Clever Geek Handbook
18 July 2025

Viral Loop

Recommendation

In 2000, the “Naked Scientists,” a group of Cambridge University physicians and researchers who popularize science, satirically described the viral path of an odd growth industry: Elvis Presley impersonation. At that time, more than 85,000 Elvis impersonators actively performed around the world, “compared to only 170 in 1977 when Elvis died.” The Naked Scientists jovially argued that, at that rate of growth, “by 2019, Elvis impersonators will make up a third of the world’s population.” Of course, this is deliberately ridiculous, but “viral growth” is not. Just note the astounding expansion of such Internet juggernauts as YouTube, Google, Ning and Facebook. Indeed, based on Facebook’s remarkable current popularity, it is not inconceivable that everyone on the globe with an Internet connection could be a Facebook member in 30 years. What accounts for such incredible growth? If you want an answer to that question, BooksInShort recommends Adam L. Penenberg’s absorbing and detailed (perhaps too detailed) book. He examines this timely subject with a focus on the Web’s ability to foster sites that are social trendsetters and economic powerhouses.

Take-Aways

  • Some traditional companies, such as Tupperware, achieved “viral”-type success decades before popular use of the Internet.
  • Online firms grow virally when members of a Web site invite their friends to join.
  • When this pattern generates exponential growth, it becomes a “viral expansion loop,” which has three categories:
  • A “viral loop” expands based on referrals from members to their friends.
  • A “viral network” is made up of numerous connected viral loops, such as Facebook.
  • A “double viral loop” is a combination of a viral loop and a viral network.
  • With quality online offerings, sites don’t need salespeople or advertising to go viral.
  • Viral companies, such as Hotmail, YouTube, Facebook, LinkedIn, Twitter and eBay, share certain traits, like clear concepts, ease of use and rapid adoption.
  • A Web offering’s “viral coefficient” is measurable; a score of 1.0 – indicating that each member generates one new member – leads to exponential growth.
  • Viral growth is an integral component of great products and services, and is suited for smart phones, which will soon outsell PCs as Internet access machines.

Summary

Hot or Not?

In the fall of 2000, two 20-something entrepreneurs, James Hong and Jim Young, had a simple idea for a new Web site: Am I Hot or Not allowed visitors to vote on whether they thought the men and women in photographs displayed on the site were good-looking. On October 9, Am I Hot or Not debuted with a few dozen “candid” shots gleaned from the Internet. Hong invited 42 friends to be the first visitors. By the end of the day, the site had drawn 37,000 guests, and people had uploaded 200 more pictures. The next day, more than 100,000 people viewed the site. That is a viral bonanza in action.

“A viral expansion loop is like compounding interest on a bank account: one user becomes two, then four, eight, to a million and more.”

To avoid an expensive bandwidth problem due to their soaring popularity, Hong and Young quickly began to use Yahoo as the posting destination for new photos. They set up commercial Web hosting. The two young men made all the right moves. By its eighth day of operations, Am I Hot or Not had reached 1.8 million page views daily, a remarkable figure considering that it had started out with a few dozen visitors a week earlier. Within six weeks, this number grew to three million daily page views and 3,000 volunteered photos.

“It’s possible to build a multimillion- or even billion-dollar business from scratch, simply by designing a product the right way.”

Hong and Young monetized their Web site with advertising. Within three months, Am I Hot or Not became one of a major rating service’s Top 25 Web ad sites, with $100,000 in revenue. Hong and Young renamed and refined Hot or Not, and affiliated with a photography-hosting site (Ofoto). They started Meet Me, their second site, in April 2001. It allowed Hot or Not visitors to network with each other for $6 per month. By the spring of 2002, Meet Me had generated $600,000 in membership fees. By 2004, Hot or Not was earning $4 million annually. It became an Internet sensation for one reason: Visitors told their friends about it, their friends told still others, and so on. That’s what “going viral” means. In 2008, Hong and Young sold Hot or Not for $20 million.

Build a Better Mousetrap

As Hot or Not illustrates, the Web can make a business hugely profitable if the entrepreneurs have the right design and offer something the audience really wants. This formula worked for Hotmail, eBay, PayPal, MySpace, YouTube, Facebook, Digg, LinkedIn, Twitter and Flickr, as well as Hot or Not. Such sites offer services to which people come to feel so deeply attached that they become fervent evangelists. Then their contacts do the same, in a “positive-feedback loop.” That’s how viral lightning hits. Companies become Internet juggernauts when they can ride the three-part “viral expansion loop,” wherein Web visitors reliably beget additional guests:

  1. “Viral loop” – This referral-multiplying mechanism grows member-to-member.
  2. “Viral Network” – Members form groups that intersect as they expand.
  3. “Double Viral Loop” – This hybrid of viral networks and viral loops is built on ever-increasing user content. A double viral loop grows more quickly as it adds users, often with little marketing effort (though increasing technical concerns).
“The more Tupperware sold, the more people would sell Tupperware products.”

