Buffett

by Roger Lowenstein

  And the Sun was a poor business. When it raised its rates, its circulation dropped, rather sharply. “Warren didn’t anticipate that,” Lipsey noted. The experience seems to have jolted him. Buffett suddenly wanted to learn all there was to know about newspapers. He began to study the economics of newspapers, and of other media properties, in great detail. As once, after discovering GEICO, he had immersed himself in insurance, now he wouldn’t sleep until he knew the newspaper business from the bottom up. And the more he learned, the more he knew that the Sun, as a secondary paper, was hopeless. Not long after the Boys Town story, Buffett wrote to a colleague:

  I mentioned that in 1910 there were 1207 cities in the country with daily papers, of which 689 had two or more competing papers. In 1971, there were 1511 cities with daily papers, of which 37 had two or more competing papers. Since I wrote that letter, the Washington Daily News, backed by the enormously powerful Scripps-Howard chain, has folded, as has the Boston Herald-Traveler and the Newark Evening News.… The owners learned by bitter experience that having a paper which is second in consumer acceptance and community importance produced rivers of red ink which the best of management and the deepest of pocketbooks cannot reverse.

  Referring to the Omaha Sun, Buffett emphasized that socially redeeming stories would in no way guarantee a profit.

  Suggestions are constantly made to me—frequently by academicians who are somewhat unhappy with the editorial views of the local monopoly daily—that a wonderful future would await us if we would convert to a daily paper. This advice is well intended and sincere. The inescapable fact that it has never been done … doesn’t register on these theoreticians.17

  But it had registered on Buffett that it would be “wonderful” indeed to own a dominant newspaper. Such a paper, he would tell his pals, would be like the only bridge in a small town.18 Anyone who had to get across would have to pay the toll. An advertiser in a one-paper city was in the same boat. A department store in Omaha had to advertise in the Omaha World-Herald, the monopoly daily—which meant that the paper had relative freedom to raise its rates. It had the protected franchise that lesser businesses, such as the Hathaway mill, could only dream of.

  Buffett would have liked to buy the World-Herald, but it was not for sale.19 So he began to nose around in publishing circles, trying to find a paper. He checked out possibilities in California and Maryland. He made a bid for the Cincinnati Enquirer, but got turned down.

  He also got Bill Ruane to set up a dinner with Tom Murphy, a Harvard classmate of Ruane’s. Murphy was chairman of Capital Cities Communications and a rising star in the broadcasting business. The two of them hit it off. Murphy took Buffett to the Republican Convention in Miami and decided he wanted to get Buffett on his board. Taking a tip from Ruane, Murphy went to Omaha, where he could see Buffett without distractions.

  They had “a hell of a game of racquetball,” after which Buffett bought Murphy a steak dinner. Sensing Murphy’s purpose, Buffett never let him pop the question.

  “You know, Murph,” he said, “I couldn’t become a director of your company without a major position, and your stock’s much too high. But any way I can help, you feel free to call me.”

  High stock prices had been a problem for Buffett all around. Since folding the partnership, he had not been able to find bargains. Going into 1972, Berkshire’s insurance company had a portfolio worth $101 million, of which only $17 million was invested in stocks. Buffett had put the rest in bonds.

  But little by little, he began to creep back into the game. Once again, the catalyst for his metamorphosis was Wall Street. Fund managers, who had been stunned by the collapse of Go-Go, had retreated into a shell. Their funds were now clustered in a group of big, well-known growth stocks, such as Xerox, Kodak, Polaroid, Avon, and Texas Instruments, which were dubbed the nifty fifty. In the prevailing view, these companies, unlike the small high-fliers of the Go-Go era, would grow forever. They were thus said to be “safe”—indeed, safe at any price.

  By 1972, the nifty fifty were trading at an astronomical eighty times earnings. Wall Street had drawn a moral from Go-Go, but not the right one. The funds had converged on “safer” stocks, but risk is never wedded to one stock or another; it is present wherever investors mindlessly imitate one another.

  Buffett, meanwhile, began to find bargains outside the nifty fifty, and to buy them for Berkshire’s insurance company. One day it was California Water Service, the next 1st Citizens Bank & Trust of Smith-field, then General Motors. And there were more: Scripps-Howard Investment, Cleveland Cliffs Iron, Vornado, the Omaha National.

