is an insightful ForbesLife interview by Warren Buffett in their “When I was 25” series. The article is primarily about how he ended up starting the investing partnership that eventually became Berkshire Hathaway. But what I didn’t know was that before that happened, he actually was ready to settle down in early retirement when he was 25 years old, content to invest just his own money:

The thing is, when I got out of college, I had $9,800, but by the end of 1955, I was up to $127,000. I thought, I’ll go back to Omaha, take some college classes, and read a lot—I was going to retire! I figured we could live on $12,000 a year, and off my $127,000 asset base, I could easily make that. I told my wife, “Compound interest guarantees I’m going to get rich.” […]

I had no plans to start a partnership, or even have a job. I had no worries as long as I could operate on my own. I certainly did not want to sell securities to other people again.

Adjusting for inflation using CPI, $127,000 in 1955 would be about $1,100,000 in 2012 dollars. Spending $12,000 a year in 1955 would be just about $100,000 a year today. A 9% portfolio withdrawal rate is pretty high, but then again he’s Warren Buffett.

If he had gone the early retirement route, I’m sure he’d still be a comfortably rich Nebraska family man today, but given his quiet lifestyle we probably wouldn’t know anything about him. In fact, Buffett had already turned down an offer to be a partner in the hedge fund that Benjamin Graham founded. But events conspired to let him manage other people’s money without the pressures of salesmanship or marketing, and $50 billion later he’s one of the richest people alive.

I already knew from reading his biography The Snowball that he was quite the young entrepreneur and by 16 years old he had already accumulated over $58,000 in 2012 dollars ($5,000 in 1946). This was from many different micro-businesses including delivering newspapers, selling everything from gum to car washes, and owning pinball machines. He already knew that the faster he earned that money, the more time he would have to let compound interest do its thing. After moving back to Omaha, he even rented a house at first instead of buying so he wouldn’t have to commit any of his precious capital.

In any case, interesting that his initial goal was early retirement and career freedom, not necessarily doing whatever he could to accumulate more money. I look forward to the other articles in this series.

Poor Charlie’s Almanack: Wisdom of Charlie Munger – Book Review, Part 1

Charlie Munger is best known as the long-time friend and business partner of Warren Buffett, and officially as the Vice-Chairman of Berkshire Hathaway. Even though he is Buffett’s partner in investing, Munger is different in that he does not enjoy the spotlight as much and is rather more blunt and cranky. For some reason that just makes me like him more. :)

Ever since I read more about him in the Buffett biography The Snowball, I have wanted to learn more about him via the book Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, which is mostly a collection of his speeches but also includes some of his own personal notes and reflections from his peers and family. From the website:

For the first time ever, the wit and wisdom of Charlie Munger is available in a single volume: all his talks, lectures and public commentary. And, it has been written and compiled with both Charlie Munger and Warren Buffett’s encouragement and cooperation. So pull up your favorite reading chair and enjoy the unique humor, wit and insight that Charlie Munger brings to the world of business, investing and life itself.

The first thing you should know about this book is that it is not meant to be an investing How-To book. Yes, there is a lot of investing advice in it, but the book is more about how to live a successful and fulfilling life more than the accumulation of money. Munger puts more emphasis on integrity and how to think correctly than how to calculate a company’s return on capital.

Financial Independence
One of the reasons that Buffett and Munger appeal to me is that their primary motivation for doing what they do is not simply to be rich, it is to to be independent. Here’s a quote from Buffett on why he wanted to make money: [Read more…]

Buffett on Charlie Munger: Work For Yourself An Hour Each Day

I’ve gotten to the part in The Snowball that involves Charlie Munger. A very interesting person, although perhaps not someone I’d like to have a beer with (I’d feel stupid), he is probably best known as Buffett’s long-time friend, business partner, and vice-Chairman of Berkshire Hathaway.

Even before meeting Warren Buffett, Munger was wealthy according to most standards from real estate investing. Here is a quote from a Buffett interview in the book:

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 the client, and then work for other people, too, and sell yourself an hour a day.

Now, I’m sure just being a successful lawyer would be plenty for many people. But if you aren’t satisfied with your current situation, why not work for yourself an hour each day? Instead of just idle dreaming, set aside specific time for action. Perhaps the key is small chunks of time, but at regular intervals.

Example. If you’re an administrative assistant making $10 an hour and you don’t want to be, don’t just sign up to work another hour for $10. Working longer is not necessarily the best idea. Instead, give up the $10 (or $8 after taxes), and improve yourself in some way or create something so you’ll be making a lot more. There is no one solution, look into yourself. Nursing school? Investment books? Finding a mentor?

