Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) Chairman Warren Buffett gave Alice Schroeder unprecedented access when he tapped her to write his official biography. The Snowball: Warren Buffett and the Business of Life has won critical acclaim and racked up big sales for Schroeder. Last year, Buffett scored sweetheart deals with Goldman Sachs (NYSE: GS ) and General Electric (NYSE: GE ) , and while the book sheds light on Buffett's business virtues and opportunistic investing, it also highlights some of Buffett's business blunders (see Dexter Shoes) and personal failings.
In our third of three installments, my colleague Chris Hill talks with Alice Schroeder about Buffett's smartest and dumbest investments, his impersonal approach to giving, and his not-so-hot reaction to The Snowball.
Buffett's smartest and dumbest investments
Chris Hill: What do you think have been his smartest and dumbest investments?
Alice Schroeder: His smartest investment was actually the creation of Berkshire Hathaway itself. In the book, I detail how he got control of Blue Chip Stamps, Diversified Retailing at Berkshire, and put them together into a vehicle through which he could put capital to work with insurance float. It is a detailed story, but it is a very interesting story because he had this vision of what could be and how he could use insurance float to make investments. He created this great big engine to drive the boat, and that was the smartest thing that I think he ever did.
In terms of mistakes, every insurance company that Berkshire has ever bought has gone into the tank and lost money right after he bought it -- that has been a pattern since the 1960s and I don't know why, but all of them have turned out to become powerful profit centers later, so there is something funny about that. ConocoPhillips (NYSE: COP ) was a huge mistake, and it is a little bit inexplicable. USAir [now US Airways Group (NYSE: LCC ) ], the preferred stock, and then NetJets has been a terrible mistake, and you could see that coming several years ago. He got entranced with the romance of the aviation and the glamour of it, and I think it will probably never earn more than a token return on capital.
Hill: I was born and brought up in Maine, and [I had a] friend growing up [whose] dad had a business called Dexter Shoe, which ended up being acquired by Berkshire Hathaway.
Schroeder: Warren calls that his greatest mistake, and the thing about it is, it was small. I don't think if you make a small investment, and it has a minor financial impact, that it is fair to count it as your greatest mistake, but the reason he says that is twofold.
One, it was basically a total loss, and it is his only real total loss. The other is that he hates having to lay off people. It is very painful for him to have to shut down plants, and with Dexter, they had to move the plants overseas, and … basically the whole town of Dexter, Maine … lost their jobs. That is something that for Warren is really tough.
Hill: Are you a shareholder of Berkshire Hathaway?
Schroeder: When I wrote the book, I never owned the stock. I thought it would be a conflict of interest. After the book was published, Berkshire tanked, and I finally bought it. So I am an owner right now.
Buffett's chilly response
Hill: Now, Buffett gave you unprecedented access for this book. He said you could interview anyone without his interference. He promised not to ask for revisions when the book was done. And the thing I found most astonishing is that he said that if his recollection differed from the recollection of one of your sources, that you should go with the less-flattering view.
But after the book was published, it kind of got awkward between you and Warren Buffett -- and to my knowledge, he hasn't told you why. The book was critically acclaimed, and I think part of the reason for that is because it really does capture the human side of Warren Buffett and his imperfections. Do you think he was expecting a different book?
Schroeder: I think that nobody expects what they are going to see on paper when they hand over to an author the unfettered task or responsibility to write about their life. Everybody has an internal narrative in their head of what their story is, and if they say, "Go write this," and five years later the result comes back, it is going to be shocking to anybody. Authors and their subjects get into this sort of intense dynamic of working together where it is a mutual cooperation toward a common goal. He knew that a truthful book would be the one that served both the reader and his long-term legacy, and that is what he wanted, but Warren is intensely subject to criticism.
He is someone who feels very strongly the flaying of anybody who says anything that feels unkind. He went into this knowing that the book might feel like flagellation, and we had some ... sensitive conversations early on where it was clear that that was going to be the case. I realized fairly early on that there was a chance that after this book was over, that he might never speak to me again because of some things that happened with other journalists, and so I just had to make a choice of what I would do.
I knew that that would happen even though he might even intellectually realize that the book was good, that it might just be so painful for him that he couldn't approach me as the vehicle of that pain, and that is what has happened.
Hill: And you haven't spoken to him since then, have you?
Schroeder: We had one very brief conversation at the shareholder meeting.
Hill: Now you did mention the billions of dollars he announced he was giving to The Gates Foundation, the foundation set up by friend and Microsoft (Nasdaq: MSFT ) chairman Bill Gates. Up until that point, and that was 2006, but up until that point, his giving was pretty spotty. In terms of generosity, you said that Buffett really can't do one-on-one. Can you explain that?
Schroeder: Yeah, I have called him a "telescope philanthropist," which is someone who can give money to all of mankind, sort of from a distance, but it is painful to actually hand over money to someone who is standing right there in front of you.
Hill: So if I needed $10, he wouldn't loan it to me?
Schroeder: He might these days. There was a story someplace -- I think it may have been The New York Times -- about people who are savers and don't like to spend money. The parts of their brain that feel pain, like emotional pain, light up if you are doing a brain scan if they have to spend or give away money. It is painful for them to give away money. That is how Warren is. It is like giving a part of himself. He feels diminished by it. If he has to give it to another person directly, even a member of his family, it is sort of like actually carrying off a piece of his flesh. Whereas giving it to mankind, he feels is giving back to society. He feels that he was lucky, and that it belongs to all mankind. He is more comfortable with abstractions.
Hill: What part of his story has had the most impact on you personally?
Schroeder: On me personally what has been the most important was to understand the value of time -- and this is something that has come from observing him, learning his story and that time compounds. What you do when you are young (and as you use time over your life) can have an exponential effect so that if you are thoughtful about it, you can really have powerful results later, if you want to.
Also, that is a reason to be hopeful, because compounding is something that happens pretty quickly. If you are 50 or 60, it is not too late. He said to me one time, if there is something you really want to do, don't put it off until you are 70 years old. ... Do it now. Don't worry about how much it costs or things like that, because you are going to enjoy it now. You don't even know what your health will be like then.
On the other hand, if you are investing in your education and you are learning, you should do that as early as you possibly can, because then it will have time to compound over the longest period. And that the things you do learn and invest in should be knowledge that is cumulative, so that the knowledge builds on itself. So instead of learning something that might become obsolete tomorrow, like some particular type of software [that no one even uses two years later], choose things that will make you smarter in 10 or 20 years. That lesson is something I use all the time now.
Hill: The book is The Snowball: Warren Buffett and the Business of Life. Alice Schroeder, thank you so much for joining us.
Schroeder: Thank you, Chris.
Be sure to check out parts 1 and 2 of our interview with Alice Schroeder: