Tag: Alice Schroeder

Compounding Knowledge

The filing cabinet of knowledge stored in Warren Buffett’s brain has helped make him the most successful investor of our time. But it takes much more than simply reading a lot. In this article, learn how to create your own “snowball effect” to compound what you know into opportunity.


Alice Schroeder, the author of Warren Buffett’s authorized biography The Snowball, tells the story of getting into Buffet’s thinking in this informative talk. In her words,

Starting [at a young age] he’s read everything that he could find about business. The subject that interests him, he’s read newspapers, biographies, trade press. He went over to his grandfather who was a grocer and he read the progressive grocer magazine, and he read articles on how to stock a meat department. He’s gone to visit every company that he could find that was even slightly interesting to him, he went down to visit a barrel maker and spent hours talking about how to make barrels. He went to American Express, and he spent hours talking about that business, he went to GEICO and learned about the insurance business. He has stacks of reports on his desk from the companies he owns, pig stalls, jewelry, boat winches, everything you can imagine. He reads hundreds of annual reports every year from companies that he doesn’t own yet, because he just wants to understand their businesses, and then when the opportunity arises, then he’s ready and he can make a decision. What he’s really done is he’s created this immense vertical filing cabinet in his brain of layers and layers and layers of files of information that he can draw back on now for more than 70 years worth of data.

Expiring Information

A lot of us are on the treadmill of consuming expiring information. Not Buffett. He filled his mental filing cabinet with information that had a long half-life.

While most of us focus on consuming information that we won’t care about next month, let alone next year, Buffett focused on knowledge and companies that change very, very slowly or not at all. And because the information he was learning changed slowly he could compound his knowledge over time. And as Schroeder notes, Buffett has been in business for a long time, giving him incredible opportunities to create a cumulative base of knowledge.

Expiring information is sexy but it’s not knowledge. Here are a few telltale signs you’re dealing with expiring information. First, it’s marketed to you. Second, lacking details and nuance, it’s easily digestible. This is why it’s commonly telling you what happened, not why it happened or under what conditions it might happen again. Third, it won’t be relevant in a month or a year.  Expiring information is one reason I stopped reading most news. It’s a false map.

But there is another subtle difference to Buffett’s approach that often goes unnoticed and few people talk about.

Matching Patterns

Buffett insists on doing his own thinking and vacuums up the details. When we don’t think for ourselves it’s easy to put the blame on someone else, to “pass the buck” so to speak.

When we consume information that doesn’t expire or expires slowly;  is very detailed; and we spend time thinking about it not passing the buck, we can match patterns. This is how you learn to see what other people are missing. The longer you do this, the more advantage you get.

Most of us use a computer to store information so that we can retrieve it when we need it. We’ve organized our knowledge around a computer. Not Buffett.

The biggest thing he’s done is to learn and create this cumulative base of knowledge in his head. One reason that he doesn’t use a computer is that in a sense, he is one. He also needs a computer to get…he uses it for news. He wants to know what’s going on in the world. So he is on the internet a lot to get news reports, and he’s up late at night seeing what’s going on. He doesn’t use it as a filing cabinet or for computation.

Just like the rest of us, Buffett’s dependent on information and knowledge to make great decisions. Unlike most of us, he has a great memory—perhaps because he’s not trying to outsource his memory or thinking to others.

A lot of what the snowball is about the concept of learning, and creating, and the advantage of having the information and knowing it. When I came here today one of the things that I was thinking is that what you do is so much at the intersection, because retrieving information is different from having it already in your head. The internet is wonderful for being able to retrieve and get information.

What you do is different. You work on manipulating how you use the information. In fact, Warren Buffett and Charlie Munger have the files in their head. That’s why they aren’t really out there googling all the time looking for, trying to look stuff up, because they already know it.

There are applications that somebody who doesn’t have the upper digits memory and their computational power would need in order to be as successful as them. Sometimes when they say, we don’t use computers. An ordinary person can be them.

I think a lot of the work that you do here is helpful to the ordinary person, but Warren Buffett or Charlie Munger don’t need it. At the same time, the lesson that they have, which is that learning yourself, making yourself as smart as you can is extremely valid, and not just relying on a library where you can look something up all the time, because a lot of times when you need to make a decision, and you need 50 pieces of information, you need to know it then.