The expansion of a viral loop depends both on users who promote a site’s goods or services, and on designers who build virality into their offerings. The Web is the ultimate, exponential connectivity medium, in that it enables people to share blogs, links, photos, videos and other Internet services. This creates a “virtuous circle,” the most efficacious form of direct marketing, based on the understanding that people will share things they like. The trick is figuring out what they like and including it, intrinsically, from the very beginning.

Tupperware as a Precursor

Tupperware plastic food containers achieved viral-type results well before the advent of the Internet. Bankrupt tree surgeon Earl Silas Tupper, a kooky inventor, created Tupperware on the heels of a string of failures, such as a “fish-powered boat.” By 1949, he was selling Tupperware brand kitchenware in large department stores such as Bloomingdale’s. His business expanded when sales dynamo and single mom Brownie Wise began to represent Tupperware in Florida. At the time, she was selling Stanley Home Products through “patio parties,” which she transformed into “Poly-T parties” (using the brand name of the plastic in Tupperware). Social gatherings quickly became the Tupperware sales model nationwide. Within a few years, thousands of women were hosting sales parties and recruiting friends for Tupperware get-togethers.

“Over the last decade and a half, some of the world’s most successful businesses started from scratch and then rode a viral loop.”

The Tupperware plant could not cope with the demands of Wise’s home-party dealers, so Tupper stopped selling his containers in stores. By 1953, Wise had 3,000 dealers and distributors; by 1955, she had 20,000. Within 10 years, “her army of Tupperware ladies” was selling tens of millions of dollars worth of containers annually. Tupperware parties were the viral networks of their time. Wise became the first female executive to make the cover of BusinessWeek. Today, Tupperware is a $2.2 billion global behemoth, but the Web tallies less than 2% of its sales. Parties still provide Tupperware with its virality, especially in Latin America and Asia.

The Viral World Wide Web

In the early 1990s, the Internet was a text-based medium that academics used to share research. University of Illinois computer science student Marc Andreessen changed all that. While working for $6.85 an hour for the National Center for Supercomputing Applications (NCSA), Andreessen developed a Web browser that anyone would be able to use, not just academics.

“The bigger a viral network gets, the faster it germinates.”

In late 1992, he teamed up with NCSA programmer Eric Bina to develop a new browser, eventually named Mosaic. Once it became available early in 1993, it made the Internet accessible to everyone. By December 1994, more than one million users were employing the new browser to navigate the Web. With Mosaic’s introduction, the Web experienced its first “network effect,” a term originally used to describe what took place when the telephone became popular in the early 20th century. Back then, each additional subscriber made the phone network more attractive to others. This same effect generated a true positive-feedback loop for Mosaic: As more people used it, they told others, who also used it and told others, and so on. With increasing numbers of users, more people began to create new Web sites, which made the Web more attractive, which drew more users to it, who built more Web pages, in a bona fide self-replicating cycle.

Ning and the “Viral Coefficient”

In 1994, Andreessen left NCSA and teamed up with James H. Clark, the co-founder of Silicon Graphics, to develop new Web technologies. Andreessen wanted to develop a “Mosaic killer,” an even better browser, so the duo recruited disgruntled NCSA programmers and went to work. The result? Netscape Navigator: a quicker, stronger, more stable browser that did indeed murder Mosaic, becoming the de facto standard for Web browsing, with 10 million users by the middle of 1995. That August, Netscape’s IPO made Clark and Andreessen immensely wealthy. Their early coders netted millions each. By the end of the ’90s, more than 400 million users were surfing the Web on Microsoft’s Internet Explorer or on Netscape Navigator.

“The blogosphere is a teeming viral network.”

In February 2007, Andreessen launched Ning to enable users to create their own social networks. By April 2009, Ning had nearly 29 million users. Its growth rate at the time was two million new members monthly, with more than 40% coming from outside the United States. Ning’s viral coefficient – the “number of additional members each person brings in” – stood at 2.0. Anything more than 1.0 means exponential growth. With a 2.0 viral coefficient, Ning became a “double viral loop” company. That is to say, on Ning, which earns its profits by selling advertising, “every network creator is a user, and every user is a potential network.” Here is how such viral growth works: If a site has a coefficient of 1.0 and 100 users, those users will generate 100 more users. Thus, the site will have 200 users on day two and 400 users on day three. On day four, it will have 800 users. This growth rate will expand exponentially, resulting in millions of users.

