This is a story that sets the stage for Roger Lowenstein’s biography Buffett. The very opening of the book is a graph comparing the astounding growth of Berkshire Hathaway, the fat line, compared to the market benchmark the Dow Jones:

It’s this graph, the awesome stock returns, that have made Buffett a household name and a legend amongst investors.

This success has brought attention on celebrity level and raises many questions. Who exactly is Buffett as a person? How did he transform from delivering Cokes door-to-door in Omaha into a mighty investor? What are his investing principles?

These are all addressed in Lowenstein’s wonderful biography. I read this book a couple years ago, and I wanted to share some of my lasting impressions for why I liked it.

(I owe a special thanks to a friend who gifted me this book–thanks for the fantastic read)

The book covers a lot of time

The biography covers some of Buffett’s childhood in the 1930s when he was instilled religious and secular values by his dad and goes until about 1995, which is about when the book was first published.

There is an entire chapter about Benjamin Graham and his influence on Buffett as well as one about how Berkshire Hathaway, a manufacturing company and cotton mill, became the name of Buffett’s holding company.

I remember liking that the book moving smoothly and not dragging in its narration.

The details are amazing

The book includes just enough detail to keeps things interesting. One of the stories I remember is about young Buffett raising money from investors.

Here is how the story goes. At the age of 26, Buffett was raising money and pitching to clients. But he was brazen and wanted to play by his rules. Some of the terms he had were: he would not disclose any of the holdings, he would only give a yearly summary of results, and he would only allow one day of December 31 for withdrawing or adding capital. And some people agreed to this!

In hindsight these investors made a great decision. But it makes me see why some people did not invest with Buffett given the tremendous risk and secrecy of it all. I have a feeling I would not have invested in a young guy asking for such strict terms.

The personal side

The book also has interesting personal details, so it’s not all business. There are stories beyond his love for Coca-Cola and his modest house in Omaha. Some that I remember are how he got married and how he pored over newspapers and data as his craft.

Lowenstein did a great job of interviewing close friends and relatives and incorporating this in the book.

Check it out

In conclusion, I highly recommend Roger Lowenstein’s Buffett: The Making of an American Capitalist both for how it is written and its fascinating topic matter–it’s well worth a read.

The only thing you need is enough beer coasters to cover a table. You can ask a server for them or you can bring some from home (beer coasters are cheap)

The rules

Here is how the game works:

–Someone goes first and places a coaster anywhere on the table

–The other person goes by placing a coaster anywhere else that’s open on the table

–The game continues with each player moving in turn to place a coaster on the table

–The winner of the game is the person who puts down the last coaster, i.e., there is no more open space on the table

To make it interesting, you can play with a rule that the loser has to buy the next round.

It’s a simple game, so what’s the best way to play? Is it better to go first or second? Is there a winning strategy?

I don’t think it matters if the table is round or rectangular, nor does it matter if the coaster is round or a square. My answer for the two-person game is in the comments.

Variations

The two person game is fun to analyze but perhaps that makes it less fun to repeat. Here are a few ways to spice up the game:

–Start the table with a random configuration of coasters and then flip a coin to see who goes first.

–Play this game with more than two players–the strategy quickly becomes more complicated!

–Try this game at a dinner party using small plates on a dining table.

Try this game and its variations out and let me know what you think!

(Just be careful if your opponent also reads this blog and you’re doing the two-person game)

Do you know of a cool bar game? Let me know and I’ll feature it so you can share your game.

But there is another, lesser talked about benefit to diversification: big returns for long-term investors.

I learned about this benefit during a high school investment seminar, and it has stuck with me till this day. The example was refreshing and I hope you’ll find it interesting as well.

An exercise

Suppose you are looking to invest $10,000. You’re looking to invest for retirement 25 years later.

You have two investment choices with the following characteristics:

Investment A

Offers an expected annual return 6.25% if you invest all $10,000

Investment B

Offers a blended return and money is invested in five chunks:

• $2,000 is risky and may get lost totally
• $2,000 is safe and breaks even
• $2,000 is expected to earn 5% annually
• $2,000 is expected to earn 10% annually
• $2,000 is expected to earn 15% annually

Which investment returns more over a 25 year period? (assuming expected returns are realized)

The answer

It surprised me to learn it was investment B that won out–and by a large margin at that!

Here is the year by year breakdown:



You can see that the safe investment is a better choice for a long time. It takes about 10 years before investment B starts to look better.

But in the end, it is the compounding returns of the diversified portfolio’s high-returning chunks that win out.

The final values after 25 years are investment A is worth about $45,550 versus investment B is worth $96,280–quite the difference.

So whenever I invest in a diversified portfolio, I remind myself to keep a long-term view about the gains.

Addendum: more realistic returns

My friend points out the example is slightly misleading because 15 percent is an aggressive expectation, not one that is sustainable over 25 years.

So let’s take a more realistic example. Suppose the guaranteed return is more like 4 percent, and the tiered diversified portfolio returns 5, 7.5, and 10 percent. Even in this case the diversified portfolio comes out on top: $42,640 versus $26,660. The diversified portfolio also lags for about 10 years.

Diversification still wins though the total returns are not as much in either case. The caveat therefore is these returns are all illustrative and should not be taken as practical expectations.

Look at the graph for the search term IRS in the United States:

The graph generally has two spikes yearly. Why might this be? I’ll take a guess.

The first spike is in Jan-Feb when people are probably double-checking definitions and new rules (what is a dependent, how much charity is deductible, etc)

The second spike is for April when people are likely scrambling to file near the deadline.

(And if you’re wondering, the lower, more regular graph, is about news references and shows fewer spikes.)

I’m working on tax stuff now…not quite last minute, but definitely contributing to the March traffic.

How’s your tax prep going?

The video clip features mathematician Ken Binmore and concerns betting strategy in poker. Binmore explains why poker pros bluff wildly and suggests the reason why amateurs don’t bluff enough.

The advice was timely as it actually helped me in my most recent friendly poker game. Though admittedly, I am far from arriving at an optimal mix.

Here is the two minute video clip, courtesy of ponderabout.com. Be sure to watch till the end with the Star Trek clip of a virtual reality poker game between Stephen Hawking, Albert Einstein, Isaac Newton, and Data:

Link to Youtube video The art of bluffing

My transcription of the video

[Narrator] Game theory. That means using equations and logic to work out the best way to play a game. One of the games mathematician Ken Binmore enjoys studying is poker.

[Binmore] You have to go to the world poker championships–you know where they play for millions of dollars, very experienced players–and you see them sit at the table. And they bluff like crazy, with really bad hands, with really large sums of money. This is what turned me on to game theory in the first place. And I just didn’t believe it could be optimal to bluff so much, as is frequently the case in game theory.

[Narrator] Okay, I’m going to try this out on Friday night.

[Binmore] Haha. You probably don’t bluff enough, because the reason you are bluffing is not because you might win it. You are bluffing because you want to be called sometimes when you are bluffing so that people can see that sometimes when you bet high, you have a bad hand. If you never bet big with a bad hand, as soon as you bet big, everyone will know you have a good hand, so you will make no money on your good hands. So you bet big on some bad hands so that you will make a lot of money on your good hands.

[Narrator] So game theory is all about developing strategy, and it turns out to be a mix of highly complex mathematics with a large dollop of psychology thrown in.

(Rest is about poker game in Star Trek–just watch it!)