The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [570]
23. Carol Loomis, “The Inside Story of Warren Buffett,” Fortune, April 11, 1988. Buffett stated these rumors were false in the article.
24. Katharine Graham letter to the members of the Buffett Group, December 14, 1987. She added a personal note to Warren’s copy: “Here is what I sent out. Hope it is ok and I don’t get lynched.”
25. Investors use different periods to estimate cash flows—from ten years to forever (“perpetuity”)—as well as different interest rates. Buffett’s margin of safety, however, was big enough to essentially eliminate the differences in methods; his view was that debating such precision mattered less than applying a big haircut. The key assumption is what growth rate the business is assumed to have—and for how long.
26. Robert L. Rose, “We Should All Have an Audience This Receptive Once in Our Lives,” Wall Street Journal, May 25, 1988.
27. Or 14,172,500 KO shares costing $593 million at an average price of $41.81 (or $5.23 split adjusted for the three 2-for-1 stock splits that occurred between 1988 and 2007). All shares and prices are adjusted for subsequent stock splits.
28. Interview with Walter Schloss.
29. At that point, KO’s market value represented 21% of the total market capitalization of Berkshire Hathaway—by far the biggest bet, in dollar terms, that Buffett had ever made on a single stock. Yet in percentage terms, this fit his past pattern.
30. Interview with Howie Buffett.
31. Michael Lewis, Liar’s Poker: Rising Through the Wreckage on Wall Street. New York: W. W. Norton, 1989.
32. BRK received a 9.25% coupon from the Champion preferred, above the going rate of 7%, and raised debt at 5.5% to fund this $300 million purchase. Champion called the preferred early, but Berkshire was able to convert its shares prior to the call and sell them back to the company at a small discount. Berkshire booked a 19% after-tax capital gain over the six years it held Champion.
33. Linda Sandler, “Heard on the Street: Buffett’s Special Role Lands Him Deals Other Holders Can’t Get,” Wall Street Journal, August 14, 1989.
34. From an interview with a friend who said this to Munger.
35. Speech at Terry College of Business, the University of Georgia, July 2001.
36. Interview with John Macfarlane.
37. Interview with Paula Orlowski Blair; Michael Lewis, Liar’s Poker.
38. Many contracts required posting of collateral or margin, but this did not compensate for the risk of mismarking in the model.
39. Buffett and Munger, 1999 Berkshire Hathaway annual shareholder meeting.
40. Salomon held on for eight years. Phibro sold its share in the JV in 1998. Alan A. Block, “Reflections on resource expropriation and capital flight in the Confederation,” Crime, Law and Social Change, October 2003.
41. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management. New York: Random House, 2000.
42. Interview with Eric Rosenfeld.
43. Meriwether characteristically exempted himself from this lucrative deal.
44. Report to the Salomon Inc. Compensation & Employee Benefits Committee, “Securities Segment Proposed 1990, Compensation for Current Managing Directors.”
45. This pay deal was still one-sided; the arbs could only break even or win. Buffett’s partnership had exposed him to unlimited liability to share in losses if he performed poorly—i.e., his incentives were truly aligned with his partners.
46. Michael Siconolfi, “These Days, Biggest Paychecks on Wall Street Don’t Go to Chiefs,” Wall Street Journal, March 26, 1991.
47. Interview with Deryck Maughan.
48. Using different terms. The casino/restaurant analogy was Buffett’s. Even if the customer businesses had become profitable, they would have demanded even larger amounts of capital in later years, despite bigger scale and market share, and it is questionable whether their returns would ever have satisfied Buffett.
49. Interview with Eric Rosenfeld.
Chapter 48
1. Michael Lewis, Liar’s Poker: Rising Through the Wreckage on Wall Street. New York: W. W. Norton, 1989.
2.