Buffett

by Roger Lowenstein

  By Labor Day, the market had risen 100 points more. By October, yet another 100. In 1983, economic growth resumed, and inflation retreated to a nostalgic 3 percent. The world discovered that it had not too little oil, but too much. The surge in bonds continued, driving long-term rates down to 11 percent, from 15 percent two years earlier. Meanwhile, the stock market experienced a phenomenon unseen since the sixties—a sustainable rally. New issues, out of favor since the Go-Go era, surged. Mutual-fund sales, yet another ghost from the Wall Street closet, revived. By May, the Dow was at 1,232, or 366 points higher than when Business Week had prematurely buried it. The magazine now proclaimed the rebirth of equities. As Buffett had predicted, those who had sat out the gloomy interval to wait for a “cheery consensus” had paid a dear price indeed. They had missed a 42 percent move. “The news that Business Week had rediscovered the stock market sent tremors of trepidation tripping through the Street,” Alan Abelson of Banon’s jested wickedly. “Panic set in, widows wept, orphans wailed and sell orders flooded the market with a mighty rush.”48

  Among the soaring stocks in Berkshire’s portfolio, Washington Post, purchased at an average, split-adjusted price of 5, skyrocketed to 73; Affiliated, acquired at 5, when no one else would touch it, closed the year at 38. Interpublic, the ad agency, was up from 6⅜ to 52. GEICO, bought in its darkest hour, had multiplied ninefold. Time, purchased within the previous two years, had doubled; RJR was up 17 percent; General Foods, 40 percent. Here and there, Buffett did have losses. Berkshire dropped $3 million on Vornado, a discount retailer, and lost money on Sperry & Hutchinson, a green stamp purveyor, both purchased in the 1970s. And Buffett did not do well on some inflation-hedge metal stocks. But in sum, where Berkshire once had not had any portfolio, by the end of 1983 it had $1.3 billion worth of marketable stocks. And it had all been assembled from the tiny stream of cash that Buffett had diverted from textiles.

  Berkshire’s own stock was something to watch that year. It opened for trading at 775. By spring, it was 15 points shy of 1,000. On September 30, it was quoted at 1,245. This, as it happened, was 12 points higher than the Dow. When Buffett had taken it over, Berkshire had been quoted at 18; the Dow, at 931, had been fifty times higher. Now they were neck and neck. The Dow finished the year in game fashion, at 1,259, but by then, it was plainly visible in the rearview mirror. Berkshire had risen to $1,310 a share. Buffett suddenly was worth $620 million. According to Forbes, he was one of the richest Americans.

  Shareholders pressed Buffett to split his stock. The rationale—and it is an article of faith at virtually every public company—is that a lower share price is more affordable and thus tends to enhance the public’s interest in a stock. But in his 1983 letter, Buffett ruled out a split. Slicing the pie into more pieces would hardly increase its value. (Try it with a pizza.)

  To be sure, a split would attract new investors and stimulate trading. It might even lift the price of Berkshire’s stock, at least for a while. But this would merely reapportion one investor’s share of the corporate wealth to another. If some traders exited at a higher price, others would pay more to buy in. But as a group, Berkshire’s owners would not be any richer, because the value of what they owned, See’s Candy, the Buffalo News, and all the rest, would not be affected. “These expensive activities may decide who eats the pie, but they don’t enlarge it.”49 Indeed, in the aggregate, Berkshire’s owners would be poorer by the sum of increased brokerage commissions. Brokers, themselves, praised high turnover in the guise of “liquidity.” But, as Buffett derisively added, such trading merely helped the “croupier”; it inflicted a “tax” on the customer.

  His attitude may seem extreme, but Buffett wanted no false notes that might conflict with his “ownership philosophy.” Most CEOs do not have such a “philosophy,” nor is it a matter to which they give much thought. But Buffett had thought about it quite a bit. He was consciously trying to assemble a tribe of like-minded shareholders, who would focus, as he did, on long-term value. If people bought for reasons that had nothing to do with value—such as a stock split—so, too, would they one day sell. As much as possible, Buffett wanted to dissuade such infidels from becoming his partners. This suggests the depth of Buffett’s commitment to Berkshire; it was a “job” to him in the sense that England was a job to Churchill.