  In 1973, the nifty fifty began to crack. Fund managers recoiled in horror. The “safe” stocks were falling. Where was one to turn? The Dow, which had broken above 1,000, backpedaled to 950. The broad market staggered. Wall Street, now thoroughly cured of the mania of Go-Go, retreated into a malaise. Brokerage reports dried up; analysts were sent packing. Companies that had gone public in 1969 saw their stocks fall by half.

  This spiritual anemia produced a corresponding but contrary reaction in Buffett. His transformation was uncannily familiar and yet inverted, like a filmstrip of the previous decade being run in reverse. In the Go-Go years, his ideas and desire had slowly drained, but now, with the market sinking, he was running like a colt.

  Looking over Berkshire’s brokerage activity in 1973, one has an impression of Buffett sweeping down the aisles of a giant store—here grabbing National Presto Industries, there Detroit International Bridge, in the other lane Sperry & Hutchinson.20 On it went—U.S. Truck Lines, Munsingwear, Handy & Harman. As the market fell, he raced down the aisles all the faster—J. Walter Thompson, Coldwell Banker, Dean Witter, King’s Department Stores, Morse Shoe, Ford Motor, Pic N Save, Mitchum Jones & Templeton, Grand Union, Studebaker-Worthington.

  Ralph Rigby, the textile salesman, visited Omaha and found Buffett in a state of ecstasy. “He said a lot of guys studied baseball stats or the Racing Form,” Rigby said, “He just had a hobby that made him money. That was relaxation to him.”

  One time, Judge John Grant, Buffett’s bridge partner, mentioned that he had been having fun trying an interesting case. Buffett’s eyes twinkled. “You know,” he said, “some days I get up and I want to tap-dance.”

  In the evenings, Buffett would go to Cris Drugstore, on 50th Street, for the late edition of the World-Herald, which carried the closing stock prices. Then he would go home and read a stack of annual reports. For anyone else it would have been work. For Buffett it was a night on the town.

  He did not merely do this nine-to-five. If he was awake, the wheels were turning. He would offer to help Peter with his homework, but Peter knew it wasn’t what his father really wanted to do.21 One day, when Buffett arrived home, he found his adolescent son wincing in pain on the stair landing. Peter had thrown his back out while changing a lightbulb. Buffett, in his customary haste to get to his study, blew past him up the stairs. Later, he realized how unfeeling he had been, and apologized.

  In a sense, Buffett was the boy of the house. His total delight in his work to the exclusion of all else, like his unrefined and immature eating habits, his fear of change, his dependence on Susie, even his perpetual energy and good humor, had a juvenile quality not uncommon to prodigies. A woman friend said that when she was with him, she felt as if they were “kids shooting marbles.”22

  His immersion in stocks was terribly difficult for his wife, in manifold ways. According to what Susie told her confidantes, she yearned for more of the usual sort of sharing that one would have with a spouse. When—as occurred periodically—Howie, their middle child, had some problems, Susie had to turn to her own father, the psychologist, for guidance. Her spellbound hubby was in a dream chamber. It was not that Warren was uncaring about the family. He was never mean—they knew he wouldn’t knowingly hurt a flea. As Peter said, he had blinders on.

  The entire family did a fair amount of rationalizing about those blinders.23 They treated his work like some great, so
ulful endeavor that no one could disturb. And in a sense, that was appropriate. Something was happening in that dream chamber. And in the early to middle seventies, it was happening as never before.

  Buffett would pick up the phone and return the most ordinary “How are you?” with a riveting exclamation, as if he couldn’t contain his pleasure. According to Clifford Hayes, of Chiles Heider & Co., one of the brokerages where Buffett did business, Buffett would call “two, three, four, five times a day.”

  He just wanted the information; he didn’t want opinions. He’d ask about a company he was interested in. I’d say, “What do you want, five thousand shares? Ten thousand shares?” He’d say, “Buy it!”

  He would run his finger down the price-earnings column of the stock table, and practically every P-E was in single digits. It was one of those rare times on Wall Street: America was being given away, and nobody wanted it. Buffett’s reaction was instinctive: Be greedy when others are fearful.