Viral Champions

Big-time viral winners like Ning share certain characteristics:

  • “Web-based” service – The firm is designed to function and grow on the Internet.
  • “Free” offering – The service is complimentary but may be monetized in the future.
  • “Organizational technology” – Users, not employees, develop the content.
  • “Simple concept” – Straightforward and easy is always best.
  • “Built-in virality” – Users spur growth through sharing and positive word-of-mouth.
  • “Extremely fast adoption” – Some 50% of Harvard students joined Facebook a month after the social network started, although the site spent no money on promotion.
  • “Exponential growth” – Users bring in more users, who bring in more users.
  • “Viral” characteristics – The “Virality index” must read greater than 1.0 for exponential growth.
  • “Predictable growth rates” – Just as “epidemiologists can predict with some certainty how quickly a virus will spread through a city,” you can foretell the birth of a viral loop.
  • “Network effects” – The more users there are, the more attractive joining becomes.
  • “Stackability” – PayPal’s relationship with eBay offers stackable, synergistic growth.
  • A “point of nondisplacement” – Viral companies eventually hit a “tipping point,” an unbeatable mass of users.
  • “Ultimate saturation” – Growth can slow once a site becomes immense.
“Google, with its $100 billion-plus market capitalization, is vulnerable because social networks, which count on user engagement, are, for many people, their first stop on their Web journeys.”

Increasingly, users access the Internet from mobile devices. Experts estimate that in 2010, smart phones will outsell PCs as a way to connect to the Web. Three factors will account for this surge: improved screens, stronger microprocessors and easier connectivity.

Marketing Goes Viral

Hotmail demonstrated the Web’s viral marketing capacity when it offered free e-mail accounts and promptly grew from no members to 30 million members in two and a half years. When it launched on July 4, 1996, Hotmail didn’t embed marketing copy in its clients’ e-mails for the first few days. When founder Tim Draper finally persuaded his partners to put, “Get your free e-mail at Hotmail” at the foot of every message, the firm’s growth curve soared. In six months, it had one million users. A little more than a month later, it tallied two million, with 20,000 new people enlisting every day. With a clickable link on each e-mail, every Hotmail user became an unpaid promoter. Eventually, Microsoft bought the site for almost $400 million and renamed it MSN Hotmail. (Many start-up viral loop companies sell out to bigger firms once they are experiencing exponential growth.) Later, Microsoft made Hotmail a component of the Windows Live program.

“Social networks have become a global online phenomenon.”

Compelling Web video content goes viral just as quickly. In 2006, Mentos mints demonstrated how powerful viral video can be as a sales catalyst. That year, for fun, juggler Fritz Grobe and attorney Stephen Voltz donned lab coats and goggles, and filmed themselves mixing Diet Coke and Mentos. The two materials bubble over explosively when combined. The men orchestrated a faux fountain, replicating the one at the Bellagio in Las Vegas. The tape rapidly became a Web sensation, and a surprise marketing triumph for Mentos, which had nothing to do with it. Sales climbed 20% after the initial hype, and eventually plateaued at 15% higher than normal. Sales also climbed for Diet Coke.

“Social networking makes us happy and, online or off, all of this congregating is merely a product of biological necessity.”

The popular online auction site, eBay, is also a prime example of how commercial offerings can grow in an amazingly viral spurt on the Internet. Originally named AuctionWeb, the online service was a popular hit from the start. It conducted 200,000 auctions online in January 1997. In September, the company renamed itself eBay. After confronting and handling major technical problems to keep its machinery abreast of its growth, it continued to boom, buying PayPal for $1.5 billion in 2002 and Skype for $2.6 billion in 2005. Not only does it now generate 14% of “global e-commerce revenue,” but eBay is also a major earnings source for 1.3 million people.

“The wide dissemination of our personal information – that’s the unintended byproduct of social networks – could lead to a more tolerant, less judgmental society.”

Numerous other Internet superstars, including Facebook, YouTube and Twitter, experienced the same kind of exponential growth. Like eBay, they started from scratch and exploded, blessed with baked-in virality – the goal of every Web site creator – and lots and lots of friends.

About the Author

Adam L. Penenberg teaches journalism at New York University, where he is assistant director of the Business and Economics Program. He has written for The New York Times, Forbes, Slate magazine, The Economist, Mother Jones, Fast Company and Inc.

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Viral Loop

Book Viral Loop

From Facebook to Twitter, How Today's Smartest Businesses Grow Themselves

Hyperion,
 


18 July 2025

The China Strategy

Recommendation

Perhaps Frank Sinatra’s familiar refrain needs a slight alteration to reflect the current reality: “If I can make it there, I’ll make it anywhere. It’s up to you”...China, China. No firm can afford to ignore China as a market, manufacturing base or source of competition. Management consultant Edward Tse’s wide-ranging viewpoint (Tse was born in Hong Kong but educated in the US) offers anxious businesspeople clarity and direction. He lucidly describes the forces he thinks will shape China’s future and illustrates how your business can prepare for this transformation. Although the book’s call to action – plan now for an unknown future – may overwhelm some readers, getAbstact recommends this overview of China’s shifting commercial climate to managers considering moving to China, those who are already active there, and those who realize the degree of China’s imminent influence and want to prepare for the turmoil ahead.

