Alice Schroeder Reddit AMA

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Alice Schroeder did an AMA on Reddit a while back. But I’ve compiled and sorted it into categories for easier reading.
I thought some people might be intimidated and confused by Reddit threads, so hopefully, by sorting and categorizing in a post, someone might find this useful.

I haven’t included all questions and answers from the post. Just pulled the ones I found most interesting and insightful.
Only edits I’ll do will be for capitalization and punctualization purposes.

Over 4000 words here so Control + F might be your friend.

I was fortunate to have spent 10 years getting to know Warren Buffett by spending days and weeks with him. I could ask him anything and you can ask me anything as well. Some of you may want to know why he chose me. In his words, he likes the way I think, he likes the way I write. Spending thousands of hours with Warren was like getting a Ph.D., or maybe more than one. Before writing The Snowball, I was an analyst at several firms on Wall Street, a regulator, a CPA, and now I invest, and serve on corporate boards. From auditor to board member I’ve seen the sausage factory. My motto is: do whatever will teach you the most.

Alice Schroeder, Reddit AMA Introduction

The next Berkshire CEO? (We asked Jeff Matthews a few months ago and he told us that we had to buy his book)

Hmmm. I’d be interested to know what Jeff thinks he knows. Okay what I can tell you is that the “name in the envelope” has changed often enough that it would probably surprise you. Warren is determined that it be an insider, yet like most powerful CEOs he doesn’t have anyone with skills similar to his own except perhaps Ted Weschler. It won’t be Ajit except possibly as a very temporary fix while they find someone permanent. Ajit would rather be set on fire and thrown off the roof of Kiewit Plaza. Between Matt Rose, Greg Able, or someone else, the name in the envelope could change very frequently. And I think the job is a no-win situation — imagine working for a board with Howie as chair and people like Bill Gates overseeing you, trying to live up to Warren Buffett’s reputation.

Given that no one person can run that company do you think BS should be broken up? I know that it’s not what Warren would want. But is it the best option?

Glad you asked. Warren has designed it so that Berkshire can’t be broken up as far as I can tell. For example, I am fairly sure that National Indemnity owns the railroad. No way would the insurance regulators let that be unwound.

What lessons did you learn from Warren Buffet that affected you to change? In relation to encouraging you to save more or how he invests.

Lessons that affected me personally regarding investing — the most important was about concentration. Warren believes in concentrating your bets, up to 15-20% of your assets, if you have high conviction. As he puts it, why invest in your tenth best idea. So I have a very concentrated portfolio now.

In The Snowball, Buffet’s memory seemed to play an incredibly powerful role in his success (perfect memory of textbooks in college; perfect memory of company financial information during investing). Are you aware of any exercised that Buffet did to strengthen and/or maintain that level of memory performance, or was it all raw genetic talent?

Warren seems to have been born with a near-photographic memory. He exercised it a lot (memorizing the population of all fifty states etc.) I consider it genetic for the most part.

You had mentioned in one of your interviews that you’ve changed how you manage your time as a result of writing your book. Could you explain that a little more? How has it changed?

Sure, there are several things. Warren is a master of time management. He knows how to ease people off the phone without making them feel dismissed. He is great at saying no and I learned a lot about saying no tactfully. That’s an important time management technique. Also, he manages his energy, reading when it’s optimal, talking on the phone when he’s got the right energy for that and so forth. It’s fairly compartmentalized and he does not multitask through his day. That was a useful lesson.

Why did you have a fallout with warren? Are you guys on good terms now? Does he still drink cherry coke?

Cherry coke – yes. I have never seen him drink water. Susie Jr. says likewise. I wouldn’t call it a fallout. He made himself extremely vulnerable when he opened himself up to do this book, without any control over the contents. It was the right decision and he did it because he knew it was the only way to get a credible book. Then, as you would expect, when he read it, the book did not perfectly match the narrative of his own life that he carries in his mind. That was pretty uncomfortable for him. One of his friends wrote me a letter that said, oh my god, you captured him exactly but it was like taking all his clothes off in public. And that’s true. So, I have a lot of empathy, because he made himself vulnerable in a way that I would never do myself. It was courageous of him. The end result is that the book makes him feel uncomfortable. He would rather not think about it. There’s no personal issue between us at all, it’s pretty comfortable actually.

Great book, and really helped me to remember that it’s not about that one $30k win, it’s about finding the things that will compound earnings as early as possible and putting everything into them. Not just with investing, but in all aspects of my businesses and life – find the things that can snowball and don’t worry about the slow start. I wonder how many Omaha shindigs she’s been to with Buffett, and what she thought of her first one.