  In the same annual letter of 1983, Buffett published a list of “principles,” partly intended to attract and keep the investors he wanted. There was nothing outwardly exceptional in these rules; boiled down, they amounted to a pledge that he and Munger would be straight with their investors and prudent with their capital. The spirit that underlay them would have been familiar to Oliver Chace, Buffett’s nineteenth-century corporate progenitor. But it was inconsistent with the spirit of Buffett’s own, more restless age. His aim was to profit from the long-term growth of (hopefully) well-chosen businesses, but not from nimbly entering and exiting them, or from financial legerdemain, or from various forms of pie-splitting and (at foolish prices) pie-acquiring. In the sense of abhorring change for its own sake, it was profoundly conservative. Buffett confessed a reluctance to go into debt or to play investment musical chairs even at the certainty that his attitude would penalize Berkshire’s return:

  Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns, and are very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses.… Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style.50

  In a calmer time, this would have been unremarkable. But the 1980s were no ordinary period in finance. America was home to the hostile takeover, the junk bond, the leveraged buyout. The archetypal business figure was no longer the rough-and-ready entrepreneur, the Oliver Chace, but the sheer and dicer on Wall Street. The mantra of this age was “liquidity”; not only corporate shares, but whole companies, too, were flipped like trading cards (indeed, flipped, and then dissected, and then reassembled and repartitioned). The ethos of the age was transience; credit was its catnip, instability its offspring. Supposing, for a moment, that Chace could have returned to his once-prudent world, one may imagine his horror. And yet, had he chanced to read some of his company’s letters, might he not have felt, with astonishment anew, that it was not all lost?

  * Berkshire disclosed big investments at year-end.

  Chapter 13

  THE CARPET WOMAN

  One question Buffett always asked himself in appraising a business is how comfortable he would feel having to compete against it, assuming that he had ample capital, personnel, experience in the same industry, and so forth.1

  It was after such an appraisal that, in the summer of 1983, he strode into the Nebraska Furniture Mart, a sprawling store opposite Ross’s Steak House. He made his way through the acres of convertible sofas and dining-room sets to the carpeting department, and there, amid the vast field of powder blues and placid beiges, he spied the store’s owner, a woman all of four feet ten inches, and slightly stooped at that. But as measured by Buffett’s yardstick, she might have been ten feet tall.

  Rose Blumkin, known to Omaha as Mrs. B, was patrolling the store in her golf cart. She motored down the aisle, haranguing an employee and gesturing with her arms with the vigor of a woman half her eighty-nine years. Her cheeks were flushed, and her auburn hair, done up in a bouffant, showed gray only at the temples. Buffett reckoned that he would “rather wrestle grizzlies” than compete against Mrs. B, and that was why he had come.

  Speaking deliberately, Buffett asked if she would like to sell the store to Berkshire Hathaway.

  Mrs. B said, “Yes.”

  “How much?” Buffett asked.

  “Sixty million,” Mrs. B spat out.

  They shook hands, and Buffett drew up a one-page agreement—Buffett’s bigges
t acquisition by far. Mrs. B, who could not write in English and barely could read it, made a mark at the bottom. Merely a few days later, Buffett presented her with a check for 90 percent (the Blumkin family kept a minority share). She folded it without a glance and, by way of concluding matters, declared, “Mr. Buffett, we’re going to put our competitors through a meat grinder.”2

  So well did Mrs. B incarnate Buffett’s business ideal, she seemed to have sprung from the pages of his letters, as though he had invented her to illustrate the plain virtues that he most admired. Mrs. B had the toughness, determination, and common sense that Buffett had seen in his grocer grandfather, in the retailer Ben Rosner, and in other Buffett heroes. Her story was the familiar, and distinctly American, story to which Buffett thrilled. It was a Horatio Alger script, set to the score of Fiddler on the Roof, yet magnified almost beyond belief.