That’s been one of Warren Buffet’s greatest secrets of success.

I’m not suggesting we all copy Buffett.

While there is no denying he’s successful, the way we think he developed his remarkable facility owes a great deal to living in a certain time period, with a certain biology, and a level of focus and dedication to a single pursuit that few of us can manage. That doesn’t mean we should go to the other extreme and ignore him.

There is much we can learn from him. The key questions are: what’s he doing that works, why does it work, and can I adapt it to my circumstances?

Further Considerations:

  • Will you care about what you’re reading in a month? In a year? In five years?
  • Are you focused enough on the same thing to build cumulative knowledge or are you too spread out?
  • What do you spend time on that’s likely to change in the next few years? What’s not likely to change?
  • What would need to happen for you to stop outsourcing organization of information to the computer?

The Snowball is about learning, lifelong learning. Spending some time with these questions will allow you to find ways to make your own learning and your knowledge base more powerfully productive for you.

Warren Buffett on Scorecards, Investing, Friends, and the Family Motto

This website is named after a street located in Omaha, Nebraska. An amazing place, Omaha is famous for being the home of Warren Buffett, one of the world’s richest men. The headquarters of Berkshire Hathaway — and his house — just happen to be on “Farnam Street.” The name of this website is an homage to both Buffett and his business partner Charlie Munger.

While Buffett is famous for his investing acumen, he’s also full of sage wisdom on life and living.

In October 2009, while the housing crisis was still in full effect, his authorized biography The Snowball: Warren Buffett and the Business of Life hit the shelves.

Here are some of his lessons on life and investing.

Three Early Lessons in Investing

Having bought three shares of Cities Service Preferred at the age of 11, Buffett learned a valuable lesson. After the stock plunged from $38.25 to $27 a share. His sister Doris reminded him daily on the way to school that her stock was going down. Buffett felt “terribly” responsible. When the stock recovered he sold with a slight $5 profit. Almost immediately after, Cities Service quickly soared to $202 a share.

Warren learned three lessons and would call this episode one of the most important of his life. One lesson was not to overly fixate on what he had paid for a stock. The second was not to rush unthinkingly to grab a small profit. He learned these two lessons by brooding over the $ 492 he would have made had he been more patient. It had taken five years of work, since he was six years old, to save the $ 120 to buy this stock. Based on how much he currently made from selling golf balls or peddling popcorn and peanuts at the ballpark, he realized that it could take years to earn back the profit he had “lost.” He would never, never, never forget this mistake. And there was a third lesson, which was about investing other people’s money. If he made a mistake, it might get somebody upset at him. So he didn’t want to have responsibility for anyone else’s money unless he was sure he could succeed.

The Scorecard

This is an important one to keep in mind. If we place too much emphasis on what the world thinks, we end up with an outer scorecard.

I feel like I’m on my back, and there’s the Sistine Chapel, and I’m painting away. I like it when people say, ‘Gee, that’s a pretty good-looking painting.’ But it’s my painting, and when somebody says, ‘Why don’t you use more red instead of blue?’ Good-bye. It’s my painting. And I don’t care what they sell it for. The painting itself will never be finished. That’s one of the great things about it.

The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: ‘Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?’ Now, that’s an interesting question.

This has implications if you’re a parent: What you put emphasis on matters.

If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll wind up with an Outer Scorecard.

Hang Around People Better Than You

After graduating from Columbia University, Buffett returned to Omaha to live with his parents. He spent part of that first summer fulfilling his obligation to the National Guard. While he wasn’t a natural, it sure beat going off to fight in Korea. Part of his duties in the guard required him to attend training camp in La Crosse, Wisconsin, for a few weeks. That experience taught him an incredible lesson that he’d carry forward for the rest of his life.

“It’s a very democratic organization. I mean, what you do outside doesn’t mean much. To fit in, all you had to do was be willing to read comic books. About an hour after I got there, I was reading comic books. Everybody else was reading comic books, why shouldn’t I? My vocabulary shrank to about four words, and you can guess what they were.

“I learned that it pays to hang around with people better than you are, because you will float upward a little bit. And if you hang around with people that behave worse than you , pretty soon you’ll start sliding down the pole. It just works that way.”

