[We all need to find something good to say about America, but the kicker is depressing – and the Postscript is more than just depressing.]
A long time ago, Sir Lewis Namier started a kind of revolution in the study of British history with his book The Structure of Politics at the Accession of George III. A lawyer has trouble seeing what all the fuss was about. Namier stressed the need to look for evidence at the source, and only to proceed after a careful analysis of all the evidence. To those of us who have had to make findings of fact on inadequate and conflicting evidence, the Namier revolution seems to be the unsurprising suggestion that history should be based on evidence rather than romance, on the direct evidence of primary sources rather than on secondary sources that are hearsay.
Namier really got down into the minutiae – as we say now, he drilled down deep. In the result, when he came to make large statements, people listened to him because he had established his credentials and revealed his technique. His followers remained faithful and cherished his teaching.
Those who are out to apportion guilt in history have to keep to views and opinions, judge the collisions of planets by the rules of road traffic, make history into something like a column of motoring accidents, and discuss it in the atmosphere of a police court.
This emphasis on analysing evidence and common sense reminds us very much of Warren Buffett. A mate of mine who has had dealings with Buffett told me:
He is a literal sponge for information – you only realise that your data has been mined after the event. We spent three hours once over a burger and ice cream at the Omaha Country Club discussing [business]…. He is very approachable and incredibly down to earth.
Buffett comes across as a matter-of-fact bloke. If you seek to find principles or rules for investing from reputable sources, you will almost certainly be referred to Ben Graham, The Intelligent Investor and Burton Malkiel, A Random Walk down Wall Street – and almost anything said by Warren Buffett, particularly the annual reports of Berkshire Hathaway. Like any very successful person, while Buffet has detractors, but very few people on Wall Street are game enough to take a pot-shot at him.
The basic precepts of people like Graham and Buffett include:
Investment involves using our money to increase our wealth in the future. In doing so, we try to predict the unpredictable. All investment therefore involves risk. Our aim in investment is therefore not to eliminate risk – which is impossible – but to manage it. We seek to do this by taking good care in selecting the assets that we acquire for investment. We look for companies with a good history, an established business, a sound balance sheet, and a good record of making and returning profits. If a fund acquires shares in a company, it becomes one of the owners of the business of that company. That is how investors should see their shares – as making them part owners of the relevant businesses. It follows that a sensible investor will be more interested in how the relevant business is going than in the price that other people set for the sale and purchase of shares from time to time. Sensible investors don’t trade. They are passive, not active. The other way to manage the risk is to spread or diversify the range of securities that the fund holds. Remember the risk that you are trying to manage. It is not that the price of the shares may go down. We know that the price must fall at some time. The risk is that a business will fail, in whole or in part. A drop in market price of the shares does not of itself establish any change in the underlying value of the business of the company that has issued those shares. Volatility is not risk.
These kinds of views, which are anathema to Wall Street, pervade the 900 odd page biography, The Snowball, Warren Buffett and the Business of Life, by Alice Schroeder, published in 2008. The book is very long, but you can skim the detail of some transactions. The author clearly knows what she is talking about – she was a CPA with Ernst and Young and a managing director in equities at Morgan Stanley. The result is a must for anyone interested in investing and anyone claiming to be a commercial lawyer – among others. It is also a substantial contribution to the social history of the United States. God only knows that we need to get some good news out of America.
Buffett was born in Nebraska in 1930, less than twelve months after the Great Crash. His father had a degree and responded by going into stockbroking. His mother could be difficult. His father had naturally worried whether they would survive what became the Depression. His grandfather, a grocer, said ‘I’ll just let the bill run.’ Buffett would later say that was typical of his grandfather. His father was scrupulous in business and even more scrupulous as a Republican. He would later go to Congress, but his bluntness and inability to shift his ground cost him. His son was different. But there were two family maxims that were solid. Spend less than you make. Don’t go into debt.
The boy showed that he was a prodigy at about the same age as Mozart. He turned a profit at about six. At fifteen he had put away $2000 from a paper run. (You could multiply that by thirty for today’s money) He had already bought shares. Shortly after that he bought a forty acre farm for $1200 seventy miles away where he shared profits with the tenant. He read and studied Dale Carnegie How to Win Friends and Influence People.
Rule number one. Don’t criticise condemn or complain.