  Now he had more ideas than cash—a complete reversal from the sixties. In 1973, Bob Malott, who ran FMC Corp., asked Buffett to be a fly on the wall while some candidates to manage FMC’s pension fund made presentations. They were rather esoteric, and Buffett did not think much of them. “For two days,” Buffett recalled, “we sat there and listened to it. And at the end he asked me what I thought and I told him it was all a waste of time.”24

  Then Malott asked if Buffett would take a crack at managing some of FMC’s pension money himself. Buffett said, “Okay, but understand that FMC will get the dregs of my ideas. I’m going to service Berkshire first, Warren and Susie Buffett second, and FMC third.”25 The point was, he had enough ideas to go around.

  For Malott, it was a coup. No one—not FMC’s pensioners, nor its shareholders, nor the public—knew that Buffett was running money for him. It was as if Joe DiMaggio had ripped off his Yankee suit and was playing American Legion ball incognito in his spare time. (Over the five years that he managed it, Buffett’s FMC portfolio rose 51 percent, compared with just under 3 percent for the Dow.)26

  Buffett’s first concern, as he said, was Berkshire. Early in. 1973, he wanted to raise money for it, and hired Salomon Brothers to raise $20 million in senior notes. Denis Bovin, an investment banker fresh from Harvard, met Buffett in Laguna Beach. They mapped out the deal while sipping Pepsis, in view of the Pacific. Bovin, who was unfamiliar with Buffett’s Wall Street reputation, next saw Buffett at Salomon’s headquarters, in New York. As they strolled through the great open trading room, Buffett was spotted and shouts erupted from traders—a foreshadowing of Buffett’s later dramatics at the firm. Robert Spiegel, the head stock trader, ran over and blurted out, “Warren, I got a big block of—” and tried to peddle a stock to him.

  Buffett’s decision to sell notes was based on a Buffett rule of thumb: get the money when it is cheap. (If you wait to borrow until you need a loan, it is likely to be when others are also borrowing, when—perforce—rates will be higher.)

  Lenders were not exactly eager. Salomon had to persuade them that the money was for Buffett—not for textiles. The offering document reassuringly noted that Berkshire had reduced the capital in textiles from $24 million to $11 million. Even so, lenders insisted on a term enabling them to demand repayment if Buffett sold his stock. But he got the money at 8 percent. Some months later, Salomon’s Donald Mutschler sent Buffett a congratulatory note:

  Just as an aside, the money markets have certainly verified the famed Buffet [sic] financial acumen. I am not sure whether it would be possible at all to do your financing today and if it were … the rate would be north of 9%…. Your timing was perfect.27

  Mutschler did not know the half of it. Buffett had started to nibble on the Washington Post Co. In February, Berkshire bought 18,600 shares at 27.* In May, the stock fell to 23. Berkshire, armed with the cheap money from Salomon, bought 40,000 shares more. As the price fell further, Buffett continued buying. In September, he bought a huge block of 87,000 shares, at 20¾. By October 1973, Berkshire, though unknown to the public, was the largest outside investor in the Washington Post, the newspaper that Buffett had once delivered, and the dominant media property that he craved.

  The Post, run by Katharine Graham, also owned four television stations, Newsweek magazine, and newsprint mills. Such assets often traded in private sales, and were not hard to value. Buffett figured that they were worth $400 million. But the stock market was valuing the entire company at $100 million.

  The people selling—professional fund managers—would not have disputed those numbers. Why, then, were they selling? Quite simply, they were afraid that the shares would drop further. They were afraid that other people might sell.

