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Smart Money - The Snowball

Yesterday someone mentioned to me that they heard that I was a big Warren Buffett fan. Absolutely! I hauled a few books on Buffett down from the bookshelf to show her.

Yesterday someone mentioned to me that they heard that I was a big Warren Buffett fan.

Absolutely! I hauled a few books on Buffett down from the bookshelf to show her. Then I went to the other room and grabbed about a dozen more Buffett books that I had lent to Niko. And that's just the books that I have at the office, I've got another collection of Buffett memorabilia at home.

I'm a Buffett fan in the true meaning of the word. That is, short for fanatic. This year will be my tenth consecutive trip to Omaha to take part in Woodstock for Capitalists, otherwise known as the Annual General Meeting of Warren Buffett's company, Berkshire Hathaway. So there isn't that much that I can't tell you about Buffett.

I can tell you how he looks at the world. I can tell you what he thinks about taxing the super-rich. (He supports it.) I can tell you what he thinks about passing wealth on to your kids. (He thinks it spoils them.) I can tell you what he thinks about owning gold bullion. (He thinks that's dumb.)

And I can surely tell you all of his great investing quotes, such as: "Be fearful when others are greedy, and greedy when others are fearful." And the quote that I have framed, which hangs on the wall in my office: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Recently a new Buffett biography came out, and it was eagerly anticipated. Although there are dozens of other books on Warren Buffett, this was the first one in which he really co-operated with the author. The book is called "The Snowball: Warren Buffett and the Business of Life", by Alice Schroeder.

The snowball is an analogy for the power of compounding. If you start with the right type of snow, and you start rolling it down a very long hill, you'll end up with an impressively large amount when you get to the finish.

A lot of the material in the book is about the events in Buffett's life, which is often ancillary to the stuff that makes him the world's greatest investor. Although there is plenty of material about Buffett's career, a large chunk of the book is about all the other things - the things that make him a real person, like how he struggled with his wife's cancer treatment.

This book is comprehensive; it might even have too much detail for some casual readers. And if you want to learn about Buffett's principles for investing, this probably isn't the first book that you would start with. But that's okay; there are plenty of other sources to learn about how Buffett looks at investing.

For me though, as a Buffett uber-fan, I found the book immensely satisfying, as it addressed some of my curiosities on some things.

As an example, it's well known that Buffett's annual salary as CEO of Berkshire Hathaway is $100,000, and has been for years. This is in marked contrast to the lavish salaries of most big-time corporate CEOs. It's also well known that Buffett has never sold any Berkshire Hathaway stock.

Given that, I was always idly curious about what Buffett lived on for income. His tastes are legendarily modest, preferring hamburgers to filet mignon. But still, $100,000 a year isn't that much when your life is global in scope and you are paying your own way.

Well, now I know the answer. It was there all along, actually, it just took a detailed review of the structure of his business partnerships from decades ago for me to connect the dots.

Other stories perhaps have broader appeal than the compensations structure of Buffett's pre-Berkshire Hathaway partnerships. Here's one of the vignettes that I found illuminating:

In 2000 a guy that went by the Internet name of "zx1675" posted on a Yahoo! Bulletin board that Buffett had been admitted to the hospital, and was critical condition. This was seized by another anonymous poster called "hyperpumperfulofcrap" (seriously, that's what he or she called themself) and began posting repeatedly, with titles such as "BUFFETT OLD AND WEAK, SELL", and "SELL, SELL, SELL, SELL, SELL" in the subject lines.

The thing is, Buffett was fine. He wasn't in the hospital at all. But he was concerned that other people might take the rumour seriously, so he issued a press release saying that the rumours were baseless.

And Berkshire Hathaway stock still fell by 11 percent.

I find this fascinating, in a morbid and grotesque way. People would listen to an anonymous person with an Internet alias of hyperpumperfulofcrap over Warren Buffett. That blows my mind.

Like with most good stories, there is a lesson here. Hyperpumperfulofcrap could have been a high school kid, a disgruntled ex-employee with an axe to grind, a schizophrenic, or a moron. It could have been anybody. It was just anybody, actually. And people listened to hyperpumperfulofcrap instead of Buffett.

One of the aspects of the book that I have mixed feelings about is the detailed inclusions of Buffett's foibles. On one hand, this is the material that helps you understand the journey of a little boy from Nebraska to becoming the World's Greatest Investor. On the other hand, it is kind of like discovering that Superman has dandruff.

Even so, there is a reason that I am always quoting Buffett. He is one of the richest people in the world, and he is the World's Greatest Investor.

But he didn't acquire his wealth by gambling on some long-shot ideas, or by exploiting some third-world labour force, or by manipulating some tax-loopholes. In fact, he may very well be the most respected, most honest, most ethical capitalist that has ever lived. He's also made more people millionaires, and billionaires, than anyone else on the planet.

From 1965 to 2009 the Standard and Poors 500 Index compounded at an average annual rate of 9.3 percent. Buffett's Berkshire Hathaway compounded at an average annual rate of 20.3 percent, with only two down years. Clearly, outperforming the benchmark by 11.0 percent over an extended period of time is impressive, but to truly put the magnitude of this feat into perspective consider this: during this time the total returns of the S&P 500 was 5,430 percent. Berkshire Hathaway's total return was an astronomical 434,057 percent.

This is why I am always telling people, "Warren says". Choose the right heroes. And pay no attention to hyperpumperfulofcrap.

The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Certified Financial Planner with Manulife Securities Incorporated, Member CIPF and with Manulife Securities Insurance Agency in Fort St John, BC. Brad Brain can be reached at brad.brain@manulifesecurities.caor