The Buffett Family Motto

As simple as it is powerful.

“Spend less than you make” could, in fact, have been the Buffett family motto, if accompanied by its corollary, “Don’t go into debt.”

Why Buffett Wanted Money

Even when he was little h,e was always fixated on money. He wanted money. Why?

“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.”


In July of 1952, Susie Buffett, having been married only a few months to Warren, went to Chicago with her parents and new in-laws for the Republican convention. The convention was covered on television for the first time in history. Warren, who stayed in Omaha, watched eagerly — “struck by the power of this medium to magnify and influence events.”

The front-runner was Senator Robert Taft, known as “Mr. Integrity.” He wanted three things: (1) small government; (2) pro-business; and (3) eradicate Communism. Taft’s friend and Warren’s father, Howard Buffett, was the head of his presidential campaign. Taft’s main opponent was the moderate and popular war hero General Dwight D. Eisenhower.

While it might have been the first convention covered by television it still lives in the history books as one of the most controversial Republican conventions. Eisenhower backers pushed through a controversial amendment to the rules that handed him the nomination on the first ballot. Taft and his supporters were, of course, outraged.

But Eisenhower soon made peace with them by promising to combat “creeping socialism.” Taft insisted that his followers swallow their outrage and vote for Eisenhower for the sake of regaining the White House. The Republicans united behind him and his running mate, Richard Nixon; “I Like Ike” buttons sprouted everywhere. Everywhere, that is, except on Howard Buffett’s chest. He broke with the party by refusing to endorse Eisenhower.

This was an act of political suicide. His support within the party evaporated overnight. He was left standing on principle— alone. Warren recognized that his father had “painted himself into a corner.” From his earliest childhood, Warren had always tried to avoid broken promises, burned bridges, and confrontation. Now Howard’s struggles branded three principles even deeper into his son: that allies are essential; that commitments are so sacred that by nature they should be rare; and that grandstanding rarely gets anything done.

Still Curious?

While reading about Buffett won’t make you as smart as he is, you might learn something in the process. Pick up a copy of The Snowball: Warren Buffett and the Business of Life and give it a shot.

The Buffett Formula: Going to Bed Smarter Than When You Woke Up

Most people go through life not really getting any smarter. Why? They simply won’t do the work required.

It’s easy to come home, sit on the couch, watch TV, and zone out until bedtime rolls around. But that’s not going to help you get smarter.

Sure, you can go into the office the next day and discuss the details of last night’s episode of Mad Men or Game of Thrones. And yes, you know what happened on Survivor. But that’s not knowledge accumulation; that’s a mind-numbing sedative.

You can acquire knowledge if you want it. In fact, there is a simple formula, which if followed is almost certain to make you smarter over time. Simple but not easy.

It involves a lot of hard work.

“The best thing a human being can do is to help another human being know more.”

— Charlie Munger

We’ll call it the Buffett formula, named after Warren Buffett and his longtime business partner at Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They are also learning machines.

“I can see, he can hear. We make a great combination.”
—Warren Buffett, speaking of his partner and friend, Charlie Munger.

We can learn a lot from them. They didn’t get smart because they are both billionaires. They became billionaires, in part, because they are smart. More importantly, they keep getting smarter. And it turns out that they have a lot to say on the subject.

How to Get Smarter

Read. A lot.

Warren Buffett says, “I just sit in my office and read all day.”

What does that mean? He estimates that he spends 80% of his working day reading and thinking.

“You could hardly find a partnership in which two people settle on reading more hours of the day than in ours,” Charlie Munger commented.

When asked how to get smarter, Buffett once held up stacks of paper and said, “Read 500 pages like this every week. That’s how knowledge builds up, like compound interest.”

All of us can build our knowledge, but most of us won’t put in the effort.

“Go to bed smarter than when you woke up.”

— Charlie Munger

One person who took Buffett’s advice, Todd Combs, now works for the legendary investor. After hearing Buffett talk, he started keeping track of what he read and how many pages he was reading.

The Omaha World-Herald writes:

Eventually finding and reading productive material became second nature, a habit. As he began his investing career, he would read even more, hitting 600, 750, even 1,000 pages a day.