  As Buffett analyzed the Post, sweetly and in his lonesome, he saw it as that all too rare opportunity. Mr. Market had turned gloomy—actually, seriously depressed. In such times, stock prices bore no relation to underlying values. One simply couldn’t find such a bargain in the real world. Buffett would explain:

  It’s a lot different going out to Kalamazoo and telling whoever owns the television station out there that because the Dow is down 20 points that day he ought to sell the station to you a lot cheaper. You get into the real world when you deal with a business. But in stocks everyone is thinking about relative price. When we bought 8 percent or 9 percent of the Washington Post in one month not one person who was selling to us was thinking that he was selling us $400 million [worth] for $80 million. They were selling to us because communication stocks were going down, or other people were selling, or whatever reason. They had nonsensical reasons.28

  We know their reasons. As Buffett was investing in the Post, the Wall Street Transcript assembled a group of Wall Street media analysts to assess the industry. They agreed that, based on the “fundamentals,” newspaper stocks were selling at point-blank range. But to a man, they were fearful of pulling the trigger. Kendrick Noble, of Auerbach, Pollak & Richardson, allowed that “the Washington Post is certainly a dominant newspaper with good potential growth.” But Noble had the fatal Wall Street habit of looking over his shoulder:

  I think the market is disregarding fundamentals. And with the horizons of our economic scenario, we think this market coolness may continue.… It’s a tough time for a fundamental analyst.29

  It was, in fact, a marvelous time for a fundamental analyst. Media stocks were dirt-cheap, a fact that could be demonstrated by simple math. The media analysts did not have a complicated job. They were on earth for one purpose—to evaluate shares of media companies. The stocks being at their nadir, this was their moment. And they let it pass.

  In August, Affiliated Publications, owner of the Boston Globe, went public. In the prevailing group-think, the fact that it owned only that property made it risky. Never mind that the Globe had two-thirds of its market. The fear was, if something happened—if Bostonians no longer wanted to read about the Red Sox—you’d be in trouble. You’d be second-guessed.

  First Boston, the underwriter, had to price it on the cheap. Knowing of Buffett’s interest in newspapers, the investment bank put out a feeler to Omaha. Buffett was noncommittal.

  Privately, he was doing cartwheels. Controlled by two old Boston families, Affiliated had published the Globe since 1872. Its circulation, revenue, and profits were rising, and these trends were accelerating. As Buffett knew, the rival Herald Traveler had folded the previous year. Boston was becoming—Lord be praised!—a one-paper town, or, as Buffett would have envisioned it, a monopoly toll bridge spanning the Charles. To Buffett, Affiliated’s simplicity was not a weakness but a virtue, because its crown jewel was undiluted.

  When the offering came to market, Berkshire was the biggest buyer. Buffett explained his rationale in a letter to William Taylor, Affiliated’s president.

  Harold Andersen [publisher of the Omaha World-Herald] is a good friend of mine, and can tell you of my enthusiasm for excellent newspapers. I am equally enthusiastic about bargain securities. A combination of the two in a single product is irr
esistible to me. When the stock market values the Boston Globe at under $30 million, it strikes me as ludicrous.30

  The trick in such markets was to have the cash to exploit the moment—as Buffett put it, “to have your check clear.”31 Owing to Buffett’s timely sale of notes, Berkshire had the money. It was buying stocks, especially media stocks, at every turn: Booth Newspapers, Multimedia, Harte-Hanks Newspapers, and on it went.

  Around this time, Buffett asked his Omaha buddy Dick Holland an innocent-sounding question about the merits of owning an ad agency. Suspecting nothing, Holland rattled on about how great it was to be his own boss. He soon discovered Buffett’s true interest: Berkshire was buying major chunks of two big agencies, Interpublic Group and Ogilvy & Mather International.†

  Buffett saw advertising as a free ticket on the media business. Why free? Unlike, for instance, a certain mill in New Bedford, an ad agency did not require capital—merely a desk and a couple of pencils. To Buffett, the lack of assets was a plus, because the profits flowed directly to the owners.

  The Wall Street wisdom was directly opposite. Since an agency’s “assets” went down the elevators at night, the agencies were seen as evanescent. An agency was like Gertrude Stein’s Oakland—there was no there there, just some English majors fiddling with slogans. Theoretically, anyone could do it. Bill Ruane, who was buying the same ad stocks as Buffett, got a bit huffy over this point with the Wall Street Transcript:

  TRANSCRIPT: Well that [advertising] is kind of wide open. Anybody can become an ad agency. Tomorrow.

  RUANE: We are not talking about a couple of long-haired artists in a loft in Greenwich Village. We are talking about a worldwide business [Interpublic] with clients like Coca-Cola, General Motors and Exxon, [with] gross revenues of approximately $150 million.32