Omaha shindigs 🙂 I have a feeling you know that Warren’s not that active socially in Omaha. For example, he is not that fond of Ak-Sar-Ben. I have a quote on that which he asked me not to use while he’s alive … He has local friends and tends to see them for dinner, not parties. Most of my local socializing was around the shareholder meeting. Omaha’s a great town.

How Warren would value a company. First let me just start by saying that all value investing works. If you buy a dollar bill for sixty cents over time you will make money. So the search for a single method is to some extent a chimera. Warren’s way is very simple. I have copies of an envelope or two where he did his calculation on the back – literally. If the margin of safety is wide enough, it almost doesn’t matter what method you choose.

Here, you describe what seems to be a quick calculation that Warren uses to contribute to his valuation analysis of companies. Is it too bold of me to ask for further details about what this calculation is? Or if it would be possible for us to see the actual calculation?

ok this is from memory because i’m traveling, and it’s not by any means a complete way of looking at it but just to illustrate the simplicity, there might be something like this:

net quick $42

inventory $30

earnings $11


and that would be it. shooting fish in a barrel stuff.

what he would spend his time on was making sure the quick assets were real, finding any other assets that could be converted to liquid, figuring out how much you could reduce the inventory and increase the turnover, and how much you could increase the earnings (or cash flows).

i was at an event recently and a buy-sider said, the reason we all want a book is that warren tells these parables about his investments, and they’re great and make important points. however, he has never told the complete story of any investment, that’s not his style. and we want the insights that you’d gain from that.

So that is the reason to write a book or give the information in some manner, and it’s also a caution that the back of the envelope is only a small part of the story.

What is one piece of advice you would give a teenager who is looking to major in finance/business?

Advice for a teenager. It’s tough being a teenager these days, you have a lot of pressure to make life choices very early. My advice would be to do be ruthless about making your choices based on what will teach you the most about something you’re interested in. Also — statistics is not emphasized enough in business schools or high schools but it’s probably the most important element of mathematics you can now and applies to nearly everything in life. So I’d go out of my way to learn it.

What way would you recommend to maybe contact Warren Buffett.

Contacting Warren Buffett. He prefers to be contacted in writing and likes handwritten or typed letters more than email. Write him a letter at Kiewit Plaza. As a side note, a lot of people write him with essentially the following message: Dear Mr. Buffett, you are wonderful, will you please do the following for me (a) hire me (b) give me money (c) speak at my event (d) donate to my charity (e) be my mentor (f) help me get out of prison (g) help me market my invention. He gets thousands of these letters — no kidding! Be original and you’re more likely to get his attention.

what advice she has for a 16 year old investor like my self?

Advice specifically for an investor. As I mentioned in the intro I’ve been inside the sausage factory and know how complex business is in the real world. In that context, a lot of investor opinions display a high level of confidence based on a relatively sparse set of facts. So as you develop your skills its important to be mindful of the risk of overconfidence. This is where the margin of safety and circle of competence have done wonders for Warren. I would look at how he’s applied those in investing and really think through the implications of “don’t lose money.”

How do you go about determining the underwriting quality of an insurance company as an outsider? It’s the most important part of an insurance company, and I find that accountants can be frustratingly vague about the issue. Any tips, on how to approach the matter, or materials someone can use to get better at it?

Yes, learn to do reserve tables using the statutory filings. Get an analyst to teach you. Also the history of the company is revealing. The companies that underwrite well tend to keep on doing so, and those that have had negative surprises and reserve blow-ups will generally keep on doing so.

Do you have any plans to write any more books?

As you know I’m not one of the people who has a career as a “Warren Buffett author.” However, there is a lot of demand for an investing book as I’ve been told more than a few times! I have been carefully and slowly moving in that direction. It would not be a tome like Security Analysis. And I’m still on the fence about publishing it as a book versus doing something else. There are a lot of people, a whole lot, who are certain they know everything about how Warren Buffett invests. Disillusioning them may not be the right thing to do. Whatever I end up doing, the goal is to reach an audience that wants to learn more, not upset the applecart of people who make their living from magic formulas and so forth.

Can you tell us some non investing stories of you with Buffett? (or team) Maybe 3 instances where he made you laugh or helped you in a difficult time? We’d like you to help us get to know him as the person, not as the investor. What moments which you’ve shared with him stand out to you?

Sure. Dining with Warren is such an experience. Once, we were at a restaurant and Warren ordered a steak. The waiter offered him truffle sauce. The look on his face was priceless. it was as if someone said, would you like some arsenic, Mr. Buffett?