Combs discovered that Buffett’s formula worked, giving him more knowledge that helped him with what became his primary job—seeking the truth about potential investments.

But how you read matters, too.

You need to be critical and always thinking. You need to do the mental work required to hold an opinion.

In Working Together: Why Great Partnerships Succeed, Buffett comments to author Michael Eisner:

Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action. And Charlie—his children call him a book with legs.

Continuous Learning

Eisner continues:

Maybe that’s why both men agree it’s better that they never lived in the same city, or worked in the same office. They would have wanted to talk all the time, leaving no time for the reading, which Munger describes as part of an essential continuing education program for the men who run one of the largest conglomerates in the world.

“I don’t think any other twosome in business was better at continuous learning than we were,” he says, talking in the past tense but not really meaning it. “And if we hadn’t been continuous learners, the record wouldn’t have been as good. And we were so extreme about it that we both spent the better part of our days reading, so we could learn more, which is not a common pattern in business.”

It Doesn’t Work How You Think It Works

If you’re thinking that they sit in front of a computer all day obsessing over numbers and figures, you’d be dead wrong.

“No,” says Warren. “We don’t read other people’s opinions. We want to get the facts, and then think.” And when it gets to the thinking part, for Buffett and Munger, there’s no one better to think with than their partners. “Charlie can’t encounter a problem without thinking of an answer,” posits Warren. “He has the best thirty-second mind I’ve ever seen. I’ll call him up, and within thirty seconds, he’ll grasp it. He just sees things immediately.”

Munger sees his knowledge accumulation as an acquired, rather than natural, genius. And he’d give all the credit to the studying he does.

“Neither Warren nor I is smart enough to make the decisions with no time to think,” Munger once told a reporter. “We make actual decisions very rapidly, but that’s because we’ve spent so much time preparing ourselves by quietly sitting and reading and thinking.”

How Can You Find Time to Read?

Finding the time to read is easier than you think. One way to help make that happen is to carve an hour out of your day just for yourself.

In an interview he gave for his authorized biography The Snowball, Buffett told this story:

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.

It’s important to think about the opportunity cost of this hour. On one hand, you can check Twitter, read some online news, and reply to a few emails while pretending to finish the memo that is supposed to be the focus of your attention. On the other hand, you can dedicate the time to improving yourself. In the short term, you’re better off with the dopamine-laced rush of email and Twitter while multitasking. In the long term, the investment in learning something new and improving yourself goes further.

“I have always wanted to improve what I do,” Munger comments, “even if it reduces my income in any given year. And I always set aside time so I can play my own self-amusement and improvement game.”

Reading Is Only Part of the Equation

But reading isn’t enough. Charlie Munger offers:

We read a lot. I don’t know anyone who’s wise who doesn’t read a lot. But that’s not enough: You have to have a temperament to grab ideas and do sensible things. Most people don’t grab the right ideas or don’t know what to do with them.

Commenting on what it means to have knowledge, in How to Read a Book, Mortimer Adler writes: “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”

Can you explain what you know to someone else? Try it. Pick an idea you think you have a grasp of and write it out on a sheet of paper as if you were explaining it to someone else. (See The Feynman Technique and here if you want to improve retention.)

Nature or Nurture?

Another way to get smarter, outside of reading, is to surround yourself with people who are not afraid to challenge your ideas.

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”

— Charlie Munger

The Art and Science of Asking Better Questions

At the recommendation of Warren Buffett’s Biographer, Alice Schroeder, I’ve been reading The Craft of Interviewing.

Schroeder seems pretty crafty at knowing when, what, and how to ask questions that get to interesting answers.

Given our podcast, The Knowledge Project, I endeavor to ask better questions. I want to suppress my ego and stop thinking about what I want to say when the other person is talking and let them talk.

I’ve never been taught how to ask questions, which makes me wonder if I’m getting the most out of the questions I do ask.

If you think about it, asking better questions is really just a clever way to steal from the rich and give to the poor. In this case, I’m stealing knowledge from someone that has it (them) and giving it to someone that needs it (me).

