Buffett

by Roger Lowenstein

  One time, as Leila was leaving, she and her son passed in the hallway. When she attempted a kiss goodbye, Warren backed away, leaving his mom in tears. But save for such a rare chance encounter, Susie would cover for him. Susie would talk to Leila so that Warren wouldn’t have to.26

  Warren’s need for Susie was palpable. Once, when they were visiting his sister Doris in Washington, Susie awoke at six in the morning with an extremely painful case of diverticulitis. En route to the hospital, even though Susie was the critically sick one, she was trying to comfort Warren, who had a mortal fear of hospitals and visibly was the more distraught.27

  Even on a normal day, Warren’s face would light—a touching betrayal of his feeling—when Susie entered the room. She would run her fingers through his hair, fix his tie, sit on his lap, hug him. She sustained him. Referring, presumably, to her soothing explorations of his childhood, Warren once declared, “Susie removed the thorns, one by one.”28 And Susie would speak of Warren like a fragile child whom she was sworn to protect. She would hint to her children that there were parts of him they didn’t know about—that only Susie knew about.29

  They were perfectly complementary—Warren, self-absorbed, Susie, reaching out to the world. She tended to an unending stream of confidants and solace-seekers—a friend going through a divorce, a neighbor with a sick relative. It seemed that anyone in Omaha who had a problem landed on Susie’s “couch.” On more than one occasion, she became so involved in talking to a waiter or waitress that she left the restaurant with his or her phone number.

  Susie was determined to see that the Buffetts did not lead narrow lives.30 In a trivial example, they joined a “gourmet cooking club”—a group of couples who dined on Swedish meatballs one month and French crêpes the next. Each time, though, Warren would pleasantly ask the hostess to make him a hamburger.31 He preferred to stick to the familiar: the same city, the same foods, the same single-minded pursuit. He stuck to the arc.

  At a party, the Buffetts were a study in contrasts. Susie would work the room. She’d lean into someone with her big round eyes and say, “Is everything okay?”32 Warren would plop himself in a corner, “looking so young, with this cowlick sticking up, kind of cute,” said Susie’s friend Eunice Denenberg. But people would drift over to him. Without any apparent effort, he would start to tell a story, choosing the words precisely and pacing it to perfection, “and you would look around and suddenly people were at his feet.” School was always in with him.

  Buffett was a talker more than a conversationalist. Richard Holland, an Omaha advertising executive, observed that even in social settings, Buffett had a purposeful quality. Holland met Buffett in the late fifties, when Holland was serving on a creditors’ committee of a bankrupt client. Buffett, who had been recommended to manage the workout, showed up in tennis shoes and an old shirt. “I thought maybe he was ready for bankruptcy,” Holland said. They got to be good pals, and Holland also invested with Buffett. He noticed that Buffett was not a chitchatter. “He wanted to talk about something.” But he was awkward at small talk, which he punctuated with a nervous chuckle.

  Jane Orans, Jerry’s wife, thought Buffett’s mind “worked differently.” He would pick a subject for an evening and ask everyone what he or she thought of it, as if he were leading a seminar. One year, about 1961, when Warren and Susie were visiting the Oranses in New York, Buffett spent much of the evening arguing that overpopulation was the world’s most serious problem. It was a typically Buffett-like position: logical and mathematically derived. Also, it touched on his morbid fear for human survival. But Buffett wasn’t confrontational about it; his touch was much lighter. Quoting Jane Orans:

  He injected it all with humor. He was very convincing, very logical, but it wasn’t lecturing. He made you feel you had reached the same conclusion with him, though obviously he had given it more thought. When he left you felt he had shaped the evening, but you didn’t feel that you hadn’t enjoyed it.

  Buffett was also raising serious money in New York. The Buffetts would visit in the spring, both to see friends and for Warren to do business. He would ring up Orans from his hotel, usually the Plaza, and say, “Big Boy, could you bring over a six-pack of Pepsi? You can’t believe what room service charges!” Meanwhile, Buffett was collecting six-figure checks.