Take-Aways

  • Every aspect of China will mutate in the second decade of the 21st century. Firms must prepare themselves for such a radical overhaul.
  • Four “drivers” will bring about deep-seated changes in China’s economy:
  • “Open China” means competition will flood the market and consumers will be “fickle.”
  • “Entrepreneurial China” is a source of stiff local and foreign competition.
  • To engage with “Official China,” foreign firms operating in China must align their goals with the national government’s objectives for their industry.
  • The “one world” feature of China’s economy means that firms operating there will find themselves increasingly connected to the rest of the globe.
  • To succeed in China, develop three competencies:
  • Companies with “vision” recognize China as a key element of the global business environment, not just as a manufacturing base or a sales market.
  • Heightened “versatility” will help your firm quickly adapt to China’s erratic, unpredictable business environment.
  • Leaders with “vigilance” gauge the significance of each new trend and react accordingly.

Summary

You Ain’t Seen Nothing Yet

The fruits of China’s economic development are obvious – from the imposing skyscrapers in its eastern megacities to its investments on every continent. China’s rapid recovery from the 2008 economic crisis proved its resilience. Although the government’s nearly $600-billion stimulus package played a large role, credit also goes to the entrepreneurial spirit and steely resolve of China’s 1.3 billion citizens. Their attitude is a harbinger of things to come. During the second decade of the 21st century, every aspect of China will change from its 2000-to-2010 status quo: New business leaders will emerge, consumer tastes will shift, and the government will instigate new policies and move in fresh directions. Given that China’s economic expansion will cause disorder and dynamism worldwide, to do business there, your firm must create a “China strategy” – a “long-range developmental plan” for working in a world where China is a central constituent. Four “drivers” will shape the future of China’s economy:

1. “Open China”

China’s consumers are the primary beneficiaries of its “unlocked” economy. The business world now vies for their attention with a huge assortment of cheap goods and services. Yet, foreign firms will find that China is still complex to enter. They should consider these facets of openness:

  • “Openness to outsiders” – Critics condemn China’s “unfair trade practices,” but China hosts more international brands than any other country. By 1992, foreign direct investment flooded freely into China, generating jobs and injecting competition and “best practices” into the economy. China now has access to most of the business resources it lacked in the ’90s. Thus, new entrants have little to offer and won’t receive the same fiscal hospitality (incentives and tax breaks) China gave to its pioneer partners. Newcomers will discover a packed, competitive market. Although China’s economy is wide open, the “greatest era of foreign investment’s impact” is over.
  • “Regional markets” – By 2020, 60% of China’s population will live in cities. China has approximately 600 cities with populations surpassing 500,000. Each one will grow in the coming years, creating new, large, wealthy markets. Foreign firms must time their expansion into these markets carefully: Proceed prematurely, and you may lose money; dillydally, and your competitors will get there first.
  • “Improved distribution” – China’s infrastructure is expanding rapidly. One project aims to create an expressway network connecting cities of 200,000-plus people by 2030. Meanwhile, the “retail revolution” has taken hold: Open-air markets are ceding popularity to shopping centers and convenience shops. These changes will facilitate foreign firms’ product distribution so they may no longer have to outsource it.
  • “Consumer culture” – Until the late ’70s, the Chinese people weren’t big consumers; then a vast array of products suddenly inundated the market. Firms had no time to build customer rapport, so brand loyalty is scant and buyers are “fickle.” Before entering China’s market, study its complex, diverse cultures and consumer patterns.

2. “Entrepreneurial China”

China’s economy consists of public-, private- and foreign-owned firms. The vast majority of China’s 569,000 state-owned enterprises (SOEs) are local collectives – “remnants of China’s socialist era.” The state tightly controls competition in strategic industries, such as energy, steel and telecommunications, where it retains control over about 150 extremely influential, protected and highly regulated firms. Foreign firms that embark on joint ventures with these SOEs face tough restrictions and the possibility of being ousted by local firms.

“After decades of being held back by their country’s adoption of socialism, [entrepreneurs] and the rest of the Chinese population are moving forward with the force of water gushing from a broken dam.”

Private business, “practically nonexistent” before Mao’s 1976 death, grew to 80 million workers in 2008 and is now China’s “least regulated,” “most fragmented” sector. Privately owned enterprises generally receive little government protection or support – even securing a bank loan is difficult. This has made Chinese entrepreneurs very industrious. The competitive private sector focuses on the domestic market. When a foreign firm enters, a local competitor quickly blooms. Today, foreign businesses produce 60% of China’s exports. But as domestic industry expands, this share will fall. Global companies are taking full advantage of China as a base for doing business via “value-chain migration.” During the 1980s and ’90s, the first entrants relocated only their manufacturing operations, but as China’s economy accelerates, many corporations will bring in their entire value chains – from R&D to customer service. Knowing that China’s usual inefficient, low-cost strategy is not viable, the Chinese – in reaction to change – will move toward high-quality production, a “culture of innovation” and a sustainable, knowledge-based economy.

