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Rousing tale of advice left unheeded

Vasant Gokarn  |  New Delhi 

Warren Buffett is probably the most written about businessman today. From the earlier biographies like the one by Roger Lowenstein of Wall Street Journal (1995) to the latest book, The Snowball: Warren Buffett and the Business of Life (2008), by Alice Schroeder, touted as the authorised biography at a massive 1,000 pages, the total page count would probably exceed 20,000. These cover every aspect of his life in great detail, from childhood to the time when he became a legend, now generally known as the Sage of Omaha. There is awe and respect for the man who leads a simple life despite his immense wealth and admiration for his shrewd business judgments which have seen him on the right side of every financial crisis that has plagued the US financial system in recent years. So, what’s new?

In actual fact, the book is not so much about Buffett as about the author herself, Janet Tavakoli, who runs a financial advisory firm in Chicago and has been an active participant in and astute observer of the financial market for the last 20 years. She has been a contrarian, questioning major decisions taken by financial majors and regulating authorities and as a result, has developed a remarkable predictive capability. This book showcases some of her successful predictions, from the collapse of Long Term Capital Management in the late 1990s to the recent implosion of AIG in September 2008. During much of this time she had only read about Warren Buffett and had occasionally exchanged letters with him. Buffett invited her to lunch in August 2005 and since then she has been an ardent admirer of his. She was impressed by his easy informality and simplicity and the four hours that she spent with him seem to have radically changed her outlook and attitude. She became a more vocal advocate of the values that Buffett espoused and achieved a better work-life balance. While reading the book one can almost sense Buffett’s presence in the background, nodding his approval from time to time.

When the author takes a critical look at some of the leading companies in the financial sector, their performance, the attitude and behaviour of chief executives, she uses Berkshire Hathaway and Warren Buffett himself as the benchmark for comparison. Many events which took place in the last one year, such as the collapse of brokerage houses like Bear Stearns, Merrill Lynch and Lehman Brothers, could have been averted if warnings emanating from saner people like Buffett and the author herself had been heeded. These warnings were usually contained in his annual letter to the shareholders of Berkshire Hathaway, which has almost a cult following among companies and individual investors, and additionally in signed opinion pieces in major newspapers. For example, he had warned hedge fund managers against over-leveraging, against structured financial instruments which he called “weapons of mass destruction” in 2004, against excessive bonuses paid to fund managers (he himself has been taking an annual salary of $100,000 for several years), and about the lack of transparency in the presentation of annual accounts to shareholders. The author in her account of various events has shown how non-adherence to basics like caution, due diligence, shareholder interest etc, has led to the debacle we are witnessing today.

One of her targets for criticism has been the SEC, which was found to be woefully short of the degree of surveillance and supervision that was required. She aptly describes it as “Slumbering Esquires’ Club”.

It is not as if Buffett was above making mistakes in judgment. He had first-hand experience in subprime lending when he bought Oakwood Homes which was into manufactured housing. The finance to the buyers was provided by an associate company, Vanderbilt. The shenanigans indulged in by mortgage brokers — forcing mortgages on people who were not in a position to repay loans — appalled Buffett. Oakwood soon went bankrupt and he admitted his mistake in his letter to the shareholders in 2003. One would have thought this warning would have been heeded by the bigger mortgage refinance companies like Fannie Mae. Yet Fannie Mae, along with Freddie Mac, went belly up in 2008, requiring government intervention. Incidentally, Fannie Mae is referred to in Jim Collins’ book Good to Great as one of the companies having made the transition!

Altogether this book is an excellent read, loaded with information about the goings-on in the financial sector in the US till as recently as September 2008. The style is informal, almost like a conversation in a lounge bar, racy, laced with wit and when it comments on leading actors in the drama, dipped in vitriol. Tavakoli is a name we will be hearing about frequently in the near future.


Janet M Tavakoli
$24.95, 304 pages

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First Published: Thu, April 23 2009. 00:31 IST