  In part, he was feeding off the Graham network. He met Marshall Weinberg, a broker and fellow Graham alumnus, at a lecture at the New School. He and Weinberg became friends, and Weinberg and his brothers invested $100,000. Henry Brandt, another broker friend, invested and steered his clients to Buffett. Laurence Tisch, tipped off by Howard Newman (formerly of Graham-Newman), was good for another $100,000.

  Then there was David Strassler, a New Yorker whose family was in the business of fixing distressed companies. Strassler flew into Omaha to look into buying Dempster, the windmill company. Buffett picked him up at the airport. Quoting Strassler:

  I had the typical attitude of a New York guy meeting a hayseed. I had gone to Harvard and studied at MIT. I had just finished working out some deals. I was feeling pretty good. After we had been driving a little bit he started asking me questions about a company in which my family had a majority interest. It was Billings & Spencer, of Hartford. It made forgings and metal shears. Only [about 2%] of it was public. I’m still not sure how he knew about it. Then he started asking me questions about the balance sheet. He knew the balance sheet better than I did. That stopped me totally cold.

  Strassler, the “typical” New York guy, invested on the spot.

  The Buffett partnerships, begun with a $105,100 grubstake, entered 1962 with $7.2 million in capital—more than Graham-Newman at its peak. Of the total, $1 million belonged to Buffett personally. He was still small, but not unproven. And though unknown to the general public, he was no longer obscure. The original nucleus of seven investors had mushroomed to ninety, grouped in clusters from California to Vermont.33

  Swelling with new accounts, Buffett decided that he had outgrown his sitting room. He merged the partnerships into one: Buffett Partnership, Ltd. He quadrupled the minimum investment, to $100,000. And he moved his office to Kiewit Plaza, a fourteen-story pale-green-and-white tower on Farnam Street.

  Kiewit Plaza was perched at the crest of a hill on the outskirts of Omaha’s business district, in a hybrid neighborhood with strip shopping, apartments, and an old steel foundry. Buffett’s building was drably functional down to the industrial-carpeted halls—happily drab, as Buffett could assure his partners that he wasn’t overspending. Indeed, from Buffett’s point of view it was a palace. He had a secretary and an assistant to shake him loose from administrative details—thus, more time for Moody’s. He had space to rent to his father, who was ailing. And the office was on the same street as his home—as though he had merely tacked on a couple of miles to the hallway linking his bedroom to his study.

  Buffett spent the day reading annual reports and business publications and talking on the telephone. With more and more reports to read and stocks to analyze, he was ever in good humor. But it was rather solitary. He often lunched alone, sending out for a cheeseburger and french fries. His tiny staff knew nothing more of his stock picks than his wife did.

  Buffett did have an adviser away from the office—miles away, where it suited him. His letters to his partners were peppered with references to a “West Coast philosopher” friend, a nom de guerre that only hints at this fellow’s influence. Charlie Munger, six years Buffett’s senior, had also grown up in Omaha, the son of a lawyer and grandson of a judge. He was a close family friend of Edwin and Dorothy Davis and had worked (“slaved”) at the Buffett store on Saturdays.

  After three years in college and a wartime stint studying meteorology, Munger got into Harvard Law School without a bachelor’s degree. His classmates found him brilliant and opinionated to a fault. Called on by a professor when he was unprepared, Munger shot back, “I haven’t read the case, but if you give me the facts, I’ll give you the law.”34

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p; After Harvard, Munger practiced in Los Angeles, but in 1959 he returned to Omaha to close out his father’s practice. Edwin Davis’s son, one of Buffett’s investors, was struck by his likeness to Munger and invited the two of them to lunch at the exclusive Omaha Club. They hit it off immediately.35

  “Warren, what’s your racket?” Munger inquired.

  “Well, we have a partnership.”

  “Maybe I could do that out in Los Angeles.”

  Buffett peered at him and said, “Yeah, I think you could.”

