The Snowball, Warren Buffett and the Business of Life
About Author
Book Review
Warren Buffett is arguably the most successful investor of all time. He has been averaging approximately a 20% growth of his capital per year, which has turned his small fortune of a thousand bucks in the early 1940s into quite an outstanding one of 86 billion as of 2018 in 2007. He became the richest man in the world for the first time and lately, he's been having a back and forth with the likes of Bill Gates and Jeff Bezos.
His complete focus on investing can't be overstated. He always tried to save a buck in order to grow his capital faster. not interested in real estate art costs or any other tokens of wealth. He still lives in the same old house which he did 50 years ago during his honeymoon together with a young Suzy Buffett. he travelled the US with a car stuffed with annual reports and Moody's manuals. he basically never stopped studying ever.
The best takeaways of the Snowball Warren Buffett and the business of life written by Alice Schroeder. Leading up to this biography Buffett told Alice ruder: whenever my version is different from somebody else's use the less flattering one. In other words not just the greatest investor of all time but humble too.
let's get started with the takeaway. The power of compounding income: imagine that you recently started a new job, during your first day you work for eight hours and at the end of the day your manager gives you 100 bucks. the next day you go back and you get ready for another 8 hours of labor, after 7 hours and 50 minutes your manager goes over to you, gives you a hundred dollars and asks you to leave for the day. you're slightly confused but don't complain about being able to quit 10 minutes. earlier on day 3 the procedure is repeated only this time your manager gives you a hundred bucks after 7 hours and 40 minutes. on day seven when your manager hands over your salary after only seven hours, you feel that you must ask what all this is about, why do you keep earning the same amount but with less effort? your manager simply gives you the following explanation, because you worked yesterday. this example illustrates the power of compounding income. money comes easier and easier the more you have of it or as in our example the more that you've worked previously.
Warren Buffett understood the importance of compounding income at an early age, when he was presented with the book 1000 ways to make a thousand dollars. He was fascinated by one of the business ideas of the book which was to buy weighing machines, you get paid by taking out a small fee every time someone wanted to use the machine. Once you've gained enough money from weighing people with the first scale. you can now buy a second one and earning money for the third one will go twice as fast.
Warren Buffett used this approach early in his life but the business consisted of pinball machines not weighing machines. In this he also discovered the miracle of capital money that works for its owner. He used the power of compounding income to his advantage in forming his first investing partnership Buffett associates, the deal was that he would gain half the upside above a 4% gain but pay a quarter of the downside to his partners. I have a hard time seeing the fund managers of all Street exposed themselves to such a risk of losing capital but in Buffett's case this was a calculated risk that accelerated he is compounding even further.
By turning his company berkshire hathaway into an insurance company Buffett has been using compounding to his advantage for many years now. you see, insurance premiums are always paid before the actual claims might come, which gives Buffett plenty of time to compound the money before an eventual payout. According to the saying if someone dropped a dollar the average billionaire wouldn't bother picking it up because the money gained from doing so is less than what he usually earns during such a timeframe. Warren on the other hand would gladly pick it up and state this is the start of my next billion. that's the power of compounding.