China’s “wave of energy and entrepreneurship is changing the world, but its impact has just begun to be felt, and it is still often misunderstood, both by outsiders and by China’s own people.”

One form of Chinese innovation creates a lot of contention: the production of shan zhai goods – cheap, knock-off products “tailored to local requirements.” Future Cola, which began as an imitation of Coca-Cola, is China’s third-most popular cola. In many ways, shan zhai entrepreneurs typify China’s domestic business culture, which has six features:

  1. “Bursts of entrepreneurship” – Chinese firms happily assume risks and make quick “rough and ready” decisions when opportunities appear.
  2. “An emphasis on speed” – Taking action outweighs careful planning.
  3. “A preference for imitation and experimentation over innovation” – Trial and error have led to “a significant number of breakthrough models.”
  4. “A ‘good enough will do for now’ attitude” – The current model or process doesn’t need to be ideal. Firms can iron out the kinks later.
  5. “Acceptance of ‘the Confucius inside’” – Hierarchical, top-down leadership models prevail. “Obedience” is a characteristic of all work teams.
  6. “A ‘why not me?’ view of success” – The Chinese believe anyone can succeed internationally by grasping any available opportunity.

3. “Official China”

A foreigner may be forgiven for thinking that the Chinese Communist Party (CCP) has faded into the background. Party slogans no longer adorn the building facades, and the CCP no longer controls every aspect of citizens’ lives. Foreigners may go many months, or even years, before directly encountering the party. However, the CCP is a 70-million-strong, “omnipresent” organization, whose vast power pervades “every level of government and society,” including academic, military and commercial institutions. Its goals are “economic growth, social stability and continued Communist Party rule.” Leaders need “subtlety and understanding” to negotiate with official China. Research how the government sees your industry. Banking is strategic and highly regulated, with tough government restrictions that tightened more after the 2008-2009 fiscal crisis. The government says Western banks are not an apt model for China. Official China sets goals for each industry. If officials think your firm is conducive to meeting those goals, they’ll let you “participate.”

4. “One World”

Any major multinational firm operating in China will become increasingly integrated with the rest of the business world. As the country connects further to the worldwide economy, two significant trends emerge that could reshape global business: The first is the growth of Chinese innovation. Soon, other countries will turn to China’s evolving R&D sector for knowledge and staff. Second is the accelerating rate of “value-chain growth...from China to the rest of the world.” Business networks of Chinese and foreign firms have developed in China. As this trend grows, whole value chains, not just single firms, will compete. Chinese and foreign companies in these multinational value chains will have to work harder to sustain their positions.

“China’s development over the next decade and beyond will shape the economic and perhaps the political landscape of the rest of the world.”

“One-world companies” – that is, “international enterprises that can combine the best elements of international and Chinese operations in unified value chains” – will benefit most from these trends. While China attracts countless one-world companies, no such Chinese firm has emerged. Chinese companies still need to adjust their “management practices.” Private companies place too much power in the hands of a single dynamic leader, while SOEs mire down in complicated decision-making protocols. Secondly, other nations, particularly the US, have shown “hostility” by blocking some of China’s acquisitions and criticizing its actions abroad. China needs at least 10 years to surmount these obstacles.

“Dramatic change and uncertainty can be found everywhere in China. Many decisions are gambles. This will remain true for the foreseeable future.”

Most Chinese firms lack the resources to expand globally. Those that eventually emerge as one-world companies will have to create international partnerships to boost the weaker elements of their value chains. The Chinese government will continue to control how much companies can integrate with the global economy. The party will keep protecting strategic industries, and it won’t let private business develop “oligarchs or a tycoon class” that could threaten its hegemony.

Developing a China Strategy

The four drivers of change create a complex international business climate, but you can create a China strategy to deal with the transformation. Develop three competences:

1. “Vision”

Myopic firms enter China to exploit it as a cheap manufacturing base or to penetrate its huge market. They are either “dismissive of China” or “China-centric.” Yet, visionary one-world companies enter China because they see it as “a place of strategic value.” Instead of “isolating China,” they integrate it into their global approach. To develop a holistic vision for China, ask: How much freedom does your industry have there? Would your firm be able to import elements of its value chain? How can you incorporate its strong suits – “manufacturing, innovation, new business model incubation, talent development” – into your global value chain? How can you obtain the local knowledge to compete there? Can your firm handle risk and uncertainty?