Finally, another quote from Charlie Munger about the desire for independence:

I had a considerable passion to get rich. Not because I wanted Ferraris – I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t where I got that notion from, but I had it.

I think I’ll be buying a copy of Poor Charlie’s Almanack the next time I run low on things to read, even though it costs fifty bucks.

Update: I bought a copy of Poor Charlie’s Almanack and will be reviewing it shortly. I still think this idea of working for yourself for an hour each day is great advice and timeless.

Buffett: Wealth, Estate Taxes, and the Ovarian Lottery

I’ve finished reading The Snowball, and one of the things that struck me was how Buffett thought about individual destiny, meritocracy, and wealth. For one thing, he is a wealthy person who supports an estate tax for those with very large estates (currently for those greater than $3.5 million). Here’s a glimpse of why:

Wealth is just a bunch of claim checks on the activities of others in the future. You can use that wealth in any way that you want to. You can cash it in or give away. But the idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society.

I also connected strongly with a related concept Buffett termed the “Ovarian Lottery”.

I’ve had it so good in this world, you know. The odds were fifty-to-one against me born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.

Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, “One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one this is born in the United States?” It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, “I did it all myself,” and think of themselves as Horatio Alger – believe me, they’d bid more to be in the United States than in Bangladesh. That’s the Ovarian Lottery.

He also made a comment that if born several hundred years earlier, he and Gates probably would have been some other animal’s lunch because they did not see well and could not climb trees well. I’ve had the exact same thought, as my eyesight is really horrible. If was born in the 1700s, I’d probably be considered a cripple.

This led me to a post by a Kiva Fellow working in Uganda. Kiva is the site where you can lend as little as $25 to low-income entrepreneurs.

Any one of these people could be tremendously successful in America (economically speaking). Maybe a CEO of a prominent company, or a hotshot lawyer who wears a two-thousand-dollar suit to work everyday. But they arent. And the only reason for that is because of where they were born.

[…] I won the ovarian lottery. I am a US citizen; got a good education; enjoy great health; and came equipped with a “engineer” gene that allows me to prosper in a manner disproportionate to other people who contribute as much or more to society. I’m in the top 1% of the entire population of the world.

Kiva, to me, is simply a way for those of us who drew the best tickets in the ovarian lottery to help those who drew less fortunate ones.

Something to spread a little humility. You or I may have worked hard, but that’s doesn’t mean we didn’t get a huge head start from winning the Ovarian Lottery. Would you be where you are if you grew up in a country where nobody would even teach you how to read?

Warren Buffett’s Original Money Management Fee Structure

Here’s a another little fact from The Snowball that I found interesting. When Warren Buffett set up his first investing partnerships where he agreed to manage other people’s money, he wanted a compensation agreement that was fair and equitable.

I got half the upside above a four percent threshold, and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited.

The last part meant he could lose more money than he put actually invested into the partnership. He would cover a quarter of all losses from his partners, even if it meant selling his house or other assets. Now that is what I call a true alignment of interests.

Sure, half of the upside past 4% is a lot, but can you imagine any modern hedge fund agreeing to such a fee structure that would expose them to losses? Nope, they get “2+20”, which means 2% of assets no matter what plus 20% of profits, which really encourages them to just swing for the fences. If they implode (which many did recently), they simply pack up and open a new fund down the street.

It’s hard enough these days to find a mutual fund manager where a substantial part of their net worth is invested in the fund they manage.

Book Review: Pilgrimage to Warren Buffett’s Omaha (Berkshire Hathaway Annual Meeting)

There are hundreds of books about how to invest like Warren Buffett. For whatever reason, I haven’t read any of them (yet). For one, if really wanted to invest like him, why not just invest with him and buy a share of Berkshire Hathaway? A Class B share recently traded at around $2,300, more than 50% off its high of $5,000. And if I bought a share, I could attend those annual shareholder meetings in Omaha, Nebraska* that I’ve heard so much about. (I have read some of the shareholder letters.) Buffett himself calls it the “Woodstock of Capitalism”.

What’s a Berkshire Hathaway Annual Meeting Like?
That’s the question behind the book Pilgrimage to Warren Buffett’s Omaha by hedge fund manager Jeff Matthews. He first went to the 2007 annual meeting and wrote about it on his blog. I guess people liked it, and so he went back in 2008 and weaved it all together into this book.