I have a lot of smart friends — by smart, I mean incredibly smart, not just plain smart — and I want to maximize the knowledge I gain from this privilege when we’re together

Here are some of the things I dog-eared while reading this book that you might be interested in:

  • The interview, generally, may take two shapes: one, like a funnel, and the other like an inverted funnel. The funnel-shaped interview opens with generalities – “What are the benefits of nuclear warfare, Mr. President?” – then pins down the generalizations – “When and were has it produced those spectacular sunsets that you mention?” The funnel allows the subject some say in the direction of the interview.
  • Sherlock Holmes would have been fond of the inverted-funnel; it opens with hard, fast, specific questions, then ascends to a more general ground. Used appropriately this form can help put people at ease. Another way to put people at ease is to start with the easy questions. (Learn to think more like Holmes.)
  • Don’t ever make someone feel as if he can’t get his point across, no matter how hard he tries.
  • Far too many people ask questions that try to put the spotlight on themselves rather than the person with the information.
  • Avoid two-part, hypothetical, and leading questions.
  • People won’t confess their inner thoughts unless they have proof the person asking those questions is sympathetic.
  • Mike Wallace says “The single most interesting thing you can do in television, I find, is to ask a good question and then let the answer hang there for two or three seconds or four seconds as though you’re expecting more.”
  • Envelope tough questions with “people are saying” because that helps avoid the person responding from thinking the questioner is attacking them. (Blame someone else for the question.) Another technique for this is to imply the question is a playful one, “I’d like to play the devil’s advocate for a moment.” You can also preface the question with praise.

If anyone knows of other books on asking better questions shoot me an email.

Update: We did a whole interview on asking better questions.

The decline of Berkshire Hathaway’s stock from Triple-A status

From Alice Schroeder’s new chapter: THE CRISIS: The decline of Berkshire Hathaway’s stock from Triple-A status in the updated (and condensed) version of The Snowball.

As the financial crisis evolved, the lame-duck Bush administration and the new Obama administration followed a consistent course under Federal Reserve Chairman Benjamin Bernanke and Treasury Secretary Timothy Geithner, with the Fed injecting trillions of dollars into the U.S. banking system, trying to forestall deflation—chronic falling prices such as occurred in 1932. The still unfolding crisis revealed its complex brew of causes, including artificially low interest rates, foolish borrowing by businesses and individuals, foolish lending by banks and investors, overreliance by institutions on complex financial instruments, aggressive behavior by derivatives traders, conflicts of interest at the banks being paid as agents to package loans sold to them by originators and resell them to investors, a climate of deregulation, lax oversight and enforcement by regulators, abdication of responsibility by rating agencies, inadequate capitalization of bond insurers, investor indifference—in other words, effects of all the normal dysfunctions that precipitate a bubble.

Of the responsible parties, it was the banks and AIG that earned the public’s greatest ire, while Buffett became the public’s greatest symbol of financial responsibility.

Treasury yields soon reached zero, but the flood of money failed to open the channels of business lending; credit remained virtually nonexistent. Buffett, who was at the time acting as the economy’s greatest cheerleader, lent at interest rates that in some instances bordered on usurious—$150 million of twelve percent notes in Sealed Air; $300 million of Harley-Davidson debt for a fifteen percent interest rate; $300 million of ten-percent contingent convertible senior notes from USG; $250 million of Tiffany bonds at ten percent; and a $2.7 billion, twelve-percent perpetual convertible stake in Swiss Re that would give Berkshire a thirty-percent ownership in the insurance giant.

This latter move baffled insurance industry insiders, including Swiss Re employees. Swiss Re was General Re’s biggest competitor; observers concluded that, on any terms, the investment to prop up Swiss Re made no sense because of its negative long-term strategic consequences to Berkshire—unless Buffett ultimately meant to take over Swiss Re and merge it with General Re. In the past, however, Buffett had made opportunistic insurance investments that worked against Berkshire’s long-term interests. Challenged on this, he would respond, “If we don’t do it, somebody else will.” Thus it was equally likely that there was no strategy whatsoever behind the deal besides extracting some fast cash from the pockets of the Swiss.

Throughout, Buffett became an even more frequent presence on CNBC and other networks. He filled the role of America’s statesman and father figure during the financial crisis, but he had also fallen into the trap of competing for attention instead of trusting that his sterling record would bring it to him. “Dignity, Warren, dignity,” counseled one of his friends—but Buffett had never wanted to be dignified; he had never minded looking silly if it would get people to pay attention to him. He was a performer and a showman, and now he feared the show might end. He would keep on giving as many performances as possible while there was time. And indeed, his profile grew and grew in proportion to how often he appeared on the magic medium of television.