2. “Versatility”

In China, “business takes place on a greater scale than almost anywhere else.” Thus, maintaining versatility is crucial. That requires:

  • “Mental fluidity and resilience” – When faced with uncertainty, which is rampant in China, leaders must remain strong to continue pursuing their original vision and goals.
  • “Organizational nimbleness” – Prepare a plan of action for numerous possible scenarios so you can adapt with agility.
  • “Coordination...among markets” – China’s abundant, diverse markets are at various stages of development. Synchronize your strategies for each region.
  • “Monitoring of new developments” – If you constantly observe industry trends, you can make quick decisions in the face of cultural, social or regulatory shifts.
  • “Managing human capital” – China’s dearth of skilled workers and managers persists, and strong cultural differences impede progress. Many firms overcome these obstacles by working to understand Chinese employees’ attitudes and investing large sums in training.
  • “Establishing and maintaining relationships” – Preserving strong connections with official China and with your business partners is important. Chinese regulations are often opaque, but the right local partner can help you navigate.
  • “Running Janus-faced operations” – Model your firm on Janus, the Roman god who had a face on the front of his head and one on the back. In other words, “run integrated operations that simultaneously look in toward China and its possibilities and outward elsewhere to see how these China strengths can be leveraged globally.”

3. “Vigilance”

The wind of change is blowing across China. Learn to gauge the significance of any given change, and react in a fitting way. “Vigilant leaders” plan a decade or more ahead. They keep an “external focus” by consulting outside sources and professional networks for advice. These executives have good “organizational skills,” and they empower others to make decisions. Leaders of foreign businesses should understand that China can change rapidly. What works in business today may fail tomorrow. Events don’t always unfold as planned, so brace your firm for the next big change.

About the Author

Management consultant Edward Tse is Booz & Co.’s chairman for Greater China. He has worked for the World Bank, the Asian Development Bank and the Chinese government.

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The China Strategy

Book The China Strategy

Harnessing the Power of the World's Fastest-Growing Economy

Basic Books,
 


18 July 2025

Of Permanent Value

Recommendation

Andrew Kilpatrick has written a most unusual biography of one of the world’s richest men, investor Warren Buffett. Instead of the dry chronology presented in most biographies, Kilpatrick has stuffed his 890 pages with 157 immensely readable, personal and professional vignettes. They are arranged in no particular order, yet they add up to a detailed and satisfying journey. Filled with plenty of inside detail from numerous original and published sources, the book lets you pull up a comfy chair inside Warren Buffett’s brain. BooksInShort.com recommends this book to anyone interested in investing and general business, and to curious readers of all persuasions.

Take-Aways

  • Warren Buffett grew up in Omaha, Nebraska, where he lives and runs his business today. He bought his first share of stock at the age of 11.
  • He was a math prodigy and has been fascinated by finance since early childhood.
  • He got his master’s degree from Columbia University, where he studied with Ben Graham, "the father of value investing."
  • He learned to keep his investment plans secret.
  • He learned to ignore conventional wisdom and still does so.
  • In 1956, at 25, he formed the Buffett Partnership with seven other investors who contributed $105,000. He made all the decisions.
  • By 1969, the partnership’s assets had grown to more than $104 million.
  • Buffett is now one of the richest men in the world.
  • In 1969, Buffett dissolved the partnership and began investing under the umbrella of his company, Berkshire Hathaway.
  • Berkshire has never had a year in which it lost money.

Summary

Warren Buffet’s Early Years

Warren Buffett jokes that he "was conceived during the stock market crash" in the fall of 1929. To add to the irony, his father was a stock salesman at the time. Young Warren’s future could have been predicted by looking at one of his first and favorite toys: a metal moneychanger he wore strapped around his waist. The little boy walked around making change. He was fascinated by this and by keeping track of money. "Making math calculations, particularly when it concerned compounding money at a blistering pace... absorbed him from his earliest days."

“Traditional wisdom can be long on tradition and short on wisdom.” [Warren Buffet]

As a child, his first business was peddling Coca-Cola fitting for a fellow who would one day own billions of dollars of Coca-Cola stock. When little Warren was six years old, he came up with the idea of taking a 25-cent six pack of Coke and selling the drinks individually for five cents a bottle. "Those 20% returns were about consistent with Buffett’s entire business career. And that’s why he’s a multi-billionaire."

“Buffett’s easy manner and down-home ways mask a highly sophisticated man.”

Buffett grew up in Omaha, with the exception of spending his teen years in Washington, D.C., after his father was elected to Congress in 1942, and lives there today. He still lives the down-home, traditional middle-class lifestyle that shaped his youth.

As a child, he retrieved discarded bottle caps from soda machines, sorted and counted them, to find out which soda brand was really selling. He had an auditor’s instincts even then. His ability to get at the real numbers, not the supposed numbers passed along by others is still one of his greatest strengths. Buffett was a math prodigy, fascinated with finance, stocks and ways to make money. At age eight, he began reading his father’s books about the stock market. Surprisingly, his father had little interest in amassing money for its own sake, and hoped his son would one day join the clergy.