He worked for both his grandfather and father, but started dealing in his own right. After college, history did us a favour. Harvard knocked Buffett back and he wound up at Columbia, where he came into orbit around Ben Graham. This would be the first of four relationships that were fundamental to Buffett’ s career – the others would be Charlie Munger, Kate Graham, and Bill Gates.
He began to form partnerships for investing. By 1962, the main partnership was standing at $7.2 million, but Buffett was not afraid of going long on one stock if it met his criteria. If a company did that, Buffett would back his judgment. By 1966, he had spent $13 million on American Express leading him to inform his partners of a new ground rule.
We diversify substantially less than most investment operations. We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and our reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.
Here are two other maxims.
We will not go into businesses where technology, which is way over my head, is crucial to the investment decision.
We will not seek out activity in investment operations, even if offering splendid profit expectations, where major human problems appear to have a substantial chance of developing.
American Express got embroiled in a scandal that left subsidiaries owing $60 million dollars. Would it stand behind them? Buffett said that their business depended on trust. He wanted the company to pay the debts. A group of shareholders sued saying that the company should defend itself. Buffett said:
It is our feeling that three or four years from now, this problem may well have added to the stature of the company in establishing standards of financial integrity and responsibility which are far beyond those of the normal commercial enterprise.
Buffett said that an American Express that took responsibility and paid the $60 million would be ‘worth very substantially more than an American Express disclaiming responsibility for its subsidiary’s acts’. He described the $60 million payment as inconsequential, like a dividend cheque that ‘got lost in the mail.’ The company paid up, its stock went up, and Buffett profited.
This all took place not much more than fifty years ago, but it looks positively medieval to us now. We have lost people in business, and lawyers, with the balls to say ‘Forget the small print – our name will stink if we pull a stunt like this.’ Instead, we have companies that pay dividends and report regularly and are run by people whose pay precludes long term sense or decency. They then behave in a way that gets them offside with their business and their owners in about equal measure. Banks are now regarded with more distrust than insurers were forty years ago – and that is a very large statement. That is why people, including now me, think that we should have a Royal Commission to expose the corrupt ways and inhumane manners of the banks to the cauterising glare of publicity.
I do not exclude lawyers from my assessment of a decline in public and corporate life. I described elsewhere an incident in the battle for BHP in 1986 where a senior lawyer showed the required independence and sense of looking after the whole reputation of the client. I had been acting for Robert Holmes a Court.
Finally, I mention an incident that happened I think after I had gone back to Blakes. There were lawyers milling around someone’s chambers including Alan Goldberg, Frank Callaway, and sometimes Geoff Nettle (still a junior). Robert Heathcote [a partner of ABL who had instructed me] came in in some slight agitation. One of our (Holmes a Court’s) brokers had received in error the details of what may have been referred to as John Elliott’s battle plan for his defence of BHP. It was something that Holmes a Court would dearly like to see, but could he make use of confidential material sent by mistake?
We wondered and pondered. Frank Callaway delivered a lecture on Lord Cairns’ Act. It was brilliant and irrelevant. Then Tom [Hughes] came in – Senior Counsel. ‘Simple. Send it straight back. Or man’s credit would not survive.’ ‘Thanks, Tom. Will you tell Robert?’ ‘No one need tell Robert anything. We cannot advise the broker. Send him off to a competent silk. If his advice cuts across mine, ask him to get in touch.’ There you have the authority and wisdom of experience. It was an immense thrill to have worked with Tom Hughes.
Tragically for them, that is just the sort of advice that the directors of James Hardie should have received but did not.
Despite his accumulating wealth, Buffett’s tastes stayed plain He has not been corrupted by riches that are beyond the dreams of Croesus. He stayed in the same house and drove a plain car. A proper suit was one ‘that you could bury a ninety-year old banker from a small town in Western Nebraska in.’ On one occasion later when he went to an establishment that displayed fabulous wealth in a mansion that had to have ‘fifty – something servants’, he said ‘You had $1 billion worth of art on the walls, and I’m the only guy there that didn’t ooh and aah over the art. I’d just as soon have a bunch of old Playboy covers on the walls.’ This is from a man who dines with presidents and royalty.
Buffett’s relationship with Berkshire Hathaway started in 1967 when this textiles manufacturer was on life support. Through rescuing that business and using it as a vehicle for acquiring others, Buffett would generate vast wealth. His children could have received great wealth, but Buffett did not want them to live on Easy Street because of Berkshire Hathaway. Rather he thought that the future of his children and the future of the company would be joined not through ownership of the company, but by an act of philanthropy – their participation in the stock in the Buffet Foundation.