  Rose Gorelick was born on the eve of Hanukkah, 1893, in a village near Minsk in czarist Russian.3 She and seven brothers and sisters slept in one room, on straw. Her father was a rabbi, but his piety was wasted on Rose, who observed that his prayers did not provide the family with a mattress.4 She would awake in the middle of the night to see her mother, who ran a grocery, slaving over an oven baking bread. Hating to see her mother work so hard, she helped her in the store from the age of six. Her other formative experience was of the Cossacks, who now and then would lay siege to the Jews in bloody pogroms.

  The Gorelicks had no money for school (Rose never saw the inside of a classroom), but she learned to read and do figures at the home of a rich family. From her mother, she acquired a conviction that begging was ignoble. At thirteen, she talked her way into a job at a dry-goods store in Minsk. At sixteen, she was running the store, a slip of a girl supervising five men. She married Isadore Blumkin in 1914 and saw him off to America, intending to follow. But the war broke out before she could go. In the desperate winter of 1917, with Europe aflame and Russia tottering, she boarded the trans-Siberian railroad. At the Chinese frontier, a Russian guard stopped her. Mrs. B, who did not have a passport, told him she was buying leather for the army, and promised to bring him a bottle of vodka on her return. Then she crossed Manchuria to Japan and gained a berth on a peanut boat. Six weeks later she set foot in Seattle.

  In 1919, she and her husband settled in Omaha. Though penniless, she sent for her parents and siblings, who moved in under the same roof. Isadore ran a pawnshop and secondhand-clothing store. To supplement this meager living, Mrs. B sold furniture out of her basement. She spoke not a word of English, but her kids, who picked it up at school, taught her.

  In 1937, at the age of forty-four, she scratched together $500 and rented a storefront, on Farnam Street, one block east of the original Buffett grocery. Thinking big, she dubbed it Nebraska Furniture Mart. A photo from the time shows a determined face, the black hair drawn in a bun, the jaw set firmly. Her method was her motto: “Sell cheap and tell the truth.”

  Brand-name manufacturers considered that her ultralow prices were bad for business, and refused to supply her. But Mrs. B was an adroit bootlegger. She would hop a train to Chicago or Kansas City, where retailers such as Marshall Field would sell their excess merchandise to her at a little above their cost.5 When she was out of stock, she dragged the furniture out of her home. One time, one of her grown daughters got a call from Mama. “Empty the baby’s storage chest. I got a customer.”6

  When she applied for credit, the banks would refuse her with a snicker, out of which experience Mrs. B developed an enduring hatred of “big shots.” What kept her going was her will. She worked seven days a week, fifty-two weeks a year, never a day off. In addition, she found that she had an affinity for her working- and middle-class customers, whom she referred to as “the vunderful American people.” These loyal customers always came up with cash when Mrs. B had bills.

  In 1949, Mohawk Carpet Mills hauled her into court, accusing her of violating fair-trade laws.7 Mohawk, a manufacturer, set a minimum retail price on one of its carpets of $7.25 a yard. Mrs. B was charging only $4.95. “So what’s wrong with that?” Case dismissed. The next day, the judge walked into Nebraska Furniture Mart and purchased $1,400 worth of carpet.

  The next year, Mrs. B couldn’t pay her suppliers. A friendly banker gave her a ninety-day $50,000 note. In a desperate bid to stay afloat, she rented a hall, unloaded $250,000 of furniture in three days, and vowed never to borrow again. And so, at age fifty-seven, Mrs. B was on her way.

  She was merciless with her staff, including those in her family. “You worthless golem!” she would scream. “You dummy! You lazy!” What saved her from herself was her gentleman son, Louie. Louie was just as keen as his mother, but his manner was mild. When Mrs. B ripped into a salesman, Louie would buck him up. Mrs. B would fire the help; Louie would hire them back. “Mama was very tough,” Louie noted. “I liked to smear on the honey.” Isadore died, but Louie stayed in the store. Whatever Mrs. B said, he would answer with honey. “Mama, you know best.”