He’s a terrible driver. There’s always something going on in his head and he’s also talking to you, meanwhile the car wanders between lanes and goes through yellow lights. He drives slowly to make sure it won’t cause too much damage if he gets into an accident. I think he is doing less driving these days and being driven more, thank goodness.

Here’s a good one. I bought a house in 2004 and when I told him he was aghast. That’s when I knew we were in a serious housing bubble. Finally he said, well, don’t worry, you’ll be able to sell it in ten years, so just hold on until 2014.

Do you have a favorite Warren investment?

Favorite investment. Um, it would be easy to say Coca-Cola or something like that however my favorites are actually the ones that were his most complex operations. They include FMC, Butterick, Dempster, and the creation of Berkshire Hathaway. Not a lot has been written about some of these.

Is there something that the popular press get’s wrong about warren that really annoys you?

Popular press. Yes, they get a lot wrong. The main thing is that Warren is extremely literal. You need to listen to what he says, and read his words, very carefully. People extrapolate and read things that aren’t there. As just one example, he invited a bear to ask questions at this meeting. Then it was revealed there would be no bear. What got reported was that he “couldn’t find a bear” or “no bear showed up” and the like. That’s not what he said. There would not be a bear, however, it isn’t because nobody volunteered. So you have to be careful not to read more into what he says than is there.

At what point in your life did life get easier? It sounds like now you invest and serve on boards. Has life taken a turn for the better and how did you go about achieving this status?

Well, I will tell you a little story. When I was 47, I was having a difficult year for a variety of reasons and Warren sat me down and said look, when I was 47 I thought my life was over. Susie had left me, and I had already accomplished everything I thought was worthwhile as an investor. Berkshire, as far as I knew, was at its peak. And to my surprise, my life kept getting more and more interesting since, and most of the really important things I’ve done happened after I was 47 and thought my life was over. The reason, he said, was that he had stored up so many experiences, good and bad, in the first part of his life, and as a form of compounding, their positive consequences unreeled over the next thirty-some-odd years.

So that’s something to ponder.

What is your favorite Buffett quote/memory?

On who influences him:

“When I get up in the morning I look in the mirror, and at that point, everybody’s had their say.”

Do you have any recommendations (specifically books) that are a good source for learning them in greater detail? Any other recommendations for those of us who are more fundamentals based investors instead of technical/momentum?

I like books from business history — anything by Galbraith, Keynes, John Brooks. Mark Twain said history doesn’t repeat but it rhymes and that’s really true. Warren stressed to me over and over how much studying business history has helped him.

I would also recommend Generations: The History of America’s Future by Strauss and Howe. or its follow up, The Fourth Turning.

Apart from books I think you should know what is going on that will affect the future. Not in the sense of forecasting. But for example, I was at a conference and asked a successful entrepreneur, “How do you get ideas to start businesses” since he had started quite a few. His answer … “I look for big companies that have a lot of employees, and I figure out ways to get rid of the employees.”

This sort of thing can take you aback, but it is worth knowing, which is one reason I stay in touch with the tech world.

Alice, would you mind telling us a bit more about your current investments? Like how concentrated do you go? Do you do special situations or deep value or quality at a fair price and so on?

I have a few cigar butts, I have one very large investment in what you could call a bond surrogate bought at a discount to book value that will compound for years. I will put 15-20% of my investable assets in one investment and right now have two of that size. Also I have a few venture capital investments. It’s obvious that the capital markets grow less efficient further back in the chain, so early stage investing is the most inefficient market. It’s possible to find great businesses, meaning terrific models that generate very high cash flow margins, run by experienced people. I am willing to take execution risk with successful serial entrepreneurs in a diversified portfolio. Please understand I don’t invest in companies that make apps or in social media. I like b-to-b hardcore businesses that take big costs out of somebody’s value chain. Also I prefer companies that can cash-flow themselves quickly so they do not rely on venture capital. What’s going on in consumer tech is insane and I would not touch it. Congrats to the founders of What’sApp but you know a blowup is coming from that deal.

Could you go into a little detail on what Warren reads and how he spends his day? I often hear too many generic responses.
What I’m asking is, does he truly read everything cover to cover in the WSJ? Does he sift through the NYT online and read every article?
What is his filtering process like? Does his staff request an annual report and then he starts reading it when he gets it? Does he go from Company A to Company Z?
When he finds a company that catches his interest, does he really spend 500+ hrs doing more reading and research on it?
Essentially, how does Warren best use his time to efficiently read what matters to him? I am often very overwhelmed and end up burning out feeling like I’m not getting anywhere.