He became a follower of Martin Luther King. King impressed him when he said ‘The laws are not to change the heart but to restrain the heartless.’ They both got that right.
Here is an anecdote that is typical Buffett. The Omaha Club excluded Jews. Buffett nominated his friend Herman Goldstein for membership. The Omaha Club sought to justify its exclusionary policy on the ground that the Jewish Highland Country Club – yes, you are reading it right – excluded gentiles. So, Buffett got himself nominated for that club. He ran into stiff opposition. But a couple of rabbis got involved and an Anti–Defamation League spokesman appeared on the half of Buffett. Buffett got into that club, and Goldstein got into the Omaha Club. Another exclusionary wall had been toppled.
This book is worth the price of purchase just for the two chapters on the collapse of Salomon Bros. That company had become synonymous with the saying that ‘Greed is good’ and after the publication of the book Liars’ Poker, it was widely reviled, even on Wall Street. It was brought undone by an act of fraud and was looking to be put out of business by regulators who were keen to get its scalp at a time when the firm had no friends.
Buffett had taken a position in the firm, but he was ushered in as the only person in America who could possibly save it. He rang the boss of the regulators and said that ‘This is the most important day of my life.’ Eventually they were given a kind of lifeline. Buffett was running a depraved financial institution and he took the first critical press conference himself. The press were desperate for blood. Buffett just sat there and kept answering questions. His minders were agitated, but he was wearing the press down and giving them something they were not used to receiving – answers that were apparently straight. He was asked a question that Australians now will immediately recognise. Had the culture of the bank contributed to the scandal? ‘I don’t think the same thing would have happened in a monastery.’
He then sacked the firm’s lawyers and got someone he trusted in. That lawyer then took the extraordinary step of waiving all attorney-client privilege of the firm – that meant that that legal firm on behalf of Salomon had volunteered to act as an arm of the government. You might wonder who could have instructed that lawyer to make that waiver, but Buffett was then in charge.
Someone had invited PR people into show their wares. After fifteen minutes of bullshit, Buffett excused himself and walked out. He told the lawyer to tell them that they were not wanted. ‘We don’t have a public–relations problem. We have a problem with what we did.’
If these steps were extraordinary, his appearance before the baying jackals in Congress would become legendary. He again gave straight answers, and conceded that the firm had been very badly run. He said that:
I want to find out exactly what happened in the past so that this stain is borne by the guilty few and removed from the innocent….Huge markets attract people who measure themselves by money. If someone goes through life and measures themselves solely by how much they have, or how much money they earned last year, sooner or later they’re going to end up in trouble.
He said that the priorities of the firm had changed:
Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.
Alice Schroeder says of this remarkable exercise:
Those words have since been parsed and dissected in classrooms and case studies as the model of corporate nobility. Buffett’s unflinching display of principle summed up much about the man. In this statement, many of his personal proclivities – rectitude, the urge to preach, his love of crisp, simple rules of behaviour – had merged. Openness, integrity, extreme honesty, all the things that he meant to stand for: Buffett meant for Salomon to stand for them too. If Berkshire Hathaway was his editorial page, Salomon would be the church of finance.
Here is another line that will resonate, as the Americans say, with Australians today. When a Congressman asked Buffett if a bond trader had been overpaid, Buffett said: ‘If you asked me whether that compares to a good teacher in a public school, I would not want you to press me on it.’ Amen, Brother. Amen. He said that it was just so apparent that the whole business was being run for employees. Again, amen.
Buffett dragged this leaking corrupt craft through. He remarkably persuaded the government not to indict them. He settled on a very large fine. Alice Schroeder says that he had gone from being ‘a rich investor into a hero. The success of his unorthodox approach to scandal – embracing regulators and law enforcers instead of hunkering down – touched the yearning for nobility in many people’s hearts: the dream that honesty is rewarded; that the besmirched can be redeemed through honour.’ In almost every facet of the business he had found some sort of inherent conflict of interest between the employees and the customers of the bank.
So, after this man had brought the wreck to shore, and put at risk his one asset that was beyond price – his reputation – how did the good folks on Wall Street repay him for keeping them out of jail and out of bankruptcy? When he said they would have to take a hit in their bonuses, they threw a tantrum, and many of them started to walk out. The whole culture looks to me to be incurably corrupt. Greed is bad.