All this was not only personally effective—Buffett was his own best publicist—but also understandable for someone his age, until his marathon performances on CNBC resulted in some serious gaffes: criticizing newly elected President Obama’s performance, giving advice to the White House (the Shoe Button Complex, something that Buffett had heretofore spent a lifetime avoiding), and a claim that he, like everyone else, had thought housing prices could only go up—an absurdity that raised eyebrows.

When Berkshire finally reported its 2008 earnings, the consequences of some of Buffett’s earlier decisions became even clearer. The insurance businesses had suffered large losses from that year’s unusually active hurricane season. “Last year was a bad year for a float business,” Munger would later say at the shareholder meeting, citing GEICO and the energy and utility businesses as bright spots. Although Buffett referred to Berkshire’s “Gibraltar-like” balance sheet, the erosion in its financial strength was unmistakable. Because of Berkshire’s heavy insurance exposure and its concentration in financial stocks such as American Express, Wells Fargo, and U.S. Bancorp, its book value was down by 9.6 percent—only the second decrease in its history (and the largest). Berkshire had recorded $14.6 billion of accounting losses on its derivative contracts. While many of these losses would probably be reversed in the long run, they had a significant impact on the balance sheet. Nearly all of the decline was due to bets on financial assets that were market-dependent.

Even so, the decrease in Berkshire’s book value was insignificant compared to major banks and nonbank lenders, which were technically insolvent or close to it, and receiving hundreds of billions in government aid. Buffett had steered Berkshire to a stellar performance, by that measure. All the work of many years had culminated in this moment: Berkshire standing alone after other businesses crumbled around it.

You would not know this by reading some of the commentary on Buffett. One of his challenges at this late stage of his long career was that he tended to be measured by some observers and journalists against a standard of perfection, as if he had to be infallible to be any good at all.  Bloggers and financial writers went wild writing about Buffett’s derivatives exposure. Buffett went on the counterattack. That year’s shareholder letter contained a lengthy explanation of his reasoning for selling the equity-index puts. Yet by some calculations, under various scenarios Berkshire could indeed lose billions at the expiration dates of these contracts, which were not as well priced as Buffett had apparently thought when he entered into them. Ultimately, the concentration of financial assets and their effect on Berkshire’s value was significant enough that first Fitch Ratings, then Moody’s, downgraded the credit ratings of Berkshire and its subsidiaries (such as National Indemnity and MidAmerican) by one notch, from AAA or the equivalent.

The top rating had given Berkshire a lower cost of funding and significant advantages in its insurance business, which made it attractive to sellers of businesses. Buffett had displayed quiet satisfaction when Berkshire’s two largest insurance competitors lost their triple-A ratings, and had at times said privately that the one thing he would never do was jeopardize Berkshire’s triple-A, which he considered one of its most precious assets. In his shareholder letters, he liked to comment that Berkshire was one of only “seven,” or whatever the dwindling number was, of the remaining triple-A companies. He considered it unlikely that this rating, once lost, would be reinstated.

Now Berkshire had suffered that blow, which it probably could have avoided by raising (expensive) equity capital, something Buffett chose not to do. At the 2009 shareholder meeting, he downplayed the consequences. He said the derivatives did not impinge on capital and that a triple-A rating only conveyed “bragging rights.” “We’re still a triple-A in my mind,” he said. It was actually possible that Berkshire—in its uniqueness—could get the rating reinstated, but if so, it would be expensive even if Berkshire did not have to raise capital: It would have to reduce its exposures to insurance and equity market risk as a percentage of book value. Buffett probably would choose not to pay that price because its benefit was limited; no other financial institution remained with a triple-A rating.

Thus, the real meaning of the downgrade, in a larger context, was that the crisis had unveiled the true risk inherent in the global financial system—and the rating agencies had responded by increasing the capital threshold for a triple-A rating to a level that meant even the soundest institution found it financially unattractive to qualify.