  Mrs. B’s formula was irresistibly simple; she bought in volume, kept expenses bone-trim, and passed on the savings. Typically, she sold at 10 percent above her cost, but was known for making exceptions. When a young couple came in, misty-eyed at the prospect of their very own convertible, Mrs. B, who had memorized the wholesale price of every item, would slash her price on the spot. And that couple would come back.

  The Mart became a rite of passage, the coda to weddings, births, promotions. Omahans who had furnished homes at Mrs. B’s store would return when they moved, or when their kids moved. Advancing age didn’t slow her in the least. When a tornado took her roof off, she kept selling. When a fire scorched the store, she handed out free televisions to the firemen.8 Mrs. B never took a vacation. “I never lied,” she said. “I never cheated. I never promised I couldn’t do. That brought me luck.”

  Susan Buffett was friendly with the Blumkin family, and Warren heard from her of the wondrous store that was furnishing half of Omaha.9 Buffett tried to buy it, early in his career, but Mrs. B dismissed his offer as “too cheap.”10

  But the rejection merely stiffened him. He kept a close eye on the store and observed that Mrs. B was running one competitor after another out of business. Driving around town with the writer Adam Smith, in the early seventies, Buffett pointed out the store and reeled off its operating statistics—the volume, floor space, turnover, and so on.

  “Why don’t you buy it?” Smith wondered.

  “It’s privately held.”

  “Oh.”

  “I might buy it anyway,” Buffett added. “Someday.”11

  When the day arrived, Louie and his three sons were running the store. Mrs. B remained its chairman and full-time boss of the carpet department. Buffett, having heard that she was ready to sell, went to see Louie first—to sound him out on price and ensure that he understood Mrs. B’s thickly accented English.12

  Before the sale, Buffett looked at the Furniture Mart’s tax returns, which showed that it was earning about $15 million a year pretax. He did none of the usual checking, such as asking for an audit or examining the inventory, receivables, or property titles. The average home buyer probably looks at more pieces of paper than Buffett did in spending $60 million. His approach seems strange in a modern context, but it was in accord with the notion of J. P. Morgan, Sr., that the principal judgments in business are those concerning character. In Buffett’s terms, if he couldn’t trust the Blumkins, why become their partner?

  One was tempted to ask, as so often with Buffett, were things really so simple? The answer is that he had a genius for keeping them simple. In his 1982 letter, just before the deal with Mrs. B, he printed a “Want Ad” describing his criteria for acquisitions. He promised to respond to offers quickly—“customarily within five minutes.” What Buffett was saying was that he wouldn’t pursue a close call. A business had to grab him by the throat—and this the Blumkin business surely did.

  The Mart was the biggest furniture store in the country, with $100
million in annual sales. In Omaha, it accounted for an astounding two-thirds of all furniture sales—a percentage that leading stores in other markets did not come close to matching.13 Indeed, department store chains such as Dillard’s ($4 billion in annual sales) refused to sell furniture in Omaha because Mrs. B was too tough a competitor.14 As Buffett might say, she had a toll bridge to the living rooms of Omaha.

  The Mart was so dominant that it ferried sofas out-of-state in unmarked trucks so as to avoid angering merchants in other cities. “If somebody else advertises Maytag washers she tears out their ad and puts it on her Maytag washer,” Buffett marveled. “It is hell to compete with her.”15

  Don Danly, Buffett’s pinball partner, was in Omaha the day of the purchase. After a ritual steak dinner, Buffett took Danly through the Furniture Mart, recounting the saga of “the amazing Blumkins” in exquisite detail. Another visitor, Norman Lear, the Hollywood producer, said, “Warren’s admiration for Mrs. B is like a child’s. He talks about her the way a small boy would talk about his grandmother.”