He challenged the conventional teachings at business schools. He’s a 25 Top Visionary, one of the Top 24 Most Powerful Men In Business, and advises people to hang out with people who are better than you.

I wanted to add to the Warren Buffett story by sharing another valuable lesson from one of the world’s richest men: Never Back Down!

“You’re neither right nor wrong because other people agree with you,” says Buffett. “You’re right because your facts are right and your reasoning is right – and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”

Buffett made a career out of taking the road less traveled. He is a value investor; he spends his time looking for securities whose selling prices are lower than their intrinsic value. He ignores the stock market, instead choosing to look at the overall potential of a company in the long term. Claiming that his favourite holding period is “forever”, Buffett’s conservative nature has distinguished himself from other investors.

Despite having many followers, value investing still has its critics. Taking this road less traveled was not always easy for Buffett, who has endured years of ridicule for his investment decisions, particularly during the dot-come frenzy. In 1999, Berkshire Hathaway stock grossly under-performed and analysts claimed that Buffett’s career was over because he had missed the technology boom. Wall Street thought he had committed the biggest mistake of his career and wrote him off. That is, until the dot-com bust in the early 2000s when his strategy proved infallible. “It was a mass hallucination, by far the biggest in my lifetime,” recalls Buffett.

Time after time, Buffett has listened to his gut instinct – and his vast research – to inform his business decisions. When others were acting and reacting to the stock market, Buffett was standing strong in his decisions. “You do things when the opportunities come along,” he says. “If I get an idea next week, I’ll do something. If not, I won’t do a damn thing…Much success can be attributed to inactivity.” His strategy is admittedly simpler than most investors feel comfortable with, claiming, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” But, there is genius in its simplicity.

Having the confidence to follow his instincts, however, never meant that Buffett was willing to make an irrational decision. Buffett knew when he was in trouble and he knew when to walk away from something. “One’s objective should be to get it right, get it quick, get it out, and get it over…your problem won’t improve with age,” he says. “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Buffett knew that no matter what move he made he would always have his critics. He decided early on, however, that regardless of what anyone else said or did, he was not going to break his stride. “The important thing is to keep playing, to play against weak opponents and to play for big stakes,” he says.

By marching to his own beat, Buffett was able to surpass his competition. He wasn’t afraid to try something new. After all, “if past history was all there was to the game, the richest people would be librarians.”

Have you benefitted in your entrepreneurial career by never backing down? I’d love to hear your story!

[via YoungEntrepreneur] by Evan Carmichael

A huge victory for Obama, the Democratic party, and the United States. But can Barak Obama come through on all his promises?

On January 20, Barack Obama will be sworn in as the 44th president of the United States. And like Franklin Delano Roosevelt did as he took the White House while facing the Depression, he’ll have to make it up as he goes.

The nation should know before Obama replaces George W. Bush much more of what he plans to do for the economy and business. Sure, there are his myriad campaign proposals—like raising the top income-tax rate and capital gains and dividend taxes on the wealthiest earners, or taking a new approach to trade agreements that emphasizes labor and environmental standards. But this promises to be a transition like no other, or at least unlike any other since 1932, when that economic crisis dominated the transfer of power.

First off, watch to see who Obama picks to be his Treasury secretary and who will fill the top economic jobs in the White House. You don’t need to be a genius to picture Austan Goolsbee, the interesting University of Chicago economist, heading the Council of Economic Advisers. And you can imagine Jason Furman, who has been Obama’s main point man on economics, heading the National Economic Council, a position filled by Bob Rubin and then Gene Sperling in Bill Clinton’s two terms.

Treasury Secretary will be interesting, to say the least. The person clearly needs to be someone Wall Street—that’s an antiquated term since there are no more investment banks—trusts, or at least doesn’t fear. But it can’t be someone who helped to get us into this mess. So I wouldn’t look for Lloyd Blankfein or John Mack or Jamie Dimon to be signing the dollar bill anytime soon. Tim Geithner would seem like a solid bet. The head of the Federal Reserve Bank of New York has street cred, and he hasn’t been seen as being part of the problem. But you could make a case that he was part of the slow Bush-administration response to the mess. Geithner would send a centrist signal to the markets and trading partners.

My favorite candidate would be Michael Bloomberg. Obama could talk the billionaire mayor out of running for a third term, making the case that, while he’s needed in New York, he’s in greater demand in Washington. Bloomberg has market cred and isn’t part of the problem. Plus, he’d give Obama a valuable Republican-Independent appointment to the cabinet.