Buffett also revealed at the 2009 shareholder meeting that to reduce Berkshire’s derivative risk, he had renegotiated two of the equity-index put contracts, shortening the terms by eight years in order to lower the price at which Berkshire would have to pay out losses. By then, the values of Wells Fargo, U.S. Bancorp, and American Express had begun to recover, but Wells and U.S. Bancorp had cut their dividends, which would also affect Berkshire’s future earnings. Buffett predicted that Wells Fargo would not have to issue stock, a prediction that was almost immediately contradicted when Wells Fargo did just that. He scored better a few weeks later when Berkshire’s SEC filings revealed that he had been buying American Express while the stock was on its back.

Thus, during the financial crisis, Buffett made a series of characteristic brilliant moves interspersed with some surprising errors. Above all, he stood pat on existing investments while adding cleverly structured new deals, deals that for the most part were not available to ordinary investors. These opportunities came to Berkshire because of its ready cash and underlying financial strength, and because of Buffett’s willingness to rent his well-earned reputation and provide quick, trustworthy handshake dealmaking.

The actions he had taken with deals struck in 2008 and 2009, in accordance with his saying “Cash combined with courage in a crisis is priceless,” would enrich Berkshire shareholders for many years to come. At the same time, the crisis—which admittedly had so many episodes of heart-stopping disintegration into near economic collapse that in some ways it eclipsed the events leading to the Great Depression—left Berkshire a weaker company financially. It undercut Buffett’s reputation as a nearly infallible manager, and cost the company its top financial rating.

The 2009 shareholder meeting would prove to be both a celebration of Berkshire’s success and a chance for Buffett to defend himself. He had changed the meeting format so that half the questions would concern Berkshire and would be submitted through a panel of journalists: Carol Loomis, Becky Quick of CNBC, and Andrew Ross Sorkin of the New York Times. A torrent of five thousand questions poured in, many of them tough-minded queries from people who wanted answers but who had not, in the past, been willing to wait hours for a position at the microphone while others asked Buffett about his personal relationship with Jesus Christ and what books he and Munger had read lately.

The new format and the unsteady economy attracted what was said to be a record thirty-five thousand people in attendance despite Berkshire’s stock price, which hovered at $90,000 per share. Buffett, who never said anything spontaneous, always seemed to have an answer prepared for every question that could be anticipated. The main difference in 2009 was that shareholders were asking truly challenging questions, rather than flattering him with their gratitude for being able to stand in his presence and receive his wisdom. At his most impressive he rattled off statistics and explained economics with a clarity that people were not hearing from anyone else. But his answers on other questions were more awkward. Buffett liked to deal with confrontation indirectly. Put on the spot, he behaved as he did in private, avoiding direct answers to some questions and meting out unpleasant information through hints and sometimes by omission.

Challenged on his decision not to sell financial stocks in the spring of 2008, he said he only sold when a company’s competitive advantage disappeared, he lost faith in management, or he needed cash. He was cutting a fine distinction in trying to separate his criteria for selling stocks when companies’ circumstances were changing materially all the time, versus selling whole businesses, which happened only when they became economically unviable or had persistent labor problems. With newspapers folding in cities all over the United States, he also went so far as to raise the possibility of eventually shuttering the Buffalo News, but said that as long as the News made a little money and had no labor problems, he and Munger would “keep it going.”

Buffett was questioned sharply about why he did not sell Moody’s when its business model was fundamentally compromised after the rating agencies were implicated in causing the financial crisis. He said he thought the odds were that Moody’s was still a good business, and that he did not think conflict of interest—rating agencies are paid by the entities they rate—was “the major cause” of the problem. (Another conflict of interest, not mentioned, was Berkshire’s twenty-percent ownership of Moody’s when Moody’s rated Berkshire.) Many in the audience had spent years listening to Charlie Munger’s often repeated saying, “whose bread I eat, his song I sing,” and understood that Buffett was rationalizing as he always did in pursuit of a profit or when he felt backed into a corner—or both.

When Buffett was asked how the four investment managers he had chosen as possible replacements performed during the 2008 market crash, and whether they were still on the list of candidates, he said they “didn’t cover themselves with glory,” then commented that neither did most investment managers during this period. Buffett did not respond to how these managers did relative to the market or to their relevant benchmarks. He left a vague impression that the list of candidates might change, over time.