“Once Washington Post Company Chairman Katharine Graham visited Warren Buffett’s modest home and joked, ’Warren, is this all you can afford?’”

In April 1942, when Buffett was only 11, he bought his first stocks - three shares of Cities Service Preferred, at $38 per share. He talked his sister, Doris, into doing the same thing. Thus began his career as an investor, not just for himself, but for others. Even as a youth, his views about the markets were more astute than those of others. He hung around his father’s office and did plenty of reading, including Ben Graham’s Security Analysis, which he said was "like seeing the light." He learned a critical lesson: Do not be guided by what other people say and don’t tell your fellow investors what you are doing at the time you do it.

“Buffett has no aides, no advance team. When he was already the richest person in the country, he once arrived at National Airport in Washington, D.C., walked up to the corporate jet counter and asked: ’How do I get a taxi?’ There are no airs. His shoes are scuffed, the watch is a Timex, and the pen is a Bic.”

Buffett studied at the Wharton School of Business at the University of Pennsylvania and at the University of Nebraska, where he graduated in 1950 at only 19. Buffett then went to New York City, to study under Ben Graham at Columbia University’s Business School. Graham taught him, "Whether someone else agrees or disagrees with you does not make you right or wrong." Buffett never forgot his mentor’s hallmark idea and reiterates that philosophy frequently. "When you are dead sure of something and are armed with the facts, then everyone else’s advice is only confusing and time-consuming."

“Buffett does his own taxes, saying they are really quite simple.”

As an investor, Buffett never lets on what he is doing until he has to disclose it. Wall Street guesses, but Buffett’s moves only leak out on rare occasions. He tries to keep his investments secret until the March publication of Berkshire’s annual report.

In 1951, at age 20, Buffett graduated from Columbia with a master’s degree. He returned to Omaha, where he worked in his father’s brokerage firm, Buffett-Falk & Co., from 1951 to 1954. On April 19, 1952, he married Susan Thompson of Omaha.

The Buffett Partnership

On May 1, 1956, 25-year-old Warren Buffett formed the Buffett Partnership, which consisted of seven limited partners: four family members and three close friends. The seven partners contributed a total of $105,000 but had no voting power, no say in the running of the partnership. Warren Buffett made all investment decisions. For his $100 investment, he was listed as general partner. He would add more of his own money in the years to come. As investment manager, Buffett received 25% of the profits, above the 6% investors could receive in savings accounts annually, with deficiencies carried forward. As the years went on, Buffett added investors. He was worth about $100,000 when he started the partnership in 1956, and about $400,000 by 1959. The partnership never failed to beat the Dow. It never had a down year.

“There is rarely any pomposity or moodiness in this multi-billionaire. People who have known him for years say they have never seen him angry. His response to things isn’t anger, but rationality.”

In November 1962, the partnership, which had previously invested in other businesses, began buying shares of a textile mill, Berkshire Hathaway. By 1965, Buffett had financial control of Berkshire and became a director. From the beginning, Buffett knew his mission was to compound his cash at a hefty, steady clip. By 1969, the partnership’s assets had grown to $104,429,431. Buffett’s motto was, and still is, "Buy Low, Don’t Sell." He didn’t hire his first employee until 1962, when he enlisted Bill Scott, who managed the company’s bond portfolio until his retirement in 1993. Since then, Scott has worked part-time at Berkshire.

“He responds to the world by examining it thoroughly and in a positive and witty way. Those who have worked with him describe him as almost unfailingly upbeat and supportive, practically never testy. He works hard. And yet he says his work is not work, but fun. Fun to Buffett is studying the world of business through voracious reading.”

By 1963, Buffett had more than 90 limited partners. In 1964, he engaged the partnership in three main investment categories:

  1. Generals: Undervalued stocks that would be held for a long time.
  2. Workouts: Securities with a timetable and an arbitrage situation arising from sell-outs, mergers, reorganizations and the like.
  3. Controls: Firms in which the partnership owned such a large block of stock that the partnership gained control of the business.
“Buffett says of bridge: ’It’s got to be the best intellectual exercise out there. You’re seeing through new situations every ten minutes. In the stock market, you don’t base your decisions on what the market is doing, but on what you think is rational. Bridge is about weighing gain/loss ratios. You’re doing calculations all the time.’”

By 1965, the partnership’s net assets, through contributions and growth, had grown to $26 million. Buffett continued to run his business from a very small office space in Omaha. From 1957 through 1968, the Dow’s compound annual growth rate was 9.1%; the Buffett Partnership’s rate was 31.6%.

