Roger Lowenstein is now a director at Sequoia Fund, founded by the legendary Bill Ruane, but he shot to fame with his first book Buffett: The making of an American Capitalist in 1995. Robert Hagstrom’s The Warren Buffett Way was the first detailed tome on Buffett’s investment style but Lowenstein’s book, which followed soon after, was personally more revealing. His book is also the one that many an investor mentions when recalling their initiation to Buffett. Though Lowenstein is a Berkshire shareholder, he is unsure about whether tech giant IBM should be in the conglomerate’s investment portfolio.
Many an investor mentions your book The making of an American Capitalist as their starting point to getting to know about Warren Buffett. What led to the book?
Salomon Brothers happened first. That really put him out there in my opinion; that’s why I did the book. That was what made me think the book would be remarkable. I have known about it for a long time. I read the Journal and saw this guy on the front pages. Even at the Journal, many of my colleagues scarcely knew who he was. It wasn’t just them: he was not well-known even though, by that time, he had 35 years of beating the market by more than 10 points a year. Not that many people knew this chap. I think Salomon Brothers made him a household name, at least in the business community.
Warren didn’t talk to me as the book was not authorised. But I wrote for his permission to quote from the letters because the personal letters are the property of the writer. These letters showed him talking extemporaneously to his colleagues when he was a much younger man. He wrote back to say that in return for that, he would want to see a copy of the manuscript. So, I sent a copy of the manuscript and heard from Charlie and he had six points that they wanted changed.
Charlie didn’t say whether he liked the book or not. He didn’t say whether Warren liked the book or not. He didn’t even make clear that Warren had read it. He just told me what the six points were. He approved the use of the letters. He didn’t ask whether I had made the changes. So, this is an insight into Warren’s character. He lets you know what he wants you to do, expects that you will do the right thing and moves on. He doesn’t want to get involved in ‘put this comma here’, ‘put that phrase there’. And that was it. I kept waiting — what do you think of it? The book came out in September 1995.
So, of course, I went to the next annual meeting. In those days, you had 2,500 people attending. It was not like he was surrounded by a mob all the time. Warren was signing books and annual reports for people before the meeting. I went up to him with a copy of the hardback and I thrust the book and pen in his hand and said, “Now, I will ask you for something.” He opened the title page, wrote Warren Buffett and closed the book. I have interviewed him frequently since then on other topics. He is perfectly willing to talk to me on subjects other than himself.
What do you make of the Warren and Charlie partnership? What are the things that you think stand out?
Someone said to me recently, ‘I think it is all Charlie because if he hadn’t come along, Warren wouldn’t have been buying good businesses.’ But I think it’s all Warren. If you had put Warren in a hole somewhere, he would have been a great investor without Charlie. I do think Charlie gave him something which was ‘feedback from someone who wasn’t afraid of him’. Warren’s son Peter told me that Warren once told him, ‘Someday, you are going to have to be able to tell your old man to go to hell.’ I asked him, ‘Did Warren ever tell his old man to go to hell’ — Warren revered his father Howard Buffett — and Peter said he didn’t think so. But I think Charlie is the one person who can tell Warren to go to hell; that is how he is. He doesn’t have a censor at the tip of his tongue. I think that is just incredibly valuable. He will give him his straight reaction and everybody needs that. Warren can get big in the head and that is why it is very valuable.
Is that something that has held them together, acting as a no-holds-barred sounding board to each other?
It is like any two best friends. You see the world in the same way, a little differently than the rest of the world seems to. It makes you rich and almost nobody else wants to follow you. Warren and Charlie are able to look through this obsession that most CEOs have with the short term. They share this feeling of being in on something that, for whatever reason, the world doesn’t seem to be in on. Charlie is a brilliant guy in his own right. He is more diverse in his reading and in his interests than Warren. I am sure over the years he has given Warren 1,000 examples from evolution and anthropology, all the kind of things that Charlie likes to do.
What aspects of his investing style have changed since you wrote the book? Have you seen any fundamental shifts during 1968-1995 or post-’95?
I would say now he is more reliant on whole businesses. There have always been both — whole businesses and securities. But the capital generation is so great that it is just too hard for him to find stocks. IBM is probably the biggest fresh equity he bought and that hasn’t worked out so great. So, they see it now as a growing collection of businesses that they literally own forever. It is different from an insurance company with a long-held securities portfolio. The other thing is that he shifted to more capital-intensive businesses — Marmon, the energy business and railroads. That is quite a shift even though he bought those very early in his career. But these are low inflationary times. I think he is aiming for a lower return than he did in the 1980s or acknowledging that is all there is, both because of his size and because that is what the market is offering.
One thing that is interesting is the partnership with 3G. He has never farmed out management before. He has always bought things with management in place. Heinz was not the greatest managed company. Kraft was an abysmally managed company but he aims to turn it around. He didn’t do turnarounds before. That is a new thing for him.
The one thing that has not changed yet is that he is still with brands. The well-known brands are under attack in this country, I think it is different overseas. It is a question about whether these health trends will come in the way of something like Coca-Cola. They usually catch up. But Buffett is still ok with these big brands. I think Coke, on a strict value basis, should have been sold 20 years ago. I think he knew it but he was on the board. My guess is he felt compromised and was willing to make a lot of money on it without making top dollar.
What has been the bigger driver of return in your view? Is it the culture or the capital allocation and investment decisions?
The cigar butt approach was not scalable or renewable. The whole thing with investing is to have somewhere you can keep putting your capital in. Even if you find a very big cigar butt, you take the puff and then what do you do? Once he started operating this company where the free cash kept coming in, he just had this insatiable unending deluge of cash. So, the cigar butt approach doesn’t work. I think the new approach is just more and more whole companies because he needs a permanent place for capital.
I think in the early years, they were buying more companies and stocks at incredible bargains. He put a billion into Coke right after the 1987 crash. They bought GEICO, which had a million-and-a-half customers. They knew they could add customers and each one would add to the net present value enormously. In the last 20 years or so, it’s been about buying good companies at fair prices, maybe discounts, because the founders want to be with Buffett.
Obviously, Heinz and Kraft are really different models. There they are counting on a turnaround, if that happens then they would have gotten a bargain. Berkshire would rather get a bargain without having to turn it around. At some point, they are going to ask themselves whether it makes sense to have all these 60 or 80 businesses under your roof. I think the marvel is that for 50 years, it has endured. How many institutions last for 50 years, essentially functioning at this level? It is quite extraordinary. The culture puts a premium on allocating capital. Buffett is a hawk about that stuff and he measures very carefully where capital should go.
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