  The next night they were reunited at Dick Holland’s, a mutual friend’s, and talked a blue streak. Munger was clutching the same drink the entire evening. He was so intent on babbling that as he lifted his glass and tilted his head to swallow he would raise the other hand in a stop sign so no one would cut him off.36

  Physically, Munger was unimpressive. He had an elfin face, pasty skin, and glasses an inch thick. Though something of a snob and highly judgmental, he had a deep sense of ethics. His smarts were matched by a Churchillian self-assurance and joie de vivre. Asked once if he could play the piano, Munger replied, “I don’t know, I never tried.” Buffett saw in him a kindred intellect and blistering independence.

  A friendship evolved over the summers, when the Buffetts went to California. When Buffett was home, he was constantly sprawled on the floor cradling the phone and talking to Munger. A familiar refrain at the Buffetts’ dinner hour, according to little Susie, was “Oh-oh, Dad’s talking to Charlie.” She recalled, “They talked for hours. They anticipated each other. It was like they hardly had to say anything. It was, ‘Yeah—Uh-huh—I know what you mean—Right.’ ”

  Buffett said he and Munger thought so much alike it was “spooky.”37 But unlike so many of Buffett’s friends—surely this was part of the attraction—Munger was not in awe of him. And Buffett was so enamored of Munger that he urged him to adopt his own line of work. He kept telling him that practicing law was a waste of his talent—and Munger did not disagree.

  Like Warren, I had a considerable passion to get rich. Not because I wanted Ferraris—I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t know where I got that notion from, but I had it. I had lived way under my income for years, saving money.

  He started a law firm, Munger, Tolles & Hills, but barely practiced there. By 1962, as Buffett was moving into Kiewit Plaza, Munger was running his own investment partnership.

  That spring, Buffett went to Munger with a problem: what to do about Dempster? Munger was no Ben Graham disciple. In his view, troubled companies, which tended to be the kind that sold at Graham-like discounts, were not easily put right.

  But Munger knew a fellow, name of Harry Bottle, who might be the man for Dempster. Buffett interviewed Bottle in Los Angeles, and Bottle was on the job in Beatrice six days later. He cut costs, closed plants, and slashed the inventory. Writing to his partners of Bottle,‖ Buffett announced:

  Harry is unquestionably the man of the year.… He has accomplished one thing after another that has been labeled as impossible.…38

  Bottle was doing—and doing well—the dirty work that Buffett couldn’t do. He was squeezing cash from Dempster’s underperforming factories, which cash Buffett was funneling into stocks and bonds. From Harry Bottle’s clay, Buffett was sculpting a wholly different enterprise—one with a diversified (and steadily rising) portfolio of securities. This was the sort of alchemy that was very much within Buffett’s range. He told his partners:

  To some extent, we have converted the assets from the manufacturing business which has been a poor business, to a business which we think is a good business—securities.39

  The redeployment carried a cost. One hundred people were laid off, and Buffett met with heavy criticism in Beatrice.40 Bill Otis, a bridge partner, asked him in a kidding vein, “How can you sleep at night after firing all those people?”

  To Buffett, who had a thin skin where his reputation was concerned, it was no joke.

  “If we’d kept them the company would have gone bankrupt,” he said. “I’ve kept close tabs and most of them are better off.”

  Though this has the ring of rationalization, Buffett hated being called a liquidator and vowed that he would “never” lay people off again.41

  But he had no problem with the results. After a year, Dempster was trimmer but more profitable, and it had $2 million worth of securities to boot. In 1963, Buffett sold it—netting the partnership a $2.3 million profit and nearly tripling its investment.42 Three things had made it work: the initial bargain price, Buffett’s patience in holding on, and his and Bottle’s turnaround. To Buffett—as ardently in Ben Graham’s camp as ever—the first point outweighed the rest.

  This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.43

  * All figures for the Dow are as Buffett reported them to his partners—that is, adjusted to include dividends.

  † George Payne, who had organized the meeting, immediately called Buffett and signed up for a partnership.

  ‡ Buffett would not call this a “mistake.” He would argue that since he did not have the technical computer expertise to value Control Data, investing in it would have been a gamble.