Berkshire Hathaway

At the end of 1969, the 100-member Buffett Partnership underwent the transformation that would see it reborn as part of Berkshire Hathaway, which the partnership had owned since 1965. Buffett liquidated the partnership and distributed to the investors their profits and their pro rata interest in Berkshire. He gave his investors a variety of options, including investing in Berkshire. The company opened on August 1, 1970, with three main businesses: the textile operation, the Illinois National Bank and Trust, and an insurance operation conducted by National Indemnity and National Fire & Marine. Berkshire also owned Blacker Printing Company, and 70% of Gateway Underwriters, but these operations were not financially significant. In 1969, Berkshire bought the Omaha Sun, along with a string of weeklies, but sold the newspaper operation in 1981.

“One problem with the Buffett/Berkshire ’Buy Low, Don’t Sell’ story is that it seems improbable. People are skeptical because most investors have trouble just treading water. Therefore, it’s hard to relate to making millions upon millions of dollars. Billions of dollars.”

Berkshire Hathaway would continue to advance Buffett’s original investment partnership agendas. He knows how to get the most bang for Berkshire’s buck. Buffett is sensitive to the economic landscape and uses industry environments to Berkshire’s advantage. He comprehends the mind of the consumer and senses which businesses have the greatest long-term competitive strength. Buffett is touched by the importance of human sensitivity, encouragement, and empathy in maximizing human achievement. Combining these elements of finance, economics and management makes Buffett unique. He views his work in a multi-dimensional way, much as Einstein viewed the solar system and Freud the brain and nervous system. The results of Buffet’s genius speak for themselves.

In 1996, Berkshire began offering a Class B share worth one-twentieth of the original now Class A shares. Class A stocks are listed as BRKA, and Class B shares are listed as BRKB. On the last day of the second quarter of 1998, Berkshire Hathaway Class A stock was listed at $70,000 per share. Although in a couple of years Berkshire’s stock price has ended lower than it began, Berkshire has never had a down year for return on stockholder equity.

An Unassuming Billionaire

While Warren Buffett may be one of the richest men in the world, (and until Bill Gates zoomed in out of nowhere, Buffett was the richest man in the United States) but you’d hardly know it from looking at him or his lifestyle. He seems more interested in having fun making the money than in having fun with the money. He doesn’t have a lavish home or lavish offices. He is considered quite the eccentric for this in the world of high-powered billionaires, flashy executives, and investors. He isn’t comfortable with the trappings of wealth, doesn’t think he needs any of it, and doesn’t spend any money on it. It’s not that he’s a miser, cheap, or punishing himself, it’s that luxurious stuff doesn’t interest him. He thinks of himself as just another Omaha businessman and conducts himself that way. Friends and business associates all know the same Warren Buffett - the one who looks more like a high school principal than a billionaire. . He is known for his warmth, his humor and his wit. He has been described in many ways: "He has an almost photographic memory. His mind is encyclopedic. He has tremendous concentration. He has no peer in security analysis. He needs help turning on the radio. He looks like a dressed-up farmer." Buffett himself has said, "There’s nothing material I want very much." He loves making the money. Spending it is of little interest to him. He has a fast, dry wit, a sunny disposition and folksy manner. He comes across as a mix between Jack Benny and Will Rogers.

Buffet’s Two Brains

Buffett continues to learn. The reasons for his success are his common sense, his own genius, and his life-long intense study of his area of greatest interest - business. It’s as though Buffett has two brains, one of which is always thinking about business. It never sleeps. The other brain works on public policy, talks with friends, and plays bridge and golf.

Buffett doesn’t seek the limelight, do the social scene, or call attention to himself. He is hardly a hermit, though, and has attended formal White House dinners and charity events with luminaries from the arts and business worlds. He was among 19 CEOs who appeared in a July 14, 1997, Wall Street Journal ad calling for an end to soft money donations to political campaigns. He knows little about technology, but he admires and spends time with Microsoft’s Bill Gates, whom he met in 1991. Gates has said that Buffett is his favorite CEO, adding, "The guy thinks. I love people who just think. The conventional wisdom, they don’t fall into it." Buffett refers to Gates and himself as "the odd couple," and regards Gates’ business savvy as "extraordinary."

Warren Buffett’s quite ordinary office is located in Kiewit Plaza, a modest Omaha building. Berkshire’s headquarters are still smaller than 4,000 square feet and are not posh by anyone’s definition. The office contains a small conference room and places for about a dozen people to operate. Berkshire maintains other offices for the team of accountants who work on its insurance subsidiaries, and has a data processing building elsewhere in Omaha to track the insurance operation’s complex finances. But that’s it. Buffett runs Berkshire’s empire from a small desk near the corner of his office, piled with reading material. True to his sense of humor, the desk often sports notepads that read, "In case of nuclear war, disregard this message."

About the Author

Andrew Kilpatrick self-published the first edition of this book in 1994. He updated and expanded it for the 1998 McGraw-Hill edition. He served in the Peace Corps, was a U.S. Naval officer, and spent 20 years as a newspaperman in Birmingham, Alabama.

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Of Permanent Value

Book Of Permanent Value

The Story of Warren Buffett

McGraw-Hill,
 



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