A very distinguishing trait of the annual meeting is that Chairman Warren Buffett and Vice-Chairman Charlie Munger not only want their shareholders to attend, but willingly sit down for a six-hour long Q&A session where you can ask any question, and they will answer it personally. Many of the famous quotes you’ve read elsewhere were first spoken in this format, and the best part of this book is probably reading about their thoughtful responses to all these questions.

Another feature I didn’t know about is that the meeting is also highly profitable for Berkshire. Shareholders are given special tours and discounts to subsidiaries like Nebraska Furniture Mart, Borsheim’s Jewelers, and so on. Estimates say that over $100 million is spent there.

What Else Is Inside The Book
A lot of the book is in informal “blog” format, with Matthews recounting his first-hand experiences down to grabbing lunch or renting a car. However, sprinkled throughout the book are also facts and tidbits about the company and Buffett, most of which I didn’t know very well but are things that I’d expect a die-hard fan to know already. It worked well for me and provided some helpful background.

For example, I learned that the businesses with Berkshire Hathaway tend to operate independently and without much oversight from Warren Buffett or Charlie Munger. And it’s a wide variety of stores – from GEICO insurance to See’s Candies to NetJets to Nebraska Furniture Mart. Berkshire also gets the chance to buy many profitable, well-run, private companies at a discount from the individuals and families that created them. Why? Because they are attached to these businesses, and want them to remain under a certain quality of stewardship.

But it’s not a total slurp-fest. Criticisms are brought up, like how Buffett has called derivatives “financial weapons of mass destruction”, but also bought millions worth anyway. Or when he talked up the values of executives for subsidiary General Re who later got convicted of securities fraud.

This book is well-written, easy to read, and a perfect companion for a cross-country airplane trip or nightstand. However, I don’t think I really learned much of anything practical from a financial perspective. I’d treat it mostly as entertainment.

To be clear, it is not a book on value investing. For that, stick to the classic The Intelligent Investor by Benjamin Graham. Nor is it a book about the personal life of Warren Buffett. For that, there is now The Snowball.

Actually, the book I most want to read next is Poor Charlie’s Almanack, which contains many quotes from Charlie Munger, who seems a bit abrasive but I have come to respect him as an independent thinker. The only problem is that the book doesn’t seem to be in print anymore and used copies are fifty bucks? Time to hit up the library.

I’m still wavering as to whether I want to attend this meeting. Would it be worth the hotel and airfare? Anyone planning on being in Omaha on May 2, 2009? :)

* Actually, you don’t even need to be a shareholder to attend any more. Buffett got annoyed that people were scalping tickets on eBay for $100+, so every year he floods eBay with tickets for only $2.50.

Weekend Reading: What If Warren Buffet Smoked Pot?

Okay, so I couldn’t think of a good title… but think about it after reading these helpful articles. 😉 I’m including some excerpts I like, but I would highly recommend reading each piece in its entirety. Good stuff.

Warren Buffett: Buy American. I Am.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

Of course, I don’t remember him ever writing an Op-Ed saying “Be 100% Bonds, I am”, or “Hedge Against The Dollar, I Am”. However, I do agree that if you are going to buy stocks, now is a fine time to buy. I am maintaining my asset allocation, and I’m not even doing it grudgingly – I’m doing it happily.

Hedge Fund Manager Andrew Lahde’s Goodbye Letter

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

This guy bet big on the collapse on the subprime mortgage market and got great returns the last few years for his small hedge fund. He brings an interesting point of what drives people to super-duper-richness. I would probably do the same as Lahde, but others would keep reaching for more. Buffett’s new biography The Snowball also goes in the family life sacrifices/choices he made. The end part about hemp… is there a hidden correlation?

Bogle & Bodie On Wise Diversification

Jack Bogle: I am a believer in diversification. You buy index funds for stocks, and your bond portion should equal your age. This is how I invest, so I know how little it’s hurt me to have a substantial position in U.S. bonds. I’m in half Treasuries, half corporates.

[…]In recent years, international investing has had a higher correlation with the U.S. market than was traditional. If you invest internationally, you have to invest in foreign companies not as diversifiers but wealth producers. If you like international, get in gradually, maybe with 20% of your portfolio, half in developing markets and half in emerging markets. Europe looks a lot like us, so it’s at least possible you might get a better return out of emerging markets. I don’t invest internationally myself.

Zvi Bodie: […] And then there is insuring or hedging. That’s when you’ve got a safe asset and to my mind that is Treasury Inflation-Protected Securities, or TIPS. One way to protect yourself is to combine a diversified portfolio of risky assets with the safe asset. We teach students that you only need two mutual funds—the risky assets and the safe asset—to generate the entire set of risk-and-reward trade-offs.