The other interesting proposition floating around is who runs the TARP (Troubled Assets Relief Program) after Neel Kashkari leaves. Will there be a special rescue czar, and could Obama persuade, say, Warren Buffett to take the gig for one year?

In many ways, the questions of how Obama will actually lead are greater now that he’s president elect than they were when he was simply a presidential candidate. And the truth is, we don’t really know what direction the Obama economic plan will take given the realities of the market crash. Will he remain as committed to deficit reduction? Will he veer left? Or will the left be wildly disappointed?

So to get one sense of where the future is headed, look to the past. I just finished Jonathan Alter’s The Defining Moment, his account of F.D.R.’s 100 days. One is reminded of how much of the New Deal was improvised and unplanned, and how tensions were high between Roosevelt’s diverse advisers. F.D.R. had, after all, run opposing Herbert Hoover’s profligate spending and promising a balanced budget. But he also promised “bold, persistent experimentation” and that’s what the United States got in plans ranging from the Civilian Conservation Corps to the genuinely socialistic National Recovery Administration. There was also a wholesale remaking of the nation’s monetary structure including the formation of banking insurance under the F.D.I.C. and the Securities and Exchange Commission, run by Joseph P. Kennedy. F.D.R. was wise enough to know that a speculator like Kennedy would be best to run an agency devoted to regulating speculation. Hopefully Obama’s bugaboo about lobbyists—he wouldn’t take their money during the campaign—won’t keep him from appointing some of the smart ones.

America’s financial architecture is about to be remade and the shadow banking system—hedge funds and mortgage lenders, private equity and credit-default swaps—are all about to be brought under federal supervision. It’s just a matter of what kind of regulations emerge from the ashes of the old Wall Street. This is where Obama likely will move at his briskest pace, rather than with things like health care, which is slow and cumbersome and fraught with political peril. (See Clinton, Hillary Rodham.) At this point, after the passage of the SCHIP that George W. Bush vetoed, the one that provides more health insurance for children of working families, Obama has a very tough road. But on financial regulation, he has something where he can declare victory relatively quickly and at relatively little cost.

But it’s really all a mystery. Back in 2000, if you were predicting the Bush years, you would have bet on a humble foreign policy and no presidential interest in nation building. You would have looked at Bush’s friendly relations with the Democratically controlled Texas legislature and predicted a period of bipartisan bonhomie. Obviously things turned out differently. Times change, and so do candidates when they become president. Right now, it’s worth holding on to hope because it may prove to be, with President Obama, as with so many others, quite fleeting.

[via Conde Nast Portfolio] by Matt Cooper

The Snowball, the first authorized biography of Warren Buffett, has been one of the most eagerly anticipated business books of the year. Published on Monday, the book is particularly timely because of Buffett’s role in the credit crisis now roiling Wall Street.

A team of Conde Nast Portfolio.com writers, starting today with finance blogger Felix Salmon, are reviewing the book in sections over the next five days, and will be commenting on each other’s reviews.

Warren Buffett is a great value investor—which means that he’s a lucky value investor, something he himself readily admits. He found himself in the right place at the right time, blessed with a skill set and self-confidence which allowed him to become the richest man in the world, a title of which he was very proud.

But Buffett didn’t reach those heady heights just by investing his money wisely. He needed more money than just his own, and he was good at finding O.P.M. (other people’s money) in many different places.

Sometimes he would raise it by persuading people to give him their money to invest on their behalf. Sometimes he would borrow it—although that kind of leverage, debt finance, has never been particularly appealing to Buffett.

Instead, Buffett’s biggest source of O.P.M. came from the most leveraged industry the world has ever invented: insurance.

One of the central ironies of insurance is that an industry predicated on safety has at its heart so much risk. Insurance premiums are essentially interest-free loans from the insured to the insurer, carrying an unknown maturity and an unknown principal amount.

With most loans, you have to pay back only the amount you borrowed; with insurance premiums, you might pay back hundreds of times that sum, if you (or, more to the point, the insured) are particularly unlucky.

When an investor buys an insurance company, then, he turns it into something of a race against time. He takes in premiums, and then invests them in the market, with the hope that his investment returns will be so great that by the time the claims come in, the premiums will more than cover them. If his investment returns are big enough, he can bring down the price of the insurance he’s selling, thereby selling even more of it and having ever more money to invest.

