Lessons Learned from The Snowball: Warren Buffett and the Business of Life

Study the greats to become great.

The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder

This is the first biography about Buffet. He is very private person who hardly ever gives interviews. The Snowball explains how Warren Buffett became who is today. And this book will help you to understand why Warren Buffett is unique among investors.

Snowball is the only complete biography in which we learn about Warren Buffett's life stories from the man himself. Buffett gave Alice Schroder complete access to his personal life including his family, friends, and business associates. Alice Schroeder's monumental biography of one of the world's greatest investors is one all investors should read... Even if you're not a value investor, you can take away many great lessons from the fascinating stories of this man.

The First Lesson - Start early

You've probably heard this advice many times before. But starting something new isn't always easy. In fact, sometimes we're too scared to start because we think we'll fail. We worry about what others might think. Or we don't know how to do it.

But there are ways to overcome those fears. And even though you might feel like you don't have enough time, you actually do. So take action now. You won't regret it.

Just put some money into an index fund. It's easy and won't take you more than an hour to set up. But starting early will give you the ability to compound your gains... And as Einstein said, "the eighth wonder of the world is compound interest." This can have a massive impact on your wealth when it comes time to retire.

Money Brings Freedom.

At the age of 10, Berkshire Hathaway CEO Warren Buffett learned about the power of money. In his autobiography, he wrote that he had just finished reading Ayn Rand’s book “The Fountainhead” and it inspired him.

Buffett recalled how he read the book and immediately understood what it meant to have wealth. He wrote: "I knew I wanted to make lots of money because money gave you freedom. You could buy anything you wanted -- even things you didn't want. And once you owned something, you never had to worry again. Once you had enough money, you'd never have to work another day in your life. You could live however you liked. You could travel anywhere in the world, meet anyone you pleased, say or do anything that came into your head. If you had money, no one could tell you what to do."

Having this motivation behind you, can help propel you forward in life and business. The ability to have this freedom is an amazing privilege One I think everyone should strive for. But that's just me...

A Stock Is the Ownership of a Small Piece of a Business

Owning a stock gives you a stake in a company, it's a piece of ownership. You don't own the whole company... And you probably don't even own enough shares to influence management's decision. That's ok. Buying stocks is generally a passive investment... One where other people are working to make you money.

If you want to learn more about the company, read the annual report. Warren Buffett is a huge proponent of reading annual reports and financial statements to learn how the business is ran and how revenue and expenses are accounted for.

To learn the classification of what assets the company owns and what kind liabilities they have, read the balance sheet. To learn how much money a company makes, look at its income statement.

That's the basics of a company... And a good start to becoming a successful stock analyst. And it's important to do your own research.

The Dangers Of Following The Leader.

Warren Buffett says he doesn't know much about investing. He does know one thing, though; he knows that following others is dangerous. "The most important lesson I've ever learned," he told CNBC's Becky Quick, "is don't try to pick stocks just because some smart person thinks they are good."

Buffett's advice isn't too dissimilar to the words of Benjamin Graham, author of Security Analysis. In 1937, Graham published a book titled The Intelligent Investor, in which he described the importance of understanding the market, and how investors shouldn't follow the herd mentality.

Don't follow hot stock tips.

Graham wrote that investors should avoid following trends, and instead look for companies that are undervalued, and ones that are likely to outperform the market. This way, he argued, people could invest in companies without worrying about whether or not everyone else was buying them.

In his book, Graham describes the concept of value investing, where investors seek out businesses that are cheap relative to their earnings potential. Value investors believe that there is a difference between price and value, and that the former often overstates the worth of a company. They argue that while prices reflect the current state of the market, values represent future growth.

According to Graham, this type of thinking is essential for long-term success. If you want to make money in the stock market, you must learn to think like a buyer. You must ask yourself questions such as: What do I really know about this company? How well positioned is it to succeed? Can it continue to grow? And, perhaps most importantly, how much will it cost me to buy shares now?

This philosophy is something that Buffett has always followed. For example, he bought into Coca Cola in 1965, despite the fact that many analysts thought the company was overpriced. Instead, he looked at the fundamentals, and saw that Coke had been growing steadily since 1885. He believed that the company had a strong brand name, and that consumers would pay a premium for products that tasted great.

When Buffett purchased Coca Cola, the company was making $1 billion a year. Today, it makes $50 billion annually.

Focus on Quality of Quantity

Warren Buffett is known for making big investments into companies... And even buying companies in their entirety. Buffett's business acumen helps him decide which companies are worthy of investing. But he sticks to what he's good at. He doesn't spread himself thin and invest in a bunch of technology stocks that he doesn't understand their business.

Buffett's biggest investments are in insurance companies. He is a great insurance industry analyst. Berkshire Hathaway itself is an insurance company. And one of his top investments ever was buying insurance company, Geico.

And even now, his portfolio is concentrated in his biggest holdings which include Apple, Chevron, and Bank of America.

Buffett also kept this true about the people in his life. His main mentor was Benjamin Graham - a great mentor to have. Benjamin Graham's book "Security Analysis" is a seminal book for all financial analysts.

And he has worked a long time with his business partner Charlie Munger. These two built Berkshire Hathaway into the behemoth that it is today.

Keeping quality investments and people in your life is better than having a lot of those things.

Mr. Market is Your Servant, Not Your Master

Graham's famous quote about Mr. Market comes from an essay he wrote called "The Intelligent Investor" published in 1949. In it, he writes: "I believe that most people are usually too timid to invest intelligently; that they do not act because they fear loss; that they lack courage and persistence; that they are unwilling to make sacrifices; that they prefer dividends to growth; that they think security rather than adventure is the chief object of life, and that they are satisfied with mediocrity."

He says the financial markets are often bipolar. One day they'll want $80 for a stock and just a few days later it can want only $40 for the stock.

We don't have to accept the prices the market gives us at any time. If the market is euphoric and selling a company at $80 and we think it's only worth $50, we don't have to buy it. We can wait for a more reasonable valuation.

In fact, if we are patient, often times the market will sell us a stock at a huge discount. We might be able to buy a stock we think is worth $50 for $30. Those are the soft pitches we should wait for as investors.

Use a Margin of Safety

A margin of safety is one of the most important aspects of value investing. And that's what you get for waiting to buy a company worth $50 for $30.

We talked about the Margin of Safety when reviewing Seth Klarman's book with the same title. You can read our synopsis here.

This is what Buffett and Munger do at Berkshire Hathaway. They wait for a stock to go on sale and take a large position.... And if they don't see any companies at valuations they like, they don't invest.

Buffett has taken criticism for sitting on billion of dollars in cash. But he was patiently waiting for a fat pitch. And when he sees it he pounces. Like he did when he bought energy companies in late 2021 and Apple a couple years before that.

We can learn a lot from studying the investing greats. That's why I started BarbellAlpha.com. To share the lessons I've learned and help followers build the foundation of knowledge to build their wealth.

And Snowball by Alice Schroeder is arguably the best book on Buffett.