Buffett had amazing powers of concentration. He later became a champion bridge player. He got on with Bill Gates from the very start. They just kept talking and talking and talking at their first meeting. At a dinner that night, Bill Gates Senior asked the resplendent businessmen present what factor had been the most important in getting where they had in life. Buffett said ‘Focus’ and Bill Gates said the same.
At about this time, Buffett started to warn people about derivatives, which would be a major part in what we know as the Great Financial Crisis. ‘Derivatives are like sex. It’s not who we’re sleeping with, it’s who they’re sleeping with that’s the problem.’
He spoke against dynastic wealth – he said that that kind of wealth turns a meritocracy upside down. He spoke against giving stock options to executives as being a cheap accounting trick to hide bonuses. Ms Schroeder drily observes that ‘since his famous no vote on the pay package at Salomon, no other board had ever asked him to serve on its compensation committee.’
When asked what had been his greatest success and greatest failure he said:
Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.
I know people who have a lot of money, and they get testimonial dinners and they get a hospital wing named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.
That’s the ultimate test of how you have lived your life. The trouble with love is that you can’t buy it. You can buy sex. You can buy testimonial dinners. You could buy pamphlets that say how wonderful you are. But the only way to get love is to be lovable. It’s very irritating if you have a lot of money. You like to think that you could write a check: I’ll buy $1 million’ worth of love. But it doesn’t work that way. The more you give love away, the more you get.
How many other titans of the till could even hint at thinking like that?
Buffett had by this time been speaking out saying that people like him were not taxed enough. He also managed to give most of his wealth away. (I think that by the time this book was being written, it was about $60 billion.) He gave most of it to the Gates Foundation. He spoke on this with typical plainness.
I have been very lucky. I was born in the United States in 1930 and won the lottery the day I was born. I had terrific parents, a good education, and I was wired in a way that paid off disproportionately in this particular society. If I had been born long ago, or in some other country, my particular wiring would not have paid off the way it has. But in a market system, where capital – allocation wiring is important, it pays off like no other place.
All along, I felt that money was just claim checks that should go back to society. I am not an enthusiast for dynastic wealth, particularly when the alternative is six billion people, who have got much poorer hands in life than we have, getting a chance to benefit from the money. And my wife agreed with me.
It was clear that Bill Gates had an outstanding mind with the right goals, focusing intensely with passion and heart on improving the lot of mankind around the world without any regard to gender, religion, colour or geography. He was just doing the most good for the most people. So when the time came to make a decision on where the money would go, it was a simple decision.
The Gates Foundation, we are told, followed a basic creed: guided by the belief that every life has equal value, it should work to reduce inequities and improve lives around the world in health and education. I wonder which of our parliaments hold that belief?
Here then is a most remarkable man. Forget, for the moment, the wealth that he has built up and given away, and focus, to use his term, on the lessons and precepts that he is leaving us. And focus on his example. Because here is a man who appears to have done what many of us feared may no longer be possible – he has been a vast success in business, but has remained a plain, decent human being. Above all, he understands noblesse oblige – the obligation of those who have received to give back.
Here then is the tragedy of America. Its next president will be the polar opposite of Warren Buffett; we will go from the best to the worst form of capitalism; and those dreary chroniclers of reaction remain sadly blind.
I have referred before to the gibberish of Jennifer Oriel in The Australian. Today it reaches hysteria of a worrying kind.
It took Trump’s victory to unmask the true character of the PC Left. What began with scenes of Clinton’s collective strewn across floors in the foetal position turned into violent rage organised in protests against democracy. Socialists, Islamists, anarchists and black supremacists have mobbed US cities with some threatening to murder people who dissent from the PC line. Fox News reported that in New Orleans, anti-Trump activists defaced a memorial with race-hate speech ‘F…k White People’ and ‘Die Whites Die’. That is incitement to genocide……
Yet I predicted Trump would win the election well before the event because he is a counter-revolution whose time has come. The Western world is entering a political era led by a grass roots movement to restore sovereignty and defend liberal democracy against its enemies….
When the news of Trump’s victory finally arrived, I thanked God not because I like Trump, but for a people reviled who rose up to be counted….
How could you fit in so much hate? And the author of this venomous bilge is one of those in the vanguard of the Evil Empire leading the charge to be loosed from laws on hate speech. Perhaps we too should have a word with God.