It’s a dangerous game, and it’s prone to blowing up—as most investment companies do, sooner or later. Sometimes they’re wiped out by a natural catastrophe, like a hurricane, where many large claims suddenly appear at once. At other times, the catastrophe is financial: A.I.G. Financial Products, for instance, brought down not only itself but also its parent by insuring complex debt instruments against default.

Buffett, like A.I.G.F.P., plays large-stakes games in the financial markets. In 2007, he took in an astonishing $4.5 billion by selling long-dated stock-index put options. He got a huge amount of money to play with, probably forever—but if certain indices perform very badly over the next 11 to 19 years, then he could find himself with a truly monster obligation down the road.

Indeed, when academic types talk about the proverbial Capital Decimation Partners—a hedge fund that looks as if it’s getting strong but not excessive returns, and then one day implodes—the model they generally use is one where the fund does nothing but sell puts.

Obviously, Buffett does many things other than selling puts. His businesses are diversified across many different industries. But there’s one thing they all have in common: they throw off substantial amounts of cash, which Buffett can then reinvest.

Author Alice Schroeder calls this the “snowball”: you put money into a company, which generates more money, which you add to the snowball, generating more money still. Any time you take money out of the snowball, you’re denying yourself much more than that sum in future gains. Buffett likes to say that when he lost $2,000 buying a gas station in the early 1950s, he really lost the $6 billion that money would otherwise have become.

But big simple ideas like these are not easy to find amidst the suffocating mass of detail in Schroeder’s book. Like many biographies, it starts off with something eye-catching and juicy before jumping back to ancestors and heritage; Schroeder decided that her centerpiece for Part One of the book would be a scene at Sun Valley in 1999 where Buffett confronted the tech titans with their bubblicious stocks.

Buffett’s talk at Sun Valley was quite simple. He said, basically, that tech stocks were overpriced. Many other people were saying that, too, and most people, even at Sun Valley, knew it, in their hearts, to be true. Why did Schroeder decide to lead with this talk, rather than any of Buffett’s decisions in and around his life’s great achievement, Berkshire Hathaway? It’s far from clear. And it’s a most frustrating chapter to read, too: because you never know quite why Schroeder is leading with this, or that the whole point of the chapter is nothing but a speech, you keep on picking up on detail which sounds like foreshadowing but isn’t.

Why, for instance, does Schroeder spend the first two pages of the chapter talking about Buffett’s flight in to Sun Valley? How can you read a passage like this and not think that it’s serving some kind of purpose?

Sometime later, the G-IV crossed the Snake River Plain and approached the Sawtooth Mountains, a vast Cretaceous upheaval of dark and ancient granite mounds baking in the summer sun. It sailed through the bright clear air into the Wood River Valley, descending to eight thousand feet, where it started to buck on the mountain wave of turbulence thrown into the sky by the brown foothills beneath. Buffett read on, unperturbed, as the plane rocked and his family jerked about in their seats…

I was convinced we were about to have a bloody plane crash; instead, the plane is uneventfully met at the airport by Herb Allen’s Sun Valley minions, and nothing is ever heard about it again. The same thing happens when Schroeder starts talking pointedly about the “very, very attractive” babysitters laid on by Allen—but again, nothing comes of it. All we get is a speech, decorated by flowers which, Schroeder says, Buffett doesn’t even notice: “scarlet petunias and blue sage”; “pastel lupines and sapphire delphiniums towering over poppies and Indian paintbrush, crisp blue salvia and veronica nestled among the stonecrop and hens-and-chicks.”

In other words, this is a book which doesn’t just make it hard to make out the forest for the trees; it makes it hard to make out the trees for the texture of their bark and the exact shape and number of their branches.

I have no idea why Schroeder felt the need to lard the book with so much pointless detail, but if the first two parts of the book are any indication, it might be because she’s so hesitant about inserting her own analysis or ideas about the bigger picture.

In general I’m a fan of the show-don’t-tell school of writing, but this is a very smart woman who has spent five years intimately involved with Buffett, his friends, his family, and his business partners. We could be forgiven for wanting to know what she thinks of him.

Yet for a woman who’s happy to spend two pages on a completely irrelevant plane journey, Schroeder seems to be very good at completely missing some of the big issues. For instance, Buffett had one thing in common with the technology gurus to whom he gave his speech at Sun Valley, and which he doesn’t have in common with the founders of most other companies: he never pays dividends.