  § Malou had previously been the companion of one of Graham’s sons, who committed suicide.

  ‖ Buffett did not hesitate to talk about a company once he had a controlling share of it.

  Chapter 5

  PARTNERS

  I cannot promise results to partners.

  WARREN BUFFETT,

  LETTER TO PARTNERS, JANUARY 1963

  Sol Parsow, who owned a men’s shop in Kiewit Plaza, knew Warren Buffett as other than a fashion plate. Typically, Buffett would come in and order five suits—all, despite Parsow’s pleading, in a dull gray—and leave on a dime.

  One morning, though, Buffett came into the store seeking a bit of fashion advice—sort of. He wanted Parsow’s opinion of Byer-Rolnick, a hat manufacturer.

  Parsow explained that President Kennedy’s bareheaded look was all the rage. “Warren,” he said, “I wouldn’t touch it with a ten-foot pole. Nobody is wearing hats anymore.”

  A bit later, Buffett returned. “Sol, what’s going on with the suit industry?” Buffett asked.

  “Warren, it stinks. Men aren’t buying suits.”

  This time, he couldn’t talk him out of it. Buffett Partnership bought a small stake in a New Bedford, Massachusetts, maker of suit liners-Berkshire Hathaway, Inc.—at precisely $7.60 a share.1 In 1962, Berkshire was one more cheap stock of the sort that appealed to Ben Graham disciples. The venerable Yankee manufacturer had long been struggling against lower-cost Southern and Far Eastern competitors. But on its books, at least, Berkshire was a bargain. It had $16.50 a share of working capital—two times its share price. As a Graham-and-Dodder, Buffett liked the stock and gradually added to his position.

  Despite this investment, it was clear that Buffett was becoming more than just a carbon copy of his teacher. He was bolder than Graham: more willing to load up on a stock or to ride a winner. And, of course, his results had been better.

  What was not so apparent was that Buffett was also beginning to think differently—that is, to think in qualitative terms, as well as in the merely numerical terms that had appealed to Graham. When Buffett looked at a stock, he was beginning to see not just a frozen snapshot of assets, but a live, ongoing business with a unique set of dynamics and potential. And in 1963, the year after he invested in Berkshire, Buffett began to study a stock that was unlike any he had bought before. It had no factories and virtually no hard assets at all. Indeed, its most valuable commodity was its name.

  American Express was a company divinely suited to the time. America had entered the space age, and its citizens were in a futuristic frame of mind. Few products symbolized the attainment of the modern life as aptl
y as those of American Express. Air travel having become affordable, the middle class was embarking on the Grand Tour, and the traveler’s check had become its passport. (“Checks That Never Bounce,” Reader’s Digest gushed.)2 Half a billion dollars of the company’s scrip was in circulation, accepted as readily as money itself. Of equal import, by 1963 one million people carried the American Express card, introduced, merely five years earlier, in the innocent era in which citizens thought it necessary to travel about with hard coin. Time heralded the advent of the “cashless society.”3 A revolution was at hand, and American Express was its beacon.

  And then the bottom fell out. The trouble began, as it often will, in a remote and seemingly minor colony of the corporate empire—in this case, a warehouse in Bayonne, New Jersey, that was owned by an American Express subsidiary.

  The warehouse, in the normal course of its less than glamorous trade, accepted tank loads, supposedly of vegetable oil, from an outfit known by the unwieldy moniker Allied Crude Vegetable Oil Refining. In return for the supposed salad oil, the warehouse issued receipts to Allied, which used the receipts as collateral to obtain loans. Subsequently, Allied filed for bankruptcy. Creditors seized Allied’s collateral—or rather, tried to. At this point—November 1963—American Express discovered that it had a problem: “Subsequent investigation disclosed that the tanks contained very little vegetable oil.”4 What they contained, in part, was seawater, and seawater of very high quality, though not worth its weight in salad oil. In short, the warehouse had suffered a massive fraud, by some estimates totaling $150 million.