SimoleonSense Interviews Buffett's Biographer, Alice Schroeder, Part 2

Miguel: So let’s bring Warren Buffett into the picture. You’re an analyst covering insurance companies. When is the first time you come across Berkshire Hathaway? Do you still remember the day you released the Paine Webber report?


Alice: Oh yes. I came across Buffett when Berkshire bought the second part of GEICO, which was a major event. It never occurred to me to begin following it until several years later, when Buffett announced his bid for General Re. At that point, a number of my clients asked me to follow Berkshire Hathaway. They were going to own the stock and they wanted research coverage.


These clients knew I liked complex difficult things to analyze. That I was interested in doing things that were different even if there was no obvious commensurate reward for the extra effort. The sell-side had limited interested in following Berkshire, to say the least. The stock didn’t trade. At the time, Warren essentially didn’t pay bankers and frequently expressed a negative attitude toward the Street.


So, I went to my research director at PaineWebber and made a case that our retail brokers would appreciate this coverage because their clients were interested in Berkshire and Warren Buffett. Being able to call and talk about Berkshire was a service for retail clients that did not involve asking for a transaction. It was something their financial advisors appreciated being able to offer. To its credit, PaineWebber gave me a thumbs up.


Miguel: What was the next step? Did your director just say ‘go for it’? What was it like discovering Berkshire Hathaway?


Alice: Warren always said he revealed everything investors needed to know from his financial statements, but that was not the perspective of many analysts. I find it interesting that Buffett has criticized Wall Street for being over-dependent on private information from management. When I started taking Berkshire’s public disclosures and merging them with my earnings model on General Re, I quickly learned what so many people already knew, which is that investors had been struggling for years trying to value Berkshire. I ultimately based my valuation on three things: insurance, the group of other little businesses, and the publicly traded investment portfolio. I just started putting it together. There really was not a lot of information to do a detailed valuation and frankly there is still a lot of ambiguity. But I assumed that anything would be value-added to investors versus what they had, and that turned out to be right.


As an aside, at the time and continuing to this day, it’s not uncommon for money managers who are vocal champions of Berkshire’s attractiveness as an investment in public to take me aside in private and wring their hands over the problem of how you value Berkshire stock, and whether it is over- or under- or fairly valued.


People get stuck in this position because they trust Warren philosophically, and they believe the empirical track record, yet, for lack of information, they’re prevented from living up to the professional standards of analysis that that they apply to their other investments and that Warren applies to his own investments. As security analysts, this makes them uncomfortable.


Warren has always had the attitude that investors should trust him enough to let him operate in privacy. People were fine with that for a long time, and were rewarded for their trust. As he’s gotten older, they’re less fine with it, which is reasonable.