Sure, happy to answer. Warren does his reading in the morning. He had cataract surgery not long ago and it’s made things much easier for him.

He starts with the newspapers. He looks at them page by page but doesn’t read every article. He is very interested in news about companies and less interested in general news. Warren is outstanding at pattern recognition and prefers to do his own synthesis so when he reads he’s looking more for data points rather than other people’s conclusions.

The annual reports — he reads them for the most part as they are received. He’s been following some companies for fifty years or longer and as noted earlier he’s got quite a memory, so the process of reading annual reports is pretty efficient for him. He can go through one in an hour or less and get what he needs. On the other hand, say when Google went public, he spent more time on their filings because it was new information. He reads a lot of annual reports of companies he would not buy to expand his knowledge.

The filtering is informal. His friends will send him something they think he will find interesting. Or he will read something in the paper and ask for the report. He isn’t systematic nor comprehensive. That’s today though. When he was younger, he filtered using Moody’s, Value Line etc. reading everything about every company, then got the reports for the ones he was interested in. That’s probably more relevant to you than what he does today.

Does he spend 500 hours? Well, he spends a lot of hours if it’s something totally new. That said, Warren’s investable universe is somewhat limited now by Berkshire’s size which means he’s already familiar with almost every investment. So he has probably invested that time, but it’s cumulative over many years.

Do you think studying a company’s sector and business is more important than analyzing cash flow, or are both equally important?

They’re both important and to some extent they’re the same thing. To analyze cash flows you need to understand a company’s business model which requires knowledge of its sector, competitors (including competitors that may not be obvious such as private companies or adjacent businesses). Quick example, cable companies. You need a vast amount of knowledge to really figure out these companies cash flows. You need to understand what is going on in the startup space (hard to get that information without investing huge amounts of time), where the company stands assembling a broadband model (very difficult to find out, they will all profess more progress than is the case), and you will need to learn adjacents such as the gaming industry. (gamers not gambling).

I believe Ted Weschler was quoted saying he spends over 500 hours doing diligence before he makes an investment. I am wondering what you think of this and how it relates to Buffett’s DD process. I am also wondering what kind of DD you do (time/channels/filings/etc). Knowing as you say “how the sausage is made” what gives you the confidence to pull the trigger on an investment.
Also, I am wondering what investors you admire (ex Buffett) and would you include Ted & Todd in that group?

My understanding is that Ted’s process is similar to Warren’s and the amount of time sounds right. Let’s say you work 50 hours a week, that’s ten weeks of work. You could spend a large part of that time reading filings and articles about the company — and its competitors — and the industry. Then you do scuttlebutt on the people running the company, which can quite a bit of networking. Ted has a big network, I assume he works it for information. Then there is the garden variety information gathering such as channel checks, meetings with management, plant tours, visits to retail stores. Add to this the time spent every day reading relevant news, and the various conferences that investors attend. The valuation takes time — early on you have a hypothesis and spend a lot of time testing and refining your assumptions. 500 hours is very reasonable.

The main effect of being in the sausage factory is to make me humble about the state of my knowledge. I am slower to pull the trigger and I pay attention to every bit of nuance I can find. My process is not that different from anyone else’s. I do a few extra things. For example, it’s useful to do a line by line comparison of press releases and filings over time to identify the “ins and outs.” You can learn a lot from this. (Companies are trying to be more concise these days; even so it’s amazing how often things disappear from sight when news is bad.) I also look at who is on the board and audit/risk committees. If you had looked at JP Morgan’s risk committee composition along the way and seen the head of a museum on it who had no business experience, that was a signal. So I look at this sort of thing.

The advent of Reg FD has created a situation in which companies are forced to, essentially, lie to investors. So a company is not thinking about a divestment until the day it is suddenly announced. Loan loss reserves are adequate, and management has unshakeable confidence in that, until the day they are suddenly increased by a walloping amount. Inside the company, there are teams of accountants, consultants, bankers, executives and ultimately the board working on the projects that lead to these surprises. Most big events develop gradually over time. Companies used to do more signaling that helped investors adjust timely to changes rather than the present requirement to throw investors over the cliff. I think that in preventing companies from giving inside information to favored people, Reg FD pushed the system too far the other way.

Investors I admire — I don’t know Ted and Todd personally so just taking Warren’s word on it. You all know who the great value investors are, there are many I admire. I will give one shoutout to John Hussman for sticking to his guns even though his fund must be bleeding investors.

Want some more AMA’s?