Fool Special
Book Review
Buffett: The Making of an American Capitalist, by Roger Lowenstein
[Buy this book from the Fool's Bookshop]
By Stuart Watson (TMFTiger)
Although this is only the third Foolish book review we are already on our second Buffett-related publication. You can't really blame us: an extremely high proportion of investment books do seem to concentrate on the Sage of Omaha. In my defence, this is one of the lesser-known books about the world's greatest investor and it does cover a lot of ground that most other Buffett books do not. It is not short, coming in at over 400 pages, and focuses on Buffett's life rather than his investment style. It also falls more into the impartial and descriptive category than most other Buffett books.
After three chapters discussing his formative years, the book effectively turns into a history of his investments. It starts with his time at Graham-Newham, the investment firm run by his idol, Benjamin Graham. It then moves onto the Buffett Partnership, which ran from 1957 to 1969. Over this period an investment in the Partnership rose 1,526%, an annual compound rate of 29.5%. The Dow Jones Index managed a gain of just 52.6%, or 7.4% per annum, over this same period. In these twelve years, Buffett's worst performance was a 10% gain, even though the Dow was down in four out of these twelve years -- that's some record. Despite its success, the Partnership was disbanded as Buffett felt he was out of touch with market conditions at the time, namely escalating price to earnings ratios and the so-called 'Nifty Fifty'.
We are almost a third of the way through the book before we even hear of Berkshire Hathaway, Buffett's current investment vehicle. He acquired a controlling stake, through the Partnership, in 1965. All was quiet for a few years but that all changed in 1974 as stocks plunged on the back of the Oil Crisis. The book portrays Buffett at this time as the proverbial kid in a candy store, snapping up his favourite stocks left, right and centre.
The next stage of the book covers some of Buffett's purchases throughout the 1970's and 1980's such as the Washington Post, the Buffalo Evening News and Salomon Brothers. His interest in the latter, and the individuals concerned, explains why he came so close to taking control of Long Term Capital Management, the hedge fund that collapsed last summer. One of the most entertaining of these chapters concerns the Nebraska Furniture Mart, run by Rose Blumkin, otherwise known as Mrs B, who runs all her competitors out of town with her ferocious pricing. Although, as we mentioned before, this book is rather long, each of these chapters would stand up perfectly well by itself as a short story.
All of these earlier investments get much more attention than Buffett's more famous and recent purchases in Coca-Cola and Gillette. But this does not detract from the relevance of the book for the individual investor. In my opinion, it adds a fresh and different perspective. I'm sure Buffett would agree with the notion that we could learn as much from his purchases of whole businesses as we can from his stock market investments. After all, he argues that all investments should be considered as part ownership of a business.
Reading this book we also discover a great deal about Buffett the individual. We learn about his peculiar double love life (you'll have to read the book!), his fear of death and his paranoia about spending money on items such as large houses and luxury cars, due to the lost investment opportunity that it represents. I can't help feeling he takes the last point to the extreme, although you can see the parallels with the principles covered in the Millionaire Next Door, our first book review.
We also discover about Buffett's clashes with authority, such as the SEC over his investment in Blue Chip Stamps and the courts over alleged anti-competitive behaviour against Buffalo's Courier Express. In both cases, his belief that 'honesty is the best policy' appears to win the day.
As with all other Buffett books, this one is full of those handy little quotes from the man himself. However, perhaps the most amusing comes not from Buffett but from Lou Green, a Manhattan stockbroker. As the Graham-Newham investment company was wound down Green commentated that it "can't continue because the only guy they have to run it is this kid named Warren Buffett. And who'd want to ride with him?" Put your hands down, everyone. Ah, the power of hindsight. Poor Mr Green probably has this little ditty chiseled on his tombstone.
The coverage of Buffett in the 1990's is almost non-existent, despite the fact that this book was first published in 1995, and the copy I read was printed in 1998. It would be interesting to see an updated version with commentary on Buffett's recent purchases of General Re and Executive Jet Aviation. He seems to be particularly fond of the latter, which allows executives or businesses to own part-shares in jets, rather than forking out for the whole package. You may have seen the adverts for this business in the Financial Times a few months ago. General Re is a further step into the world of insurance and is Buffett's largest single purchase to date at $22b.
Conclusion
As you will have probably gathered already, I rather enjoyed this book. Despite its length, it is easier to read that a lot of other Buffett books, which tend to concentrate on the numerical aspects of his investments. It also presents a much more complete picture of Buffett's personality and his investment philosophy. I suspect it is a book that I will come back to again and again. Perhaps I should have purchased the hardback version!
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Last book review: The Warren Buffett Portfolio