What was certain, whichever candidates were chosen, was that the stock market would eventually recover. More important were Berkshire’s businesses. Most were among the best in their respective industries. Buffett had built a conglomerate of stable businesses that were likely to be profitable for a long time. Still, the events of 2008 had certainly convinced many shareholders that Berkshire was not a company that could be run by a ham sandwich after Buffett was gone.

At the meeting they grilled Buffett about the question of succession with new intensity. The next CEO’s challenges would be keeping Berkshire’s managers happy, managing the company’s franchise and risks, and investing the cash flow the businesses threw off. Buffett insisted that all the candidates were internal.

He said that running a major operating business was the best qualification for the CEO job. He next talked about what he actually did as CEO, which did not involve anything remotely resembling running an operating business (nor had Buffett ever run an operating business; nor could he have, had he been forced to do so). He stated that the operating managers had experience allocating capital—perhaps a necessary rationalization, although nobody truly allocated capital at Berkshire other than Buffett, particularly not in financial services, the heart of the company and the site of Berkshire’s recent woes.

The answer revealed that Buffett was publicly introducing a rationale to pave the way for someone like David Sokol, the presumed front-runner who ran MidAmerican Energy. Buffett was also using a selection process that in some ways mirrored his two disastrous experiences at Coca-Cola, one that could someday put the board in an awkward spot.

To be sure, Buffett had already divided executive authority in a way that many outside candidates would not find comfortable—with his son Howie succeeding him as chairman, and Bill Gates taking on the role of de facto lead board member as representative of Berkshire’s largest future shareholder, the Bill and Melinda Gates Foundation. This meant that, for better or worse, Berkshire probably would always be run in an unusual manner by unusual people.

The unusual company that Buffett—or Sokol, or possibly even a committee—would be running was stable and successful, and had, because of the financial crisis, gained relative advantage over its rivals in many of the businesses in which it operated, even though as of spring 2009 its results and financial condition also reflected the weakened economy.

As for the future, Buffett said retailing, especially of luxury products, might not recover for years. Companies like Borsheim’s and NetJets were going to struggle. He said little more about NetJets; the sparsely populated aisles at Borsheim’s on Sunday after the meeting spoke for themselves. On a brighter note, he said that new household formation was the key to recovery of housing related sales, with 1.3 million new households formed in the United States every year.

He spoke optimistically of the long-term future of the U.S. economy, which had survived two world wars, many panics and depressions, the resignation of a president in disgrace, and civil unrest. At various times, he had discussed what he expected to be inevitable inflation and the declining value of the dollar. Yet it was the “unleashed potential” of the human race that caused economies to grow over time, he said; in other words, productivity. The world’s system to increase productivity works naturally and has been working for a long time. Munger waxed enthusiastic over Berkshire’s investment in BYD, a Chinese maker of electric cars. We are about to harness the power of the sun, he said, and use more electric energy to preserve hydrocarbon energy for chemicals that are more important. The main technical problem of mankind is about to be fixed, he opined. Then he and Munger headed off to meet with the international shareholders, and Buffett and Astrid attended another round of parties on Saturday night.

Within days, Buffett would begin planning the 2010 meeting—when he would be almost eighty. He couldn’t believe he would be eighty. Every year he attacked the meeting planning as though this year would be his ultimate statement—his greatest show on earth. In 2009, he had shown off an electric car. He would have to find some way to top that in 2010.

Meanwhile, to his slight chagrin, Borsheim’s had missed out on one sale in 2009. (Every sale mattered to Buffett.) At 3:00 p.m. during the shareholder meeting, “Alex from Boston” asked Buffett what individuals could do to help the economy. Buffett said, first, to spend money, then repeated that new household formation would be helpful to the economy. With that, “Alex from Boston,” who was Buffett’s grandnephew Alex Buffett Rozek, asked his girlfriend Mimi Krueger to marry him. Mimi, stunned to be asked in front of thousands of people, said yes, and Alex gave her his grandmother Doris’s sapphire-and-diamond ring, which Warren had given his sister for her seventy-fifth birthday.

Buffett the showman had always wanted to have a wedding at the Berkshire shareholder meeting, but had never quite managed to pull that off. He would settle for an engagement instead.