This decision makes valuing Berkshire Hathaway stock more difficult than it needs to be. Remember that according to financial theory, the value of a stock is just the net present value of all future dividends.

While tech companies that don’t pay dividends are very common, industrial companies with strong cash flows and strong profits almost always pay dividends. Berkshire Hathaway, which has only ever paid one dividend in its entire existence—10 cents, in 1967—is far the biggest exception, and yet Schroeder doesn’t seem to spend much time exploring this issue.

Buffett’s no-dividends decision means that anybody who’s made a lot of money from investing in Berkshire Hathaway stock falls into one of two camps. Either they sold their stock—a betrayal of everything Buffett stands for—or else they’re sitting only on paper gains. And remember that Buffett’s most cherished shareholders are the ones holding one or two or maybe three A shares worth well over $100,000 apiece. They can’t sell 3 percent of their stockholding to get a little income: that’s a necessary consequence of having shares with such enormous face value.

Schroeder gives Buffett’s dividend policy just one paragraph, among her hundreds of pages. And there, she treats it as something which is clearly and obviously correct:

Feeling flush during what would turn out to be a brief moment of financial success—”we were selling out of Rayon linings for a few months and making a lot of money”—Buffett had let himself get talked into a ten-cent-per-share dividend. The firm’s lawyers had argued that Berkshire was doing so well that it might be accused of unjustifiably retaining earnings. Either while daydreaming or simply in a moment of weakness, Buffett went along with the distibution; a dime a share sounded measly; it somehow took him 24 hours to realize the fallacy of their argument. By then it was too late and his uncharacteristic agreeableness had showered on the partners and shareholders $101,733 that he knew he could have turned into millions someday. He would never make a mistake like that again.

But of course it’s not as simple as that. If Buffett implemented a dividend, he could set up a check-the-box option where it was automatically reinvested into the company—a “scrip dividend,” it’s called in Britain, which essentially involves paying the dividend in equity rather than cash. Investors could then easily keep all their money invested in Berkshire Hathaway, just as they do now—but they’d also have the option of taking some cash money out now and then, which might be very welcome.

Instead, Warren knows best: No matter what their domestic financial position, his shareholders should entrust him not only with their initial investment but also with all of the profits which accrue from that investment.

This is consistent with Buffett’s own lifestyle. He takes a modest salary and keeps the vast majority of his wealth in Berkshire stock where it won’t ever be spent, just used as an incredibly valuable scorecard in the world’s-richest-man stakes.

It’s worth noting that somehow he’s persuaded the compilers of such lists that all of that stock should be assigned to him, even after he gave most of it away to the Bill and Melinda Gates Foundation and other charities. Buffett is one man who really can both give his money away and keep it, at the same time.

But not everybody is like Buffett, as this book makes abundantly clear. Buffett was making thousands of dollars on paper rounds before he even got to high school, a huge sum, in the early 1940s. He bought his first stock in sixth grade.

He never concentrated half as much on his studies as he did on making money. While his peers were socializing, he was very much the precocious businessman, even in his early teens. And, of course, he was extremely smart, blessed with a prodigious and photographic memory, and had both an aptitude and willingness to read thousands of pages of financial reports for fun—even on his honeymoon.

Clearly, Buffett was always an extreme outlier. But the ultra-close-up nature of this book makes that hard to get into any perspective, and the only fun that the prose offers is the fact that it occasionally veers away from its one-thing-after-another chronology into infelicities and self-contradictions. What, for instance, does this mean?

In private, Munger tended to lecture either himself or his audience, making conversations with him like sitting in the back of a runaway stagecoach.

And surely “lessened”, here, should be “lengthened:”

[Buffet's mother] Leila formed a much healthier relationship with her youngest child, Bertie, as the intervals between her rages lessened.

Or consider this: On page 137, in 1950, while a student at Columbia University, Buffett buys 350 shares of Geico. On page 165, in 1951 (you can see how this book grows to over 900 pages), Buffett’s still buying Geico—as much as he can—in order to achieve his ambition of eventually owning 175 shares.

But the real problem with this book is that Schroeder never gets inside Buffett; never explains what he’s thinking, instead making do with simply telling us what he’s doing. Consider that first investment in Geico:

Geico seemed to Warren a no-lose proposition. That Monday, less than 48 hours after he arrived back in New York, Warren dumped stocks worth three-quarters of his growing portfolio and used the cash to buy 350 shares of Geico. It was an extraordinary move